<PAGE>
1994
ANNUAL
REPORT
[Small box above fund name showing the American
flag with a gold positioned in the center]
SMITH BARNEY
GOVERNMENT
SECURITIES
FUND
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 1994
[LOGO OF SMITH BARNEY MUTUAL FUNDS APPEARS HERE]
<PAGE>
Government Securities Fund
DEAR SHAREHOLDER:
We are pleased to provide you with the Annual Report which includes the
portfolio of investments for Smith Barney Government Securities Fund for the
fiscal year ended December 31, 1994.
It was a politically eventful year both here and abroad.
Interwoven with the ebb and flow of these political events was the Federal
Reserve Board's assessment of and reaction to the potential impact of a
strong economy on the rate of inflation. As a reminder of how extraordinary a
year 1994 really was, we have taken this opportunity to briefly chronicle
some of the more noteworthy moments that influenced the global financial
markets and our investment decisions.
1994: THE YEAR IN REVIEW
January 13 President Clinton appoints a special counsel to
investigate Whitewater.
January 26 The State of the Union speech emphasizes health care and
welfare reform.
February 7 The Federal Reserve raises short-term interest rates for
the first time in five years.
February 10 The US suspends trade talks with Japan.
March 7 White House counsel Bernard Nussbaum resigns over
Whitewater.
March 22 The Federal Reserve raises short-term interest rates by
25 basis points.
March 24 Major US banks nudge the prime lending rate to 6.25%.
April 1 Mortgage rates rise above 8 5/8.
April 19 The Federal Reserve raises short-term rates by 25 basis
points.
May 5 Central banks worldwide intervene to support the falling
dollar.
May 18 The Federal Reserve raises short-term interest by 50 basis
points.
May 27 Favored trading status for China renewed.
June 10 President Clinton launches the welfare reform campaign.
June 22 The dollar falls to a post World War II low against the
yen.
July 11 North Korea's Kim II Sung dies, clouding efforts to
resolve the dispute over its nuclear program.
August 12 The House of Representatives refuses to consider a
sweeping anti-crime bill.
August 17 The Federal Reserve raises short-term interest rates by
50 basis points.
1
<PAGE>
September 19 Haiti's military rulers agree to step down, and US
military troops are sent in.
September 28 Republicans gather at the Capital to sign a "Contract
with America."
October 3 The United States and Japan reach a trade accord.
October 10 United States military troops are sent to the Persian
Gulf in response to Saddam Hussein's threats.
November 9 GOP sweeps the House and Senate for the first time in 40
years.
November 15 The Federal Reserve raises short-term interest rates by
75 basis points.
December 2 GATT is approved.
December 7 Robert Rubin is selected to succeed the retiring Lloyd
Bentsen as Secretary of Treasury.
In the shadow of these events, interest rates proceeded on a record climb not
seen in 50 years. The yield on one-year Treasury bills doubled while at the
other end of the maturity spectrum the yield on 30-year Treasury bonds rose
by 25%. As the table below shows, interest rates rose on securities of all
maturities.
<TABLE>
<CAPTION>
Yield Yield
12/31/93 12/31/94
<S> <C> <C>
1-year Treasury bills 3.58% 7.16%
3-year Treasury notes 4.51 7.78
5-year Treasury notes 5.20 7.83
10-year Treasury notes 5.78 7.83
30-year Treasury bonds 6.35 7.88
</TABLE>
During the difficult environment of the past year, the use and perils of
financial derivatives (particularly mortgaged based) come to light. In a
rising interest rate environment, the ability to sell (known technically as
"liquidity") an investment become crucial. Unfortunately, many derivatives
securities lack liquidity, which resulted during the past year in numerous
and often large financial losses to investors.
PORTFOLIO STRATEGY
The Fund is managed in a very straightforward, uncomplicated fashion which
emphasizes non-derivative, liquid securities and strategies. Early in 1994,
we believed that income would be the greatest component of total return to
the Fund's shareholders and that minimizing the erosion of their principal
would be the most crucial investment challenge. As a result, we invested the
majority of the portfolio in mortgage securities that had coupons higher than
the then-current market rate and kept a small part of the portfolio in
Treasury notes with maturities of five to ten years. As interest rates rose,
the negative impact on the Fund's portfolio was not as great as it would have
been had we been invested in securities with lower yields. The Fund's average
maturity at the end of this fiscal year was approximately nine years.
2
<PAGE>
However, the investment strategies employed resulted in a return of capital
of $0.07 for Class A, Class B and Class C shares. This was primarily the
result of a higher-than-anticipated level of prepayments in the Fund's
mortgage-backed security holdings. Tax rules require that losses realized on
prepayments be treated as a reduction of the Fund's net investment income. We
believe that the risk of prepayments associated with higher coupon mortgage
securities was preferable to the lower income and greater potential market
risk presented by a portfolio of Treasury securities and/or lower coupon
mortgage securities. This return of capital, which has been reported to you
in your year-end tax statement, reduces the tax cost of your Fund shares.
Over the life of your investment, your economic result will be the same:
lower taxable income now will be offset by a higher gain/reduced loss when
you sell your Fund shares in the future.
Although it is not explicitly stated in the prospectus, the Fund's policy is
to pay a level monthly dividend based on our projections for the government
securities market and the general direction of interest rates. This policy
has no appreciable impact on the Fund's investment strategies or total return
per share since it is guided by market conditions. We are currently
evaluating our existing dividend levels based on our projections for the
government securities market in 1995.
At this juncture, we believe that interest rates will decline, particularly
on maturities of five years and longer. This decline will be prompted by
clear signs of a moderating economy and a deficit reduction program emanating
from Washington. Although we anticipate a decline in interest rates, we do
not believe that they will decline to the remarkably low level reached in
1993. We will continue to invest the portfolio in high quality securities
that have the liquidity necessary to react to a changing market.
We appreciate your confidence during the difficult investment environment of
1994, and join you in looking forward to a more benign 1995. Should you have
any questions about your investment in the Fund or how other Smith Barney
mutual funds may help you reach your financial goals, please speak with your
Smith Barney Financial Consultant.
Sincerely,
/s/Heath B. McLendon /s/James E. Conroy
Heath B. McLendon James E. Conroy
Chairman of the Board First Vice President and
and Investment Officer Investment Officer
February 20, 1995
3
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
Year Ended Beginning End Capital Gains Dividends Return Total
December 31, of Year of Year Distributed Paid of Capital Return*
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
11/6/92 -
12/31/92 $ 9.56 $ 9.69 -- $0.10 -- 2.41%
- ----------------------------------------------------------------------------------------------
1993 9.69 10.01 -- 0.72 -- 10.87
- ----------------------------------------------------------------------------------------------
1994 10.01 9.17 -- 0.49 $0.07 (2.76)
- ----------------------------------------------------------------------------------------------
Total -- $1.31 $0.07
- ----------------------------------------------------------------------------------------------
Cumulative Total Return from 11/6/92 through 12/31/94 10.41%
- ----------------------------------------------------------------------------------------------
</TABLE>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the sales
charge (maximum 4.50%).
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------------------
Average Annual Total Return -- Class A Shares**
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge With Sales Charge***
Without Without
Actual Fee Waiver Actual Fee Waiver
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended 12/31/94 (2.76)% N/A (7.13)% N/A
- -------------------------------------------------------------------------------------
Inception 11/6/92
through 12/31/94 4.71% 4.69% 2.49% 2.47%
- -------------------------------------------------------------------------------------
</TABLE>
** All average annual total return figures shown reflect the reinvestment of
dividends and capital gains distributions at net asset value. The Fund waived
fees during fiscal year 1993. A shareholder's actual return for the period
during which waivers were in effect would be the higher return within the two
categories shown.
***Average annual total return figures shown assume the deduction of the
maximum 4.50% sales charge.
Note: The Fund began offering Class A shares on November 6, 1992. Class A
shares may be subject to a maximum 4.50% front-end sales charge and are
subject to an annual service fee of 0.25% of the value of the average daily
net assets attributable to that class.
4
<PAGE>
Growth of $10,000 invested in Class A Shares
of Smith Barney Government Securities Fund/+/
- --------------------------------------------------------------------------------
November 6, 1992 - December 31, 1994
[GRAPH APPEARS HERE]
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Government Securities
Fund Class A shares on November 6, 1992 through December 31, 1994 as compared
with the growth of a $10,000 investment in Lehman Brothers Government Bond Index
and Lipper General U.S. Government Peer Group Average. The plot points used to
darw the line graph were as follows:
<TABLE>
<CAPTION>
Growth of $10,000 Growth of $10,000
Investment in the Investment in the
Growth of $10,000 Lehman Brothers Lipper General
Invested in Class A shares Government U.S. Government
Month Ended of the Fund Bond Index Peer Group Average
<S> <C> <C> <C>
10/31/92 - $10,000 $10,000
11/06/92 $9,550 - -
11/92 $9,588 $9,985 $10,008
12/92 $9,780 $10,151 $10,017
03/93 $10,254 $10,608 $10,582
06/93 $10,530 $10,915 $10,868
09/93 $10,914 $11,269 $11,172
12/93 $10,843 $11,231 $11,130
3/94 $10,535 $10,893 $10,769
6/94 $10,416 $10,768 $10,575
9/94 $10,463 $10,814 $10,578
12/94 $10,544 $10,851 $10,604
</TABLE>
/+/Illustration of $10,000 invested in Class A shares on November 6, 1992,
assuming deduction of the maximum 4.50% sales charges at the time of
investment and reinvestment of dividends and capital gains distributions at
net asset value through December 31, 1994.
The Lehman Brothers Government Bond Index is an unmanaged, broad-based index
of all public debt obligations of the U.S. government and its agencies and
has an average maturity of approximately nine years. The index is useful in
depicting the general movement of the government securities market, but
because it is unmanaged the index is not subject to the same management and
trading expenses as a mutual fund.
The Lipper General U.S. Government Peer Group Average is composed of the
Fund's peer group of 174 mutual funds investing in U.S. government securities
as of December 31, 1994.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here represent past performance and do not guarantee
future results of Class A shares.
5
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Return of Total
December 31, Beginning Ending Distributed Paid Capital Return*
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1985 $10.01 $10.20 $0.30 $1.18 -- 18.30
- ------------------------------------------------------------------------------------------
1986 10.20 10.41 0.29 0.84 -- 13.62
- ------------------------------------------------------------------------------------------
1987 10.41 8.90 0.45 0.51 -- (5.27)
- ------------------------------------------------------------------------------------------
1988 8.90 8.75 -- 0.74 -- 6.75
- ------------------------------------------------------------------------------------------
1989 8.75 9.25 -- 0.70 $0.03 14.58
- ------------------------------------------------------------------------------------------
1990 9.25 9.11 -- 0.68 0.06 6.99
- ------------------------------------------------------------------------------------------
1991 9.11 9.81 -- 0.63 0.08 16.28
- ------------------------------------------------------------------------------------------
1992 9.81 9.68 -- 0.53 0.11 5.45
- ------------------------------------------------------------------------------------------
1993 9.68 10.01 -- 0.67 -- 10.45
- ------------------------------------------------------------------------------------------
1994 10.01 9.17 -- 0.45 0.07 (3.25)
- ------------------------------------------------------------------------------------------
Total $1.04 $6.93 $0.35
- ------------------------------------------------------------------------------------------
Cumulative Total Return from 1/1/85 through 12/31/94 118.37%
- ------------------------------------------------------------------------------------------
</TABLE>
*Figures assume reinvestment of all dividends and capital gains distributions
at net asset value and do not assume deduction of the contingent sales
charge (CDSC).
- --------------------------------------------------------------------------------
Average Annual Total Return -- Class B Shares**
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge With Sales Charge***
Without Without
Actual Fee Waiver Actual Fee Waiver
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended 12/31/94 (3.25)% N/A (7.37)% N/A
- -------------------------------------------------------------------------------------
Five Years Ended 12/31/94 6.99% 6.96% 6.84% 6.80%
- -------------------------------------------------------------------------------------
Ten Years Ended 12/31/94/+/ 8.12% 8.09% 8.12% 8.09%
- -------------------------------------------------------------------------------------
</TABLE>
** All average annual total return figures shown reflect the reinvestment of
dividends and capital gains at net asset value. The Fund's investment
adviser waived fees from January 1988 to December 1989 and during fiscal
year 1993. A shareholder's actual return for the period during which waivers
were in effect would be the higher return within the two categories shown.
*** Average annual total return figures shown assume the deduction of
the applicable CDSC.
/+/ Class B shares automatically convert to Class A shares eight years after
date of the original purchase. Thus, a shareholder's actual return for the
ten years ended December 31, 1994 would be different than that reflected
above.
Note: On November 6, 1992, outstanding shares of the Fund were designated
Class B shares. Class B shares are subject to a maximum 4.50% CDSC and annual
service and distribution fees of 0.25% and 0.50%, respectively, of the value
of the average daily net assets attributable to that class.
See Notes to Financial Statements.
6
<PAGE>
Growth of $10,000 invested in Class B Shares
of Smith Barney Government Securities Fund/+
- --------------------------------------------------------------------------------
December 31, 1984 - December 31, 1994
[GRAPH APPEARS HERE]
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Government Securities
Fund Class B shares on March 20, 1984 through December 31, 1994 as compared with
the growth of a $10,000 investment in Lehman Brothers Government Bond Index and
Lipper General U.S. Government Peer Group Average. The plot points used to draw
the line graph were as follows:
<TABLE>
<CAPTION>
Growth of $10,000 Growth of $10,000
Investment in the Investment in the
Growth of $10,000 Lehman Brothers Lipper General
Invested in Class B shares Government U.S. Government
Month Ended of the Fund Bond Index Peer Group Average
<S> <C> <C> <C>
12/84 $10,000 $10,000 $10,000
03/85 $10,185 $10,212 $10,183
06/85 $10,796 $11,008 $10,818
09/85 $10,972 $11,227 $11,149
12/85 $11,830 $12,043 $11,911
03/86 $12,704 $13,086 $12,567
06/86 $13,083 $13,258 $12,634
09/86 $13,220 $13,518 $12,950
12/86 $13,442 $13,887 $13,359
03/87 $13,374 $14,050 $13,517
06/87 $12,834 $13,805 $13,185
09/87 $12,079 $13,433 $12,775
12/87 $12,734 $14,191 $13,452
03/88 $13,114 $14,659 $13,893
06/88 $13,384 $14,798 $13,036
09/88 $13,732 $15,048 $14,265
12/88 $13,593 $15,190 $14,357
03/89 $13,740 $15,351 $14,481
06/89 $14,902 $16,586 $15,485
09/89 $14,977 $16,723 $15,607
12/89 $15,576 $17,352 $16,146
03/90 $15,312 $17,136 $15,975
06/90 $15,844 $17,735 $16,495
09/90 $15,749 $17,882 $16,596
12/90 $16,664 $18,865 $17,491
03/91 $16,970 $19,274 $17,853
06/91 $17,147 $19,534 $18,048
09/91 $18,238 $20,650 $19,090
12/91 $19,378 $21,758 $20,052
03/92 $18,677 $21,377 $19,665
06/92 $19,481 $22,221 $20,407
09/92 $20,447 $23,317 $21,266
12/92 $20,433 $23,327 $21,323
3/93 $21,395 $24,379 $22,186
6/93 $21,946 $25,084 $22,786
9/93 $22,743 $25,898 $23,423
12/93 $22,570 $25,811 $23,335
3/94 $21,901 $25,033 $22,580
6/94 $21,626 $24,746 $22,173
9/94 $21,696 $24,851 $22,178
12/94 $21,837 $24,938 $22,233
</TABLE>
/+/Illustration of $10,000 invested in Class B shares on December 31, 1984,
assuming reinvestment of dividends and capital gains distributions at net
asset value through December 31, 1994.
The Lehman Brothers Government Bond Index is an unmanaged, broad-based index
of all public debt obligations of the U.S. government and its agencies and
has an average maturity of approximately nine years. The index is useful in
depicting the general movement of the government securities market, but
because it is unmanaged, the index is not subject to the same management and
trading expenses as a mutual fund.
The Lipper General U.S. Government Peer Group Average is composed of the
Fund's peer group of 174 mutual funds investing in U.S. government securities
as of December 31, 1994.
Note: All figures cited here represent past performance and do not guarantee
future results of Class B shares.
7
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Return of Total
December 31, Beginning Ending Distributed Paid Capital Return*
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2/4/93-
12/31/93 $ 9.90 $10.01 -- $0.61 -- 7.36%
- ------------------------------------------------------------------------------------------------------------
1994 10.01 9.17 -- 0.45 $0.07 (3.25)
- ------------------------------------------------------------------------------------------------------------
Total -- 1.06 $0.07
- ------------------------------------------------------------------------------------------------------------
Cumulative Total Return from 2/4/93 through 12/31/94 3.87%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the CDSC.
- --------------------------------------------------------------------------------
Average Annual Total Return -- Class C Shares**
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge With Sales Charge***
Without Without
Actual Fee Waiver Actual Fee Waiver
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended 12/31/94 (3.25)% N/A (4.16)% N/A
- -------------------------------------------------------------------------------------
Inception 2/4/93 through 12/31/94 2.01% 1.99% 2.01% 1.99%
- -------------------------------------------------------------------------------------
</TABLE>
**All average annual total return figures shown reflect the reinvestment of
dividends and capital gains at net asset value. The Fund waived fees during
fiscal year 1993. A shareholder's actual return for the period during which
waivers were in effect would be the higher return within the two categories
shown.
***Average annual total return figures assume deduction of the
applicable CDSC.
Note: The Fund began offering Class C shares on February 4, 1993. Class C shares
may be subject to a 1.00% contingent deferred sales charge if redeemed within 12
months of purchase and are subject to annual service and distribution fees of
0.25% and 0.45%, respectively, of the value of the average daily net assets
attributable to that class.
8
<PAGE>
Growth of $10,000 invested in Class C Shares
of Smith Barney Government Securities Fund/+
- --------------------------------------------------------------------------------
February 4, 1993 - December 31, 1994
[GRAPH APPEARS HERE]
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Government Securities
Fund Class C shares on February 4, 1993 through December 31, 1994 as compared
with the growth of a $10,000 investment in Lehman Brothers Government Bond Index
and Lipper General U.S. Government Peer Group Average. The plot points used to
draw the line graph were as follows:
<TABLE>
<CAPTION>
Growth of $10,000 Growth of $10,000
Investment in the Investment in the
Growth of $10,000 Lehman Brothers Lipper General
Invested in Class C shares Government U.S. Government
Month Ended of the Fund Bond Index Peer Group Average
<S> <C> <C> <C>
2/04/93 $10,000 - -
2/93 $10,040 $10,200 $10,179
3/93 $10,180 $10,234 $10,214
6/93 $10,442 $10,530 $10,490
9/93 $10,822 $10,871 $10,783
12/93 $10,736 $10,835 $10,743
3/94 $10,418 $10,509 $10,395
6/94 $10,287 $10,388 $10,208
9/94 $10,321 $10,432 $10,210
12/94 $10,387 $10,468 $10,235
</TABLE>
/+/Illustration of $10,000 invested in Class C shares on February 4, 1993
assuming reinvestment of dividends and capital gains distributions at net
asset value through December 31, 1994.
The Lehman Brothers Government Bond Index is an unmanaged, broad-based index
of all public debt obligations of the U.S. government and its agencies and
has an average maturity of approximately nine years. The index is useful in
depicting the general movement of the government securities market, but
because it is unmanaged, the index is not subject to the same management and
trading expenses as a mutual fund.
The Lipper General U.S. Government Peer Group Average is composed of the
Fund's peer group of 174 mutual funds investing in U.S. government securities
as of December 31, 1994.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
Note: All figures cited here represent past performance and do not guarantee
future results of Class C shares.
9
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) December 31, 1994
- --------------------------------------------------------------------------------
Portfolio Breakdown
[PIE CHART APPEARS HERE]
Pie chart depicting the allocation of the Investment Funds Government Securities
Fund investment securities held at December 31, 1994 by security types. The pie
is broken in pieces representing security types in the following percentages:
<TABLE>
<CAPTION>
Security Types Percentage
<S> <C>
U.S. Treasury Obligations 14.1%
Mortgage Backed Securities 84.2%
Repurchase Agreement, Options
Contracts, Futures Contracts, and
Net Other Assets and Liabilities 1.7%
</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 9.4 years
10
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Portfolio of Investments December 31, 1994
- --------------------------------------------------------------------------------
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>
<CAPTION>
Face Market Value
Value Note (1)
- --------------------------------------------------------------------------------
<S> <C>
MORTGAGE-BACKED SECURITIES -- 84.2%
Government National Mortgage Association
(GNMA) Certificates -- 82.6%
$351,363,972 GNMA 9.000%, 30 Year $356,195,227
178,635,805 GNMA 9.500%, 30 Year 185,111,353
39,555 GNMA 10.000%, 30 Year 41,668
103,083 GNMA 10.500%, 30 Year 110,234
202,075 GNMA 11.000%, 30 Year 220,262
- --------------------------------------------------------------------------------
541,678,744
- --------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation
(FHLMC) Certificates -- 1.6%
10,592,641 FHLMC 9.000%, 30 Year 10,642,215
- --------------------------------------------------------------------------------
Federal National Mortgage Association
(FNMA) Certificates -- 0.0%
923 FNMA Dwarf 8.000% due 7/2/95 905
- --------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost $557,811,675) 552,321,864
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS -- 14.1%
U.S. Treasury Notes -- 2.4%
5,000,000 5.750% due 8/15/03 ** 4,347,750
13,000,000 5.875% due 2/15/04 11,340,810
- --------------------------------------------------------------------------------
15,688,560
- --------------------------------------------------------------------------------
Zero Coupon Treasury Securities -- 11.7%
330,000,000 U.S. Treasury Strips, due 2/15/15 67,320,000
63,000,000 U.S. Treasury Strips, due 2/15/19 9,434,880
- --------------------------------------------------------------------------------
76,754,880
- --------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $90,113,763) 92,443,440
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (continued) December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value
Contracts Note (1)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
PUT OPTION PURCHASED -- 0.0% (Cost $72,386)
226 U.S. Treasury Bond, March, $94.00 $ 38,844
- ------------------------------------------------------------------------------------------
CALL OPTION PURCHASED -- 0.0% (Cost $63,162)
105 U.S. Treasury Bond, March, $102.00 44,297
- ------------------------------------------------------------------------------------------
Face Value
- ------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 1.0% (Cost $6,783,000)
$6,783,000 Agreement with Barclay's Bank of New York,
5.700% dated 12/30/94, to be repurchased at
$6,787,296 on 1/3/95, collateralized by $6,570,000
U.S. Treasury Notes, 8.500% due 7/15/97 6,783,000
- ------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $654,843,986*) 99.3% 651,631,445
- ------------------------------------------------------------------------------------------
Contracts
- ------------------------------------------------------------------------------------------
FUTURES CONTRACT -- LONG POSITION -- 17.6% (Cost $115,143,750)
1150 U.S. Treasury Note, March 1995 17.6% 114,928,125
- ------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (Net) (16.9) (110,803,845)
- ------------------------------------------------------------------------------------------
NET ASSETS 100.0% $ 655,755,725
- ------------------------------------------------------------------------------------------
</TABLE>
* Aggregate cost for Federal tax purposes.
** Security pledged as collateral for futures contracts.
See Notes to Financial Statements.
12
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at value (Cost $654,843,986) (Note 1)
See accompanying schedule $651,631,445
Cash 72,236
Receivable for investment securities sold 217,612,482
Futures contracts - long position, at value
(Cost $115,143,750) (Note 1) See accompanying schedule 114,928,125
Interest receivable 4,579,664
Receivable for Fund shares sold 1,963,723
- -------------------------------------------------------------------------------------
Total Assets 990,787,675
- -------------------------------------------------------------------------------------
<CAPTION>
LIABILITIES:
<S> <C> <C>
Payable for investment securities purchased $217,517,543
Aggregate exercise cost of futures - long position 115,143,750
Dividends payable 1,073,337
Payable for Fund shares redeemed 521,923
Investment advisory fee payable (Note 2) 194,712
Service fee payable (Note 3) 139,080
Administration fee payable (Note 2) 111,264
Custodian fees payable (Note 2) 85,789
Distribution fee payable (Note 3) 73,635
Transfer agent fees payable (Note 2) 69,961
Accrued expenses and other payables 100,956
- -------------------------------------------------------------------------------------
Total Liabilities 335,031,950
- -------------------------------------------------------------------------------------
NET ASSETS $655,755,725
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1994
- --------------------------------------------------------------------------------
December 31, 1994
<TABLE>
<CAPTION>
NET ASSETS consist of:
<S> <C>
Accumulated net realized loss on investments sold $ (622,061,928)
Net unrealized depreciation of securities and futures contracts (3,428,166)
Par value 71,475
Paid-in capital in excess of par value 1,281,174,344
- -------------------------------------------------------------------------------------
TOTAL NET ASSETS $ 655,755,725
- -------------------------------------------------------------------------------------
<CAPTION>
NET ASSET VALUE:
<S> <C>
CLASS A SHARES:
Net asset value and redemption price per share
($482,404,076 / 52,579,944 shares of common stock outstanding) $9.17
- -------------------------------------------------------------------------------------
Maximum offering price per share ($9.17 / 0.955)
(based on maximum sales charge of 4.5% of the offering price on
December 31, 1994) $9.60
- -------------------------------------------------------------------------------------
CLASS B SHARES:
Net asset value and offering price per share/+/
($172,705,164 / 18,824,589 shares of common stock outstanding) $9.17
- -------------------------------------------------------------------------------------
CLASS C SHARES:
Net asset value and offering price per share/+/
($646,485 / 70,470 shares of common stock outstanding) $9.17
- -------------------------------------------------------------------------------------
</TABLE>
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See Notes to Financial Statements.
14
<PAGE>
Smith Barney
Government Securities Fund
- ------------------------------------------------------------------------------
Statement of Operations
- ------------------------------------------------------------------------------
For the Year Ended December 31, 1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 54,732,208
- ---------------------------------------------------------------------------------------
EXPENSES:
Distribution fee (Note 3) $3,013,419
Investment advisory fee (Note 2) 2,578,209
Service fee (Note 3) 1,841,578
Administration fee (Note 2) 1,473,262
Transfer agent fees (Notes 2 and 4) 742,400
Custodian fees (Note 2) 346,759
Legal and audit fees 89,734
Directors' fees and expenses (Note 2) 45,972
Other 156,597
- ---------------------------------------------------------------------------------------
Total operating expenses before interest 10,287,930
Interest expense (Notes 5 and 8) 1,868,717
- ---------------------------------------------------------------------------------------
Total Expenses 12,156,647
- ---------------------------------------------------------------------------------------
NET INVESTMENT INCOME 42,575,561
- ---------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON
INVESTMENTS (Notes 1 and 5):
Net realized gain/(loss) on:
Securities transactions (72,012,683)
Futures contracts (584,161)
- ---------------------------------------------------------------------------------------
Net realized loss on investments during the year (72,596,844)
- ---------------------------------------------------------------------------------------
Net change in unrealized appreciation/(depreciation) of:
Securities 3,765,327
Futures contracts (167,156)
- ---------------------------------------------------------------------------------------
Net unrealized appreciation of investments
during the year 3,598,171
- ---------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (68,998,673)
- ---------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (26,423,112)
- ---------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Year
Ended Ended
12/31/94 12/31/93
<S> <C> <C>
Net investment income $ 42,575,561 $ 69,810,331
Net realized gain/(loss) on securities sold and futures
contracts during the year (72,596,844) 54,093,456
Net unrealized appreciation/(depreciation) on
investments and futures contracts during the year 3,598,171 (24,623,673)
- ---------------------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting
from operations (26,423,112) 99,280,114
Distributions to shareholders from net investment
income:
Class A (7,072,146) (411,654)
Class B (28,417,180) (61,210,432)
Class C (18,133) (7,883)
Distributions from capital:
Class A (1,068,824) --
Class B (4,294,729) --
Class C (2,740) --
Net increase/(decrease) in net assets from
Fund share transactions (Note 6):
Class A 480,126,692 6,782,595
Class B (616,164,727) (233,212,716)
Class C 460,464 214,302
- ----------------------------------------------------------------------------------------------------
Net decrease in net assets (202,874,435) (188,565,674)
NET ASSETS:
Beginning of year 858,630,160 1,047,195,834
- ----------------------------------------------------------------------------------------------------
End of year (including undistributed net investment
income of $92,682 at December 31, 1993) $655,755,725 $ 858,630,160
- ----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a Class A share outstanding throughout each year.
<TABLE>
<CAPTION>
Year Year Period
Ended Ended Ended
12/31/94 12/31/93/+++/ 12/31/92*
<S> <C> <C> <C>
Net Asset Value, beginning of year $10.01 $ 9.69 $9.56
- ---------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.52 0.81/#/ 0.10
Net realized and unrealized gain/(loss) on
investments (0.80) 0.23 0.13
- ---------------------------------------------------------------------------------------------
Total from investment operations (0.28) 1.04 0.23
- ---------------------------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.49) (0.72) (0.08)
Distributions from capital (0.07) -- (0.02)
- ---------------------------------------------------------------------------------------------
Total distributions (0.56) (0.72) (0.10)
- ---------------------------------------------------------------------------------------------
Net Asset Value, end of year $ 9.17 $10.01 $9.69
Total Return /+/ (2.76)% 10.87% 2.41%
- ---------------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets end of year (in 000's) $482,404 $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 6.18% 7.76% 6.24%**
Portfolio turnover rate 276% 540% 426%
- ---------------------------------------------------------------------------------------------
</TABLE>
* 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 years ended December 31, 1994 and
1993 and the period ended December 31, 1992 were 1.26%, 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 shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed method does not accord with results of
operations for all classes of shares.
/#/ Net investment income before voluntary waiver of fees by investment adviser
for the year ended December 31, 1993 was $0.71.
See Notes to Financial Statements.
17
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a Class B share outstanding throughout each year.
<TABLE>
<CAPTION>
Year Year Year Year
Ended Ended Ended Ended
12/31/94 12/31/93/+++/ 12/31/92* 12/31/91
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $10.01 $9.68 $9.81 $9.11
- --------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income/#/ 0.46 0.73 0.53 0.70
Net realized and unrealized
gain/(loss) on investments (0.78) 0.27 (0.02) 0.71
- --------------------------------------------------------------------------------------------
Total from investment
operations (0.32) 1.00 0.51 1.41
Less distributions:
Distributions from net
investment income (0.45) (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 (0.07) -- (0.11) (0.08)
- --------------------------------------------------------------------------------------------
Total distributions (0.52) (0.67) (0.64) (0.71)
- --------------------------------------------------------------------------------------------
Net Asset Value, end of year $9.17 $10.01 $9.68 $9.81
- --------------------------------------------------------------------------------------------
Total Return/+/ (3.25)% 10.45% 5.45% 16.28%
- --------------------------------------------------------------------------------------------
Ratios to average net assets/
supplemental data:
Net assets end of
year (in 000's) $172,705 $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 5.69% 7.28% 5.47% 6.80%
Portfolio turnover rate 276% 540% 426% 326%
- --------------------------------------------------------------------------------------------
</TABLE>
* Shares in existence prior to November 6, 1992 were designated Class B
shares.
/+/ Total return represents aggregate total return for the period indicated
and does not reflect any applicable sales charges.
/++/ The operating expense ratios exclude interest expense. The ratios including
interest expense for the years ended December 31, 1994, 1993 and 1992 were
1.74%, 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 shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed method does not accord with results of
operations for all classes of shares.
/#/ Net investment income before voluntary waiver of fees by investment adviser
and/or distributor for the years ended December 31, 1993, 1989 and 1988
were $0.72, $0.69, and $0.74, respectively.
@ Not covered by Coopers & Lybrand's report.
See Notes to Financial Statements.
18
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
12/31/90@ 12/31/89 12/31/88@ 12/31/87@ 12/31/86@ 12/31/85@
<S> <C> <C> <C> <C> <C>
$9.25 $8.75 $8.90 $10.41 $10.20 $10.01
- --------------------------------------------------------------------------------------
0.68 0.70 0.75 0.51 0.84 0.90
(0.08) 0.53 (0.16) (1.06) 0.50 0.77
- --------------------------------------------------------------------------------------
0.60 1.23 0.59 (0.55) 1.34 1.67
(0.68) (0.70) (0.74) (0.51) (0.84) (1.18)
-- -- -- (0.05) -- --
-- -- -- (0.40) (0.29) (0.30)
(0.06) (0.03) -- -- -- --
- ---------------------------------------------------------------------------------------
(0.74) (0.73) (0.74) (0.96) (1.13) (1.48)
- ---------------------------------------------------------------------------------------
$9.11 $9.25 $8.75 $8.90 $10.41 $10.20
- ---------------------------------------------------------------------------------------
6.99% 14.58% 6.75% (5.27)% 13.62% 18.30%
- ---------------------------------------------------------------------------------------
$1,521,016 $2,001,740 $2,735,974 $4,383,816 $6,072,390 $3,053,758
1.43% 1.40% 1.34% 1.64% 1.56% 1.67%
7.60% 7.79% 8.00% 6.44% 6.20% 8.60%
274% 352% 281% 249% 353% 457%
- ---------------------------------------------------------------------------------------
</TABLE>
* Shares in existence prior to November 6, 1992 were designated
Class B shares.
/+/ Total return represents aggregate total return for the period indicated and
does not reflect any applicable sales charges.
/++/ The operating expense ratios exclude interest expense. The ratios including
interest expense for the years ended December 31, 1994, 1993 and 1992 were
1.74%, 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 shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed method does not accord with results of
operations for all classes of shares.
/#/ Net investment income before voluntary waiver of fees by investment adviser
and/or distributor for the years ended December 31, 1993, 1989 and 1988
were $0.72, $0.69, and $0.74, respectively.
@ Not covered by Coopers & Lybrand's report.
See Notes to Financial Statements.
19
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a Class C share outstanding throughout each period.
<TABLE>
<CAPTION>
Year Period
Ended Ended
12/31/94 12/31/93*+++
<S> <C> <C>
Net Asset Value, beginning of period $10.01 $9.90
- -----------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.49 0.68#
Net realized and unrealized gain/(loss) on investments (0.81) 0.04
- -----------------------------------------------------------------------------
Total from investment operations (0.32) 0.72
- -----------------------------------------------------------------------------
Less distributions:
Distributions from net investment income (0.45) (0.61)
Distributions from capital (0.07) --
- -----------------------------------------------------------------------------
Total distributions (0.52) (0.61)
- -----------------------------------------------------------------------------
Net Asset Value, end of period $9.17 $10.01
- -----------------------------------------------------------------------------
Total Return+ (3.25)% 7.36%
=============================================================================
Ratios to average net assets/supplemental data:
Net assets end of period (in 000's) $646 $213
Ratio of operating expenses to average net assets++ 1.47% 1.40%**
Ratio of net investment income to average net assets 5.71% 7.28%**
Portfolio turnover rate 276% 540%
==============================================================================
</TABLE>
* The Fund commenced selling Class C shares (previously designated as Class D
shares) on February 4, 1993.
** Annualized.
+ Total return represents aggregate total return for the period indicated.
++ The annualized operating expense ratios exclude interest expense. The
ratios including interest expense for the year ended December 31, 1994 and
the period ended December 31, 1993 were 1.72% and 1.55%. Annualized expense
ratio before voluntary waiver of fees by investment adviser (including
interest expense) for the period ended December 31, 1993 was 1.61%.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed method does not accord with results of
operations for all classes of shares.
# Net investment income before voluntary waiver of fees by investment adviser
for the period ended December 31, 1993 was $0.55.
See Notes to Financial Statements.
20
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Investment Funds Inc. (the "Company") (formerly known as Smith
Barney Shearson Investment Funds Inc.) 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 (the "Funds"): Smith Barney Investment
Grade Bond Fund, Smith Barney Government Securities Fund (the "Fund"), Smith
Barney Special Equities Fund and Smith Barney European Fund. Effective November
7, 1994, the Fund began offering Class Y shares and continued to offer Class A,
Class B and Class C shares (Class C shares were previously designated "Class D"
shares). As of December 31, 1994, no Class Y shares have been sold. Class A
shares are sold with a front-end sales charge. Class B and Class C shares may be
subject to a contingent deferred sales charge ("CDSC") upon redemption. Class B
shares will convert automatically to Class A shares eight years after the
original purchase date. Class Y shares are available to investors making an
initial investment of at least $5 million and are not subject to any sales
charges, distribution or service fees. 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 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
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
21
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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. Short-
term instruments maturing within 60 days of the valuation date are valued at
amortized cost.
Futures Contracts: The Fund may enter into futures contracts. The Fund's
futures transactions will be entered into for hedging purposes to protect
against a decline in the price of securities that the Fund owns, or to
protect the Fund against an increase in the price of securities it is
committed to purchase.
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
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
22
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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
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
23
<PAGE>
Smith Barney
Government Securities Fund
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- -------------------------------------------------------------------------------
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 Board of Directors, reviews the value of
the collateral and the creditworthiness of those banks and dealers with which
the Fund enters into repurchase agreements to evaluate potential risks.
Reverse repurchase agreements: The Fund may enter into reverse repurchase
agreement transactions with member banks on the Federal Reserve Bank of New
York's list of reporting dealers for leverage purposes. A reverse repurchase
agreement involves a sale by the Fund of securities that it holds with an
agreement by the Fund to repurchase the same securities at an agreed upon
price and date. A reverse repurchase agreement involves the risk that the
market value of the securities sold by the Fund may decline below the
repurchase price of the securities. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the Fund's use of the proceeds of the agreement may be restricted
pending a determination by the party, or its trustee or receiver, whether to
enforce the Fund's obligation to repurchase the securities. The Fund will
establish a segregated account with its custodian, Boston Safe Deposit and
Trust Company ("Boston Safe"), in which the Fund will maintain cash, U.S.
government securities or other liquid high grade debt obligations equal in
value to its obligations with respect to reverse repurchase agreements.
Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Investment income and realized and unrealized gains and losses are allocated
based upon the relative net assets of each class.
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
24
<PAGE>
Smith Barney
Government Securities Fund
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- -------------------------------------------------------------------------------
loss carryforwards, are determined on a Fund level and will be distributed at
least annually. Net short-term capital gains (including, any short-term capital
gains from options transactions) may be paid more frequently, with the
distribution of dividends from net investment income. Additional distributions
of net investment income and capital gains may be made at the discretion of the
Board of Directors to avoid the application of the excise tax imposed under the
Code for certain undistributed amounts. Income distributions and capital gain
distributions on a Fund level are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles.
These differences are primarily due to differing treatments of income and gains
on various investment securities held by the Fund, timing differences and
differing characterization of distributions made by the Fund as a whole.
Permanent differences incurred during the Fund's fiscal year resulting from
different book and tax accounting for certain debt securities have been
reclassified from income to capital gains. Permanent differences incurred during
the Fund's fiscal year resulting from overdistributions of income are
reclassified to paid-in capital at year end.
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.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER
TRANSACTIONS
The Fund has entered into an investment advisory agreement (the "Advisory
Agreement") with a division of Mutual Management Corp., which has been
transferred effective November 7, 1994 to Smith Barney Mutual Funds
Management Inc. ("SBMFM"). Mutual Management Corp. and SBMFM are both wholly
owned subsidiaries of 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 annual rate of 0.35% of the value of its
average daily net assets up to $2 billion, 0.30% of the value of the average
daily net assets of the next $2 billion, 0.25% of the value of its average
daily net assets on the next $2 billion, 0.20% of the value of average daily
net assets of the next $2 billion and 0.15% of the value of its average daily
net assets thereafter.
25
<PAGE>
Smith Barney
Government Securities Fund
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- -------------------------------------------------------------------------------
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 this agreement, the Fund paid a monthly fee at an annual
rate of 0.20% of the value of its average daily net assets.
As of the close of business on May 5, 1994, SBMFM (formerly known as "Smith,
Barney Advisers, Inc.") 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 and SBMFM entered into a
sub-administration agreement (the "Sub-Administration Agreement") with Boston
Advisors. Under the Sub-Administration Agreement, SBMFM pays Boston Advisors
a portion of its administration fee at a rate agreed upon from time to time
between SBMFM and Boston Advisors.
For the year ended December 31, 1994, Smith Barney Inc. ("Smith Barney")
received $66,217 from investors representing commissions (sales charges) on
sales of Class A shares.
A CDSC is generally payable by a shareholder in connection with the
redemption of Class B shares within five years (eight years in the case of
certain 401(k) plans) after the date of purchase. In circumstances in which
the charge is imposed, the amount of the charge ranges between 4.50% and
1.00% 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 3.00% charge is imposed for the eight year period after the date of
the purchase). A CDSC may be payable by a shareholder in connection with the
redemption of Class C shares within one year after the date of purchase. In
circumstances in which the charge is imposed, the amount of the charge is
1.00% of net asset value. For the year ended December 31, 1994, Smith Barney
received $629,700 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
officer, director or employee of Smith Barney or any of its affiliates
$16,000 per annum plus $2,500 per meeting attended and reimburses each such
Director for travel and out-of-pocket-expenses.
26
<PAGE>
Smith Barney
Government Securities Fund
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- -------------------------------------------------------------------------------
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 C shareholders, and covers expenses incurred in distributing Class B
and Class C shares. Smith Barney is paid an annual services fee with respect
to Class A, Class B and Class C 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 C shares at the rates of 0.50% and 0.45%, respectively, of the
value of the average daily net assets of that class. For the year ended
December 31, 1994, the Fund paid service fees of $334,848, $1,505,763 and
$967 for Class A, Class B and Class C shares, respectively. For the year
ended December 31, 1994, the Fund paid distribution fees of $3,011,526 and
$1,893 for Class B and Class C shares, respectively.
Under its terms, the Plan shall remain in effect from year to year, provided
that such continuance is approved annually by vote of the Company's
Directors, including a majority of those Directors who are not "interested
persons" of the Company and who have no direct or indirect financial interest
in the operation of the Plan.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any class
of shares are prorated among the classes based upon the relative net assets
of each class. Operating expenses directly attributable to a class of shares
are charged to that class' operations. In addition to the above service and
distribution fees, class specific operating expenses include the transfer
agent fees. For the year ended December 31, 1994, the Fund paid transfer
agent fees of $153,524, $588,525 and $351 for Class A, Class B and Class C
shares, respectively.
27
<PAGE>
Smith Barney
Government Securities Fund
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- -------------------------------------------------------------------------------
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of U.S. government securities,
excluding short-term investments, aggregated $2,076,332,228 and $2,207,734,351,
respectively, for the year ended December 31, 1994.
At December 31, 1994, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$4,449,541, and aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value was $7,662,082.
Information regarding borrowing by the Fund under reverse repurchase
agreements is as follows: At December 31, 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 $68,617,107. 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 year ended
December 31, 1994. Interest rates ranged from 0.875% to 4.500% during the
year ended December 31, 1994. Interest paid for the year ended December 31,
1994, on borrowings by the Fund under reverse repurchase agreements
aggregated $1,866,218.
6. SHARES OF COMMON STOCK
As of December 31, 1994, the Company had authorized on behalf of the Fund
capital of 2.35 billion shares of $.001 par value common stock. The shares
are divided by the Fund into four classes of shares, Class A, Class B, Class
C and Class Y.
28
<PAGE>
Smith Barney
Government Securities Fund
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- -------------------------------------------------------------------------------
Changes in the common stock outstanding were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/94 12/31/93
Class A shares: Shares Amount Shares Amount
===================================================================================================
<S> <C> <C> <C> <C>
Sold 55,125,066 $509,930,623 1,054,136 $10,586,544
Issued as reinvestment of dividends 576,397 5,287,429 30,502 308,583
Redeemed (3,827,269) (35,091,360) (407,209) (4,112,521)
- --------------------------------------------------------------------------------------------------
Net increase 51,874,194 $480,126,692 677,429 $ 6,782,595
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/94 12/31/93
Class B shares: Shares Amount Shares Amount
===================================================================================================
<S> <C> <C> <C> <C>
Sold 3,129,510 $ 29,835,343 6,495,924 $ 65,355,298
Issued as reinvestment of dividends 2,182,177 20,819,966 3,961,687 39,944,292
Redeemed (71,498,609) (666,820,036) (33,549,100) (338,512,306)
- --------------------------------------------------------------------------------------------------
Net decrease (66,186,922) $(616,164,727) (23,091,489) $(233,212,716)
===================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/94 12/31/93*
Class C shares: Shares Amount Shares Amount
===================================================================================================
<S> <C> <C> <C> <C>
Sold 58,124 $ 543,278 20,640 $207,781
Issued as reinvestment of dividends 2,201 20,652 780 7,883
Redeemed (11,143) (103,466) (132) (1,362)
- --------------------------------------------------------------------------------------------------
Net increase 49,182 $ 460,464 21,288 $214,302
===================================================================================================
</TABLE>
*The Fund commenced selling Class C shares on February 4, 1993.
As of December 31, 1994, no Class Y shares had been sold.
7. CAPITAL LOSS CARRYFORWARDS
At December 31, 1994, the Fund had available for federal tax purposes unused
capital loss carryforwards of $391,564,060, $148,463,086 and $66,688,191
expiring in 1995, 1996 and 2002, respectively.
8. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Bank of America (formerly Continental Bank N.A.) under an
Amended and Restated Line of Credit Agreement (the "Agreement") dated
29
<PAGE>
Smith Barney
Government Securities Fund
- -------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- -------------------------------------------------------------------------------
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 25% of its net assets,
adjusted for purposes of this Agreement. 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 year ended December 31, 1994, the Fund had an average
outstanding daily balance of $47,123 with interest rates ranging from 5.188% to
5.875%. Interest expense totalled $2,499 for the year ended December 31, 1994.
At December 31, 1994, the Fund had no outstanding borrowings under this
Agreement.
30
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
SMITH BARNEY GOVERNMENT SECURITIES FUND OF
SMITH BARNEY INVESTMENT FUNDS INC.:
We have audited the accompanying statement of assets and liabilities of Smith
Barney Government Securities Fund of Smith Barney Investment Funds Inc.
(formerly Smith Barney Shearson Government Securities Fund of Smith Barney
Shearson Investment Funds Inc.), including the schedule of portfolio
investments, as of December 31, 1994, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the two years in the period then ended and the financial highlights for each
of the six years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1994 by correspondence with the custodian
and brokers. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly in all material respects, the financial position of
Smith Barney Government Securities Fund of Smith Barney Investment Funds Inc.
as of December 31, 1994, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the six years in the
period then ended, in conformity with generally accepted accounting
principles.
Coopers & Lybrand, L.L.P.
Boston, Massachusetts
February 10, 1995
31
<PAGE>
Smith Barney
Government Securities Fund
- --------------------------------------------------------------------------------
Participants
- --------------------------------------------------------------------------------
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER AND
ADMINISTRATOR
Smith Barney Mutual Funds
Management Inc.
388 Greenwich Street
New York, New York 10013
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
COUNSEL
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
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
32
<PAGE>
GOVERNMENT
SECURITIES
FUND
DIRECTORS
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank G. Hubbard
Allan R. Johnson
Heath B. McLendon
Ken Miller
John F. White
OFFICERS
Heath B. McLendon
Chairman of the Board
Jessica M. Bibliowicz
President
James E. Conroy
First Vice President
and Investment Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Christina T. Sydor
Secretary
[LOGO OF SMITH BARNEY APPEARS HERE]
This report is submitted for the general information of the shareholders of
Smith Barney 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.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 105, 177, 212, 458
FD 0316 B5
1994 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 INVESTMENT GRADE BOND FUND
DECEMBER 31, 1994
DEAR SHAREHOLDER:
We are pleased to provide you with the Annual Report which includes the
portfolio of investments for Smith Barney Investment Grade Bond Fund for
the fiscal year ended December 31, 1994.
The year 1994 was characterized by relatively strong economic growth, a
stock market in which gains were minimal, and a dramatic rise in both
short-term and long-term interest rates. To further complicate an analysis
of the year, the Consumer Price Index, which measures inflation, was lower
in 1994 than in 1993. Even more incredible was the fact that corporate
profits rose dramatically without generating significantly higher stock
prices.
Is there no good news left for investors? Has the financial community lost
its collective perspective? Even more perplexing, is what will happen in
the years ahead as investors re-examine their investment objectives and
financial plans.
Let us try to give you our insights as we move forward in the 1990s.
First and foremost, our investment philosophy and investment strategy have
not changed. True investment decisions and returns are a multi-year propo-
sition and the element of time will help to level the peaks and valleys.
Secondly, a great deal of market actions are based on perceptions and
opinions about the future. They are not necessarily reactions to current
events.
Third -- and very important -- is the realization that trends and powerful
forces exert their influence for a long period of time.
It is our belief that the actions taken by the Federal Reserve Board in
1994 -- raising short-term interest rates -- was the right monetary policy
decision. We believe they acted in a timely fashion with the proper amount
of restraint. We are in complete agreement that it is extremely important
to be vigilant in preventing a resurgence in inflation and, more impor-
tantly, to reassure long-term fixed income investors that the Fed's re-
solve is not subject to political pressures.
We would take this opportunity to reaffirm our long-term positive outlook
for the fixed income markets. We remain fully invested in long-term secu-
rities with an average maturity of 26 years and an average credit rating
of single-A because it remains our belief that the long-term trend in his-
torically low levels of inflation remains in place. It is this trend which
ultimately determines long- term interest rates. Ancillary factors includ-
ing a competitive global economy, improvements in United States manufac-
turing productivity and a reduction in our Federal budget deficit will
contribute to keeping this trend in place.
DIVIDEND POLICY
Although not explicitly stated in the prospectus, the Fund's policy is to
pay a level monthly dividend based on our projections for the corporate
bond market and the general direction of interest rates. This policy has
no appreciable affect on the Fund's investment strategies or net asset
value per share since it is guided by market conditions. It means that we
do not invest in more speculative securities that may undermine the
Funds's net asset value per share in order to maintain an unrealistically
high dividend policy. We continually monitor both the market and the
Fund's income stream to see that our dividend projections are realistic.
We appreciate your confidence during the difficult investment environment
of 1994, and join you in looking forward to a more benign 1995. Should you
have any questions about your investment in the Fund or how other Smith
Barney mutual funds may be useful in helping you reach your financial
goals, please speak with your Smith Barney Financial Consultant.
Sincerely,
Heath B. McLendon
Chairman of the Board
and Investment Officer
George E. Mueller, Jr.
Investment Officer
February 13, 1995
PORTFOLIO HIGHLIGHTS (UNAUDITED)
DECEMBER 31, 1994
DESCRIPTION OF PIE CHARTS IN
SHAREHOLDER REPORT
INDUSTRY BREAKDOWN
Pie chart depicting the allocation of the Investment Portfolios Investment
Grade Bond Fund investment securities held at December 31, 1994 by indus-
try classification. The pie is broken in pieces representing industries in
the following percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
AEROSPACE 7.6%
AUTOMOTIVE 8.5%
AIRLINES 11.2%
FOOD AND BEVERAGE 21.1%
U.S. GOVERNMENT AGENCY SECURITIES, REPURCHASE
AGREEMENT AND NET OTHER ASSETS AND LIABILITIES 2.9%
YANKEE BONDS 13.0%
OTHER CORPORATE BONDS 16.1%
RETAIL STORES 5.9%
PUBLISHING 6.1%
PAPER PRODUCTS 7.6%
</TABLE>
AVERAGE MATURITY: 26 YEARS
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY NET ASSETS
<S> <C>
HERSHEY FOODS CORPORATION 4.8%
FORD MOTOR COMPANY 4.4
GENERAL MOTORS CORPORATION 4.1
HYDRO-QUEBEC 4.1
BOEING COMPANY 4.0
UNITED AIRLINES INC. 4.0
SEAGRAMS LIMITED 3.9
INTERNATIONAL BANK FOR RECONSTRUCTION AND
DEVELOPMENT 3.8
AMR CORPORATION 3.8
RALSTON PURINA COMPANY 3.6
</TABLE>
HISTORICAL PERFORMANCE -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
YEAR ENDED CAPITAL GAINS DIVIDENDS RETURN OF TOTAL
DECEMBER 31 BEGINNING ENDING DISTRIBUTED PAID CAPITAL RETURN*
<S> <C> <C> <C> <C> <C> <C>
11/6/92-
12/31/92 $11.67 $11.89 -- $0.14 $0.01 3.25%
1993 11.89 13.01 $0.14 0.89 -- 18.45
1994 13.01 10.67 0.31 0.86 0.03 (8.95)
Total $0.45 $1.89 $0.04
Cumulative Total Return from 11/06/92 through 12/31/94 11.36%
<FN>
*Figures assume reinvestment of all dividends and capital gains distribu-
tions at net asset value and do not assume deduction of the sales charge
(maximum 4.50%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
AVERAGE ANNUAL TOTAL RETURN -- CLASS A SHARES**
<TABLE>
<CAPTION>
WITHOUT SALES CHARGE WITH SALES CHARGE***
<S> <C> <C>
Year Ended 12/31/94 (8.95)% (13.05)%
Inception 11/6/92
through 12/31/94 5.13% 2.90%
<FN>
** All average annual total return figures shown reflect the reinvest-
ment of dividends and capital gains at net asset value.
*** Average annual total return figures shown assume the deduction of
the maximum 4.50% front-end sales charge.
</TABLE>
NOTE: The Fund began offering Class A shares on November 6, 1992.
Class A shares are subject to a maximum 4.50% front-end sales charge
and an annual service fee of 0.25% of the value of the average daily
net assets attributable to that class.
GROWTH OF $10,000 INVESTED IN CLASS A SHARES
OF SMITH BARNEY INVESTMENT GRADE BOND FUND VS.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX
AND LIPPER CORPORATE DEBT-A RATED AVERAGE+
November 6, 1992 -- December 31, 1994
DESCRIPTION OF MOUNTAIN CHART
IN COVERS (CLASS A)
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in In-
vestment Grade Bond Fund Class A shares on November 6, 1992 through Decem-
ber 31, 1994 as compared with the growth of a $10,000 investment in Lehman
Brothers Long-Term Corporate Bond Index and Lipper Corporate Debt A-Rated
Average. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE GROWTH OF $10,000
GROWTH OF $10,000 LEHMAN BROTHERS INVESTMENT IN THE
MONTH INVESTED IN CLASS A LONG-TERM CORPORATE LIPPER CORPORATE
ENDED SHARES OF THE FUND BOND INDEX DEBT A-RATED AVERAGE
<S> <C> <C> <C>
10/31/92 $10,000 $10,000 $10,000
11/06/92 $ 9,550 -- --
11/92 $ 9,603 $10,070 $10,001
12/92 $ 9,860 $10,298 $10,171
03/93 $10,478 $10,847 $10,674
06/93 $11,102 $11,276 $11,013
09/93 $11,831 $11,779 $11,413
12/93 $11,680 $11,701 $11,378
03/94 $10,982 $11,157 $10,964
06/94 $10,533 $10,847 $10,760
09/94 $10,461 $10,872 $10,785
12/94 $10,635 $11,028 $10,817
<FN>
+ Illustration of $10,000 invested in Class A shares on November 6, 1992
assuming deduction of a maximum 4.5% sales charge at the time of invest-
ment and reinvestment of dividends and capital gains at net asset value
through December 31, 1994.
</TABLE>
THE LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX is an unmanaged index
comprised of all publicly issued, fixed rate, nonconvertible, dollar-
denominated investment-grade corporate debt. The average maturity of the
bonds in this index is approximately 23 years and includes bonds from a
diverse range of industries. Because it is unmanged, the Lehman Brothers
Long-Term Corporate Bond Index is not subject to the same management and
trading expenses as a mutual fund.
THE LIPPER CORPORATE DEBT A-RATED AVERAGE is composed of the Fund's peer
group of 75 mutual funds as of December 31, 1994.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here represent past performance and do not
guarantee future results.
HISTORICAL PERFORMANCE -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
YEAR ENDED CAPITAL GAINS DIVIDENDS RETURN OF TOTAL
DECEMBER 31 BEGINNING ENDING DISTRIBUTED PAID CAPITAL RETURN*
1985 $10.88 $12.00 $0.11 $1.39 -- 26.43%
<S> <C> <C> <C> <C> <C> <C>
1886 12.00 12.91 0.25 1.10 -- 19.54
1987 12.91 10.55 0.89 1.12 -- (2.83)
1988 10.55 10.33 -- 0.88 -- 6.43
1989 10.33 11.01 -- 0.87 -- 15.57
1990 11.01 10.43 -- 0.87 -- 2.98
1991 10.43 11.80 -- 0.87 -- 22.50
1992 11.80 11.89 -- 0.83 $0.03 8.36
1993 11.89 13.01 0.14 0.83 -- 18.06
1994 13.01 10.67 0.31 0.80 0.03 (9.41)
Total $1.70 $9.56 $0.06
Cumulative Total Return from 1/1/85 through 12/31/94 164.07%
<FN>
* Figures assume reinvestment of all dividends and capital gains distri-
butions at net asset value and do not assume deduction of the contin-
gent deferred sales charge ("CDSC").
</TABLE>
AVERAGE ANNUAL TOTAL RETURN -- CLASS B SHARES**
<TABLE>
<CAPTION>
WITHOUT CDSC WITH CDSC***
WITH WITHOUT WITH WITHOUT
WAIVER WAIVER WAIVER WAIVER
<S> <C> <C> <C> <C>
Year Ended
12/31/94 (9.41)% N/A (13.10)% N/A
Five Years Ended
12/31/94 7.89% 7.88% 7.75% 7.74%
Ten Years Ended
12/31/94+ 10.20% 10.16% 10.20% 10.16%
<FN>
** All average annual total return figures shown reflect the reinvest-
ment of dividends and capital gains at net asset value. The Fund's
distributor waived fees from January 1988 to December 1989. A share-
holder's actual return for the period during which waivers were in
effect would be the higher of the two numbers shown.
*** Average annual total return figures shown assume the deduction of
the maximum applicable CDSC which is described in the prospectus.
+ Class B shares automatically convert to Class A shares eight years
after date of original purchase. Thus, a shareholders actual return
for the ten years ended December 31, 1994 would be different than
that reflected above.
</TABLE>
NOTE: On November 6, 1992, existing shares of the Fund were desig-
nated Class B shares. Class B shares are subject to a maximum 4.50%
CDSC and annual service and distribution fees of 0.25% and 0.50%,
respectively, of the value of the average daily net assets attribut-
able to that class.
GROWTH OF $10,000 INVESTED IN CLASS B SHARES
OF SMITH BARNEY INVESTMENT GRADE BOND FUND VS.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX
AND LIPPER CORPORATE DEBT-A RATED AVERAGE+
December 31, 1984 -- December 31, 1994
DESCRIPTION OF MOUNTAIN CHART
IN COVERS (CLASS B)
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in In-
vestment Grade Bond Fund Class B shares on December 31, 1984 through De-
cember 31, 1994 as compared with the growth of a $10,000 investment in the
Lehman Brothers Long-Term Corporate Bond Index and Lipper Corporate Debt
A-Rated Average. The plot points used to draw the line graph were as fol-
lows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE GROWTH OF $10,000
GROWTH OF $10,000 LEHMAN BROTHERS INVESTMENT IN THE
MONTH INVESTED IN CLASS B LONG-TERM CORPORATE LIPPER CORPORATE
ENDED SHARES OF THE FUND BOND INDEX DEBT A-RATED AVERAGE
<S> <C> <C> <C>
12/84 $10,000 $10,000 $10,000
03/85 $10,206 $10,186 $10,241
06/85 $10,916 $11,351 $11,108
09/85 $11,083 $11,556 $11,332
12/85 $12,643 $12,801 $12,240
03/86 $14,351 $14,087 $13,136
06/86 $14,334 $14,194 $13,231
09/86 $14,532 $14,510 $13,430
12/86 $15,114 $15,195 $14,005
03/87 $15,407 $15,599 $14,349
06/87 $14,547 $15,081 $13,855
09/97 $13,448 $14,241 $13,296
12/87 $15,686 $15,418 $14,102
03/88 $15,252 $15,156 $14,659
06/88 $15,313 $16,353 $14,860
09/88 $15,637 $16,769 $15,191
12/88 $15,630 $17,036 $15,386
03/89 $15,748 $17,247 $15,548
06/89 $17,428 $18,861 $16,694
09/89 $17,503 $19,052 $16,824
12/89 $18,063 $19,640 $17,317
03/90 $17,406 $19,327 $17,060
06/90 $18,170 $20,178 $17,633
09/90 $17,686 $19,930 $17,575
12/90 $18,602 $20,915 $18,474
03/91 $19,439 $21,943 $19,054
06/91 $19,812 $22,328 $19,353
09/91 $21,274 $23,881 $20,537
12/91 $22,787 $25,298 $21,683
03/92 $22,519 $24,979 $21,353
06/92 $23,547 $26,085 $22,232
09/92 $24,883 $27,377 $23,321
12/92 $24,692 $27,653 $23,305
03/93 $26,228 $29,128 $24,458
06/93 $27,762 $30,281 $25,233
09/93 $29,560 $31,630 $26,151
12/93 $29,152 $31,422 $26,069
03/94 $27,376 $29,962 $25,122
06/94 $26,222 $29,127 $24,654
09/94 $26,011 $29,195 $24,711
12/94 $26,407 $29,615 $24,784
<FN>
+ Illustration of $10,000 invested in Class B shares on December 31,
1984, assuming reinvestment of dividends and capital gains at net asset
value through December 31, 1994.
</TABLE>
THE LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX is an unmanaged
index comprised of all publicly issued, fixed rate, nonconvertible,
dollar-denominated investment-grade corporate debt. The average matu-
rity of the bonds in this index is approximately 23 years and includes
bonds from a diverse range of industries. Because it is unmanged, the
Lehman Brothers Long-Term Corporate Bond Index is not subject to the
same management and trading expenses as a mutual fund.
THE LIPPER CORPORATE DEBT A-RATED AVERAGE is composed of the Fund's
peer group of 75 mutual funds as of December 31, 1994.
Index information is available at month-end only; therefore, the clos-
est month-end to inception date of the Fund has been used.
NOTE: All figures cited here represent past performance and do not
guarantee future results.
HISTORICAL PERFORMANCE -- CLASS C SHARES (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
YEAR ENDED CAPITAL GAINS DIVIDENDS RETURN OF TOTAL
DECEMBER 31 BEGINNING ENDING DISTRIBUTED PAID CAPITAL RETURN*
<S> <C> <C> <C> <C> <C> <C>
2/26/93 -
12/31/93 $12.56 $13.01 $0.14 $0.69 -- 10.38%
1994 13.01 10.67 0.31 0.80 $0.03 (9.41)
Total $0.45 $1.49 $0.03
Cumulative Total Return from 2/26/93 through 12/31/94 (0.01)%
<FN>
* Figures assume reinvestment of all dividends and capital gains distri-
butions at net asset value and do not assume deduction of the CDSC.
</TABLE>
AVERAGE ANNUAL TOTAL RETURN -- CLASS C SHARES**
<TABLE>
<CAPTION>
WITHOUT CDSC WITH CDSC***
YEAR ENDED
<S> <C> <C>
12/31/94 (9.41)% (10.23)%
Inception 2/26/93
through 12/31/94 (0.01)% (0.01)%
<FN>
** All average annual total return figures shown reflect the reinvest-
ment of dividends and capital gains at net asset value.
*** Average annual total return figures shown assume the deduction of
the applicable CDSC.
</TABLE>
NOTE: The Fund began offering Class C shares on February 26, 1993.
Class C shares are subject to a maximum 1.00% CDSC and annual ser-
vice and distribution fees of 0.25% and 0.45%, respectively, of the
value of the average daily net assets attributable to that class.
GROWTH OF $10,000 INVESTED IN CLASS C SHARES
OF SMITH BARNEY INVESTMENT GRADE BOND FUND VS.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX
AND LIPPER CORPORATE DEBT-A RATED AVERAGE+
February 26, 1993 -- December 31, 1994
DESCRIPTION OF MOUNTAIN CHART
IN COVERS (CLASS C)
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in In-
vestment Grade Bond Fund Class C shares on February 26, 1993 through De-
cember 31, 1994 as compared with the growth of a $10,000 investment in the
Lehman Brothers Long-Term Corporate Bond Index and Lipper Corporate Debt
A-Rated Average. The plot points used to draw the line graph were as fol-
lows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE GROWTH OF $10,000
GROWTH OF $10,000 LEHMAN BROTHERS INVESTMENT IN THE
MONTH INVESTED IN CLASS C LONG-TERM CORPORATE LIPPER CORPORATE
ENDED SHARES OF THE FUND BOND INDEX DEBT A-RATED AVERAGE
<S> <C> <C> <C>
02/26/93 $10,000 $10,000 $10,000
03/93 $ 9,935 $10,014 $10,040
06/93 $10,515 $10,411 $10,358
09/93 $11,193 $10,874 $10,735
12/93 $11,038 $10,803 $10,702
03/94 $10,366 $10,301 $10,313
06/94 $ 9,929 $10,014 $10,121
09/94 $ 9,849 $10,037 $10,144
12/94 $ 9,999 $10,182 $10,174
<FN>
+ Illustration of $10,000 invested in Class C shares on February 26, 1993,
assuming reinvestment of dividends and capital gains at net asset value
through December 31, 1994.
</TABLE>
THE LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX is an unmanaged index
comprised of all publicly issued, fixed rate, nonconvertible, dollar-
denominated investment-grade corporate debt. The average maturity of the
bonds in this index is approximately 23 years and includes bonds from a
diverse range of industries. Because it is unmanged, the Lehman Brothers
Long-Term Corporate Bond Index is not subject to the same management and
trading expenses as a mutual fund.
THE LIPPER CORPORATE DEBT A-RATED AVERAGE is composed of the Fund's peer
group of 75 mutual funds as of December 31, 1994.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here represent past performance and do not
guarantee future results.
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<S> <C> <C>
U.S. CORPORATE BONDS AND NOTES -- 84.1%
FOOD AND BEVERAGE -- 21.1%
$ 14,000,000 American Brands Inc., Notes,
7.875% due 1/15/2023 $ 12,652,500
16,750,000 Borden Inc., Note,
7.875% due 2/15/2023 12,730,000
12,500,000 Coca-Cola Enterprises Inc., Deb.,
6.750% due 9/15/2023 10,109,375
18,645,000 Hershey Foods Corporation, Deb.,
8.800% due 2/15/2021 19,250,963
16,000,000 Ralston Purina Company, Deb.,
8.125% due 2/1/2023 14,540,000
16,800,000 Seagrams Ltd., Deb.,
8.350% due 1/15/2022 15,918,000
85,200,838
AIRLINES -- 11.2%
AMR Corporation, Deb.:
12,500,000 9.000% due 9/15/2016 10,937,500
4,500,000 9.880% due 6/15/2020 4,263,750
Delta Air Lines, Inc., Deb.:
10,735,000 9.000% due 5/15/2016 9,245,519
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 16,083,562
45,149,081
AUTOMOTIVE -- 8.5%
17,500,000 Ford Motor Company, Deb.,
8.875% due 1/15/2022 17,740,625
16,000,000 General Motors Corporation, Note,
9.400% due 7/15/2021 16,720,000
34,460,625
AEROSPACE -- 7.6%
20,500,000 Boeing Company, Deb.,
6.875% due 10/15/2043 16,297,500
4,000,000 McDonnell Douglas Corporation, Deb.,
9.750% due 4/1/2012 4,245,000
10,000,000 United Technologies Corporation, Deb.,
8.750% due 3/1/2021 10,075,000
30,617,500
PAPER PRODUCTS -- 7.6%
$ 11,000,000 Boise Cascade Corporation, Deb.,
9.450% due 11/1/2009 $ 10,725,000
14,000,000 Bowater, Inc., Deb.,
9.375% due 12/15/2021 14,000,000
500,000 Georgia-Pacific Corporation, Deb.,
9.625% due 3/15/2022 506,250
6,500,000 International Paper Company, Deb.,
6.875% due 11/1/2023 5,265,000
30,496,250
PUBLISHING -- 6.1%
13,000,000 News America Holdings Inc., Note,
8.250% due 08/10/2018 11,310,000
15,000,000 Time Warner, Inc., Deb.,
9.150% due 2/1/2023 13,256,250
24,566,250
RETAIL STORES -- 5.9%
14,000,000 K Mart Corporation, Deb.,
7.950% due 2/1/2023 12,215,000
3,000,000 Toys R Us, Inc., Sr. Deb.,
8.750% due 9/1/2021 3,063,750
5,000,000 Wal-Mart Stores Inc., Deb.,
6.750% due 10/15/2023 4,025,000
5,000,000 Woolworth Corporation, Deb.,
8.500% due 1/15/2022 4,625,000
23,928,750
SUPRANATIONAL ENTITY -- 3.8%
International Bank for Reconstruction and
Development:
110,000,000 Zero coupon due 3/1/2026 8,387,500
70,000,000 Zero coupon due 3/1/2028 4,550,000
42,860,000 Zero coupon due 7/15/2029 2,464,450
15,401,950
TELEVISION -- 3.5%
17,500,000 CBS Inc., Note,
7.125% due 11/1/2023 14,000,000
ELECTRONICS -- 3.4%
$ 17,500,000 Loral Corporation, Sr. Deb.,
7.000% due 9/15/2023 $ 13,868,750
ENTERTAINMENT -- 2.3%
12,000,000 Paramount Communications, Inc., Sr. Deb.
7.500% due 7/15/2023 9,180,000
TRANSPORTATION -- 1.8%
7,500,000 Ryder Systems, Inc., Bond, Series G,
9.000% due 5/15/2016 7,434,375
TIMBER PRODUCTS -- 1.3%
6,000,000 Weyerhaeuser Company, Deb.,
7.125% due 07/15/2023 5,032,500
TOTAL U.S. CORPORATE BONDS AND NOTES
(Cost $379,431,203) 339,336,869
YANKEE BONDS -- 13.0%
Hydro-Quebec, Deb.:
1,600,000 Series HE, 8.625% due 6/15/2029 1,524,000
15,000,000 Series HH, 8.500% due 12/1/2029 14,137,500
1,000,000 Series HI, 9.375% due 4/15/2030 1,030,000
5,000,000 Newfoundland Province of Canada, Deb.,
7.320% due 10/13/2023 4,131,250
6,500,000 Nova Scotia Power Corporation,
8.250% due 7/30/2022 6,036,875
Nova Scotia Province of Canada, Deb.:
3,000,000 9.125% due 5/1/2021 3,045,000
8,500,000 8.750% due 4/1/2022 8,319,375
13,500,000 Petro Canada,
9.250% due 10/15/2021 14,242,500
TOTAL YANKEE BONDS (Cost $54,029,747) 52,466,500
U.S. GOVERNMENT AGENCY SECURITIES -- 0.8%
Financing Corporation Strips, Series 19:
2,400,000 9.000% due 12/6/2018 345,288
21,400,000 9.000% due 6/6/2019 2,888,144
TOTAL U.S. GOVERNMENT AGENCY SECURITIES
(Cost $3,105,243) 3,233,432
MARKET VALUE
FACE VALUE (NOTE 1)
REPURCHASE AGREEMENT -- 0.3% (Cost $1,365,000)
$ 1,365,000 Agreement with Citibank, N.A., 6.000% dated
12/30/1994 to be repurchased at
$1,365,910 on 1/3/1995, collateralized by
$1,330,000 U.S. Treasury Note, 8.500% due
7/15/1997 $ 1,365,000
TOTAL INVESTMENTS (Cost $437,931,193*) 98.2% 396,401,801
OTHER ASSETS AND LIABILITIES (NET) 1.8 7,050,895
NET ASSETS 100.0% $403,452,696
<FN>
* Aggregate cost for Federal tax purposes.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $437,931,193) (Note 1)
See accompanying schedule $396,401,801
Cash 622
Interest receivable 10,674,209
Receivable for Fund shares sold 558,458
TOTAL ASSETS 407,635,090
LIABILITIES:
Dividends payable $3,342,111
Payable for Fund shares redeemed 336,466
Investment advisory fee payable (Note 2) 153,967
Distribution fee payable (Note 3) 93,705
Service fee payable (Note 3) 85,537
Administration fee payable (Note 2) 68,430
Transfer agent fees payable (Note 2) 39,035
Custodian fees payable (Note 2) 15,514
Accrued expenses and other payables 47,629
TOTAL LIABILITIES 4,182,394
NET ASSETS $403,452,696
NET ASSETS CONSIST OF:
Accumulated net realized loss on investments sold $ (859,600)
Unrealized depreciation of investments (41,529,392)
Par value 37,818
Paid-in capital in excess of par value 445,803,870
TOTAL NET ASSETS $403,452,696
NET ASSET VALUE:
CLASS A SHARES:
Net Asset Value and redemption price per share
($181,333,728 / 16,997,989 shares of common stock
outstanding) $ 10.67
Maximum offering price per share ($10.67 / 0.955)
(Based on sales charge of 4.50% of the offering
price on December 31, 1994) $ 11.17
CLASS B SHARES:
Net Asset Value and offering price per share+
($221,119,642 / 20,725,884 shares of common stock
outstanding) $ 10.67
CLASS C SHARES:
Net Asset Value and offering price per share+
($999,326 / 93,690 shares of common stock outstand-
ing) $ 10.67
<FN>
+ Redemption price per share is equal to net asset value less any applica-
ble contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME:
Interest $36,216,097
EXPENSES:
Investment advisory fee (Note 2) $ 1,926,359
Distribution fee (Note 3) 1,846,035
Service fee (Note 3) 1,070,199
Administration fee (Note 2) 856,159
Transfer agent fees (Notes 2 and 4) 464,092
Custodian fees (Note 2) 65,241
Legal and audit fees 59,878
Directors' fees and expenses (Note 2) 45,972
Other 121,399
TOTAL EXPENSES 6,455,334
NET INVESTMENT INCOME 29,760,763
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 5):
Net realized gain on investments during the year 2,616,051
Net unrealized depreciation of investments during
the year (76,397,864)
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (73,781,813)
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(44,021,050)
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/94 12/31/93
<S> <C> <C>
Net investment income $ 29,760,763 $29,746,397
Net realized gain on investments sold during the
year 2,616,051 29,001,216
Net unrealized appreciation/(depreciation) of in-
vestments during the year (76,397,864) 18,943,101
Net increase/(decrease) in net assets resulting
from operations (44,021,050) 77,690,714
Distributions to shareholders from net investment
income:
Class A (4,485,918) (441,259)
Class B (25,035,743) (30,089,838)
Class C (27,021) (3,570)
Distributions in excess of net investment income:
Class A -- (3,065)
Class B -- (208,991)
Class C -- (25)
Distribution to shareholders from net realized
gain on investments:
Class A (5,098,443) (106,722)
Class B (6,190,272) (5,018,275)
Class C (27,765) (2,184)
Distribution to shareholders from capital:
Class A (173,244) --
Class B (949,145) --
Class C (1,041) --
Net increase/(decrease) in net assets from Fund
share transactions (Note 6):
Class A 179,594,112 8,940,862
Class B (177,349,987) 2,664,579
Class C 865,702 214,405
Net increase/(decrease) in net assets (82,899,815) 53,636,631
NET ASSETS:
Beginning of year 486,352,511 432,715,880
End of year (including distributions in excess of
net investment income of $212,081 at December
31, 1993) $ 403,452,696 $486,352,511
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
12/31/94# 12/31/93# 12/31/92*
<S> <C> <C> <C>
Net Asset Value, beginning of year $13.01 $11.89 $11.67
Income from investment operations:
Net investment income 0.74 0.88 0.14
Net realized and unrealized gain/(loss)
on investments (1.88) 1.27 0.23
Total from investment operations (1.14) 2.15 0.37
Less distributions:
Distributions from net investment income (0.86) (0.88) (0.14)
Distributions in excess of net invest-
ment income -- (0.01) --
Distributions from net realized capital
gains (0.31) (0.14) --
Distributions from capital (0.03) -- (0.01)
Total distributions (1.20) (1.03) (0.15)
Net Asset Value, end of year $10.67 $13.01 $11.89
Total return+ (8.95)% 18.45% 3.25%
Ratios to average net assets/supplemen-
tal data:
Net assets, end of year (in 000's) $181,334 $10,136 $933
Ratio of operating expenses to average
net assets 1.11% 1.11% 1.03%**++
Ratio of net investment income to aver-
age net assets 7.35% 6.67% 7.53%**
Portfolio turnover rate 18% 65% 47%
<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.
++ 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 monthly average shares
method, which more appropriately presents the per share data for the
period since use of the undistributed method does not accord with re-
sults of operations.
</TABLE>
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/94# 12/31/93# 12/31/92* 12/31/91
<S> <C> <C> <C> <C>
Net Asset Value, beginning of
year $13.01 $11.89 $11.80 $10.43
Income from investment opera-
tions:
Net investment income 0.82 0.80 0.83 0.86
Net realized and unrealized
gain/(loss) on investments (2.02) 1.29 0.12 1.38
Total from investment opera-
tions (1.20) 2.09 0.95 2.24
Less distributions:
Distributions from net in-
vestment income (0.80) (0.82) (0.83) (0.87)
Distributions in excess of
net investment income -- (0.01) -- --
Distributions from net real-
ized capital gains (0.31) (0.14) -- --
Distributions from capital (0.03) -- (0.03) --
Total distributions (1.14) (0.97) (0.86) (0.87)
Net Asset Value, end of year $10.67 $13.01 $11.89 $11.80
Total return+ (9.41)% 18.06% 8.36% 22.50%
Ratios to average net assets/
supplemental data:
Net assets, end of year (in
000's) $221,120 $476,088 $431,783 $413,878
Ratio of operating expenses
to average net assets 1.57% 1.58% 1.57%** 1.53%
Ratio of net investment in-
come to average net assets 6.89% 6.20% 6.99% 7.90%
Portfolio turnover rate 18% 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 ratio 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 for the periods indi-
cated and does not reflect any
applicable sales charge.
++ Net investment income before waiver of fees by the distributor would
have been $0.86 and $0.87 for the years ended December 31, 1989 and
1988, respectively.
# Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the
period since use of the undistributed method does not accord with re-
sults of operations.
(1) Not covered by Coopers & Lybrand's report.
</TABLE>
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
12/31/90 12/31/89 12/31/88(1) 12/31/87(1) 12/31/86(1) 12/31/85(1)
<S> <C> <C> <C> <C> <C>
$11.01 $10.33 $10.55 $12.91 $12.00 $10.88
0.86 0.87++ 0.90++ 0.89 1.10 1.08
(0.57) 0.68 (0.24) (1.24) 1.16 1.54
0.29 1.55 0.66 (0.35) 2.26 2.62
(0.87) (0.87) (0.88) (1.12) (1.10) (1.39)
-- -- -- -- -- --
-- -- -- (0.89) (0.25) (0.11)
-- -- -- -- -- --
(0.87) (0.87) (0.88) (2.01) (1.35) (1.50)
$10.43 $11.01 $10.33 $10.55 $12.91 $12.00
2.98% 15.57% 6.43% (2.83)% 19.54% 26.43%
$405,779 $483,382 $532,794 $705,561 $421,011 $233,880
1.58% 1.63%*** 1.22%*** 1.62% 1.62% 1.79%
8.20% 8.07% 8.74% 7.96% 7.74% 9.78%
59% 118% 72% 79% 211% 717%
</TABLE>
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
12/31/94# 12/31/93*#
<S> <C> <C>
Net Asset Value, beginning of period $13.01 $12.56
Income from investment operations:
Net investment income 0.75 0.63
Net realized and unrealized gain/(loss) on
investments (1.95) 0.65
Total from investment operations (1.20) 1.28
Less distributions:
Distributions from net investment income (0.80) (0.68)
Distributions in excess of net investment
income -- (0.01)
Distributions from net realized capital
gains (0.31) (0.14)
Distributions from capital (0.03) --
Total distributions (1.14) (0.83)
Net Asset Value, end of period $10.67 $13.01
Total return+ (9.41)% 10.38%
Ratios to average net assets/supplemental
data:
Net assets, end of period (in 000's) $999 $208
Ratio of operating expenses to average net
assets 1.57% 1.61%**
Ratio of net investment income to average
net assets 6.89% 6.17%**
Portfolio turnover rate 18% 65%
<FN>
* The Fund commenced selling Class C shares (previously designated as
Class D) on February 26, 1993.
** Annualized.
+ Total return represents aggregate total return for the periods indi-
cated and does not reflect any
applicable sales charge.
# Per shares amounts have been calculated using the monthly average
shares 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.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENT
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Investment Funds Inc. (the "Company") (formerly known as
Smith Barney Shearson Investment Funds Inc.) 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 di-
versified, open-end management investment company. As of the date of this
report, the Company is composed of four managed investment funds (the
"Funds"): Smith Barney Investment Grade Bond Fund (the "Fund"), Smith Bar-
ney Government Securities Fund, Smith Barney Special Equities Fund and
Smith Barney European Fund. Effective November 7, 1994, the Fund began of-
fering Class Y shares and continued to offer Class A, Class B and Class C
shares (Class C shares were previously designated "Class D" shares). As of
December 31, 1994, no Class Y shares had been sold. Class A shares are
sold with a front-end sales charge. Class B and Class C shares may be sub-
ject to a contingent deferred sales charge ("CDSC") upon redemption. Class
B shares will automatically convert to Class A shares eight years after
the original purchase date. Class Y shares are available to investors mak-
ing an initial investment of at least $5 million and are not subject to
any sales charges, distribution or service fees. 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 ser-
vice 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 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 quota-
tions and may be valued on the basis of prices provided by a pricing ser-
vice, 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 desig-
nated by or under the authority of the Board of Directors as the primary
market. Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under
the direction of the Board of Directors. Money market instruments maturing
within 60 days of the valuation date are valued at amortized cost.
Repurchase agreements: The Fund engages in repurchase agreement 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 agree-
ments 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, formerly a division of Mutual
Management Corp., which has been transferred effective November 7, 1994 to
Smith Barney Mutual Funds Management Inc. ("SBMFM"). Mutual Management
Corp. and SBMFM are both wholly owned subsidiaries of Smith Barney Hold-
ings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of The Trav-
elers 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 in
excess of $500 million.
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% of the
value of its average daily net assets in excess of $500 million.
As of the close of business on May 5, 1994, SBMFM (formerly known as
Smith, Barney Advisers, Inc.) succeeded Boston Advisors as the Fund's ad-
ministrator. 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 and SBMFM entered
into a sub-administration agreement (the "Sub-Administration Agreement")
with Boston Advisors. Under the Sub-Administration Agreement, SBMFM pays
Boston Advisors a portion of its administration fee at a rate agreed upon
from time to time between SBMFM and Boston Advisors.
For the year ended December 31, 1994, Smith Barney Inc. ("Smith Barney")
received $114,571 from investors 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 4.50%
and 1.00% 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 3.00% charge is imposed for the eight year period after
the date of the purchase). A CDSC may be payable by a shareholder in con-
nection with the redemption of Class C shares within one year after the
date of purchase. In circumstances in which the charge is imposed, the
amount of the charge is 1.00% of net asset value. For the year ended
December 31, 1994, Smith Barney received $556,007 from investors in 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
$16,000 per annum plus $2,500 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 C shareholders, and covers expenses incurred in distrib-
uting Class B and Class C shares. Smith Barney is paid an annual service
fee with respect to Class A, Class B and Class C 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 C shares at the rate of 0.50% and 0.45%,
respectively, of the value of the average daily net assets attributable to
those classes. For the year ended December 31, 1994, service fees for
Class A, Class B and Class C shares were $147,152, $922,038 and $1,009,
respectively. For the year ended December 31, 1994, distribution fees for
Class B and Class C shares were $1,844,077 and $1,958, 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 year ended December 31, 1994, the Fund
paid transfer agent fees of $82,081, $381,528 and $483 for Class A, Class
B and Class C shares, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-
term investments, aggregated $75,583,712 and $87,942,501, respectively,
for the year ended December 31, 1994.
At December 31, 1994, aggregate gross unrealized appreciation for all se-
curities in which there was an excess of value over tax cost was
$2,891,757 and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over value was $44,421,149.
6. SHARES OF COMMON STOCK
At December 31, 1994, the Company had authorized on behalf of the Fund
capital of 2.25 billion shares of $.001 par value common stock divided
into four classes of shares, Class A, Class B, Class C and Class Y.
Changes in common stock outstanding were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/94 12/31/93
CLASS A SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Sold 16,784,949 $186,110,299 814,955 $10,439,045
Issued as reinvestment of
dividends 679,207 7,334,475 30,012 391,603
Redeemed (1,245,217) (13,850,662) (144,428) (1,889,786)
Net increase 16,218,939 $179,594,112 700,539 $8,940,862
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/94 12/31/93
CLASS B SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Sold 5,403,618 $63,270,474 7,479,308 $95,869,084
Issued as reinvestment of
dividends 1,992,592 22,870,952 2,026,146 26,160,376
Redeemed (23,258,589) (263,491,413) (9,246,595) (119,364,881)
Net increase/(decrease) (15,862,379) $(177,349,987) 258,859 $2,664,579
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
12/31/94 12/31/93*
CLASS C SHARES: SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Sold 82,608 $922,066 15,619 $209,421
Issued as reinvestment of
dividends 4,936 54,251 473 6,230
Redeemed (9,852) (110,615) (94) (1,246)
Net increase 77,692 $865,702 15,998 214,405
<FN>
* The Fund commenced selling Class C shares on February 26, 1993.
</TABLE>
As of December 31, 1994, no Class Y shares had been sold.
7. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line
of credit provided by Bank of America (formerly 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 re-
quests that otherwise might require the untimely disposition of securi-
ties. Under this Agreement, the Fund may borrow up to the lesser of $25
million or 25% of its net assets, adjusted for purposes of the Agreement.
However, pursuant to the Fund's prospectus, the Fund may only borrow up to
5.00% of its total 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 Agree-
ment of no less than 5 to 1. During the year ended December 31, 1994, the
Fund had an average outstanding daily balance of $400,822 with interest
rates ranging from 3.375% to 6.000%. Interest expense totalled $16,576
which has been offset against interest income on the Statement of Opera-
tions for the year ended December 31, 1994. At December 31, 1994, the Fund
had no outstanding borrowings under this Agreement.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
SMITH BARNEY INVESTMENT GRADE BOND FUND OF
SMITH BARNEY INVESTMENT FUNDS:
We have audited the accompanying statement of assets and liabilities of
Smith Barney Investment Grade Bond Fund of Smith Barney Investment Funds
Inc. (formerly Smith Barney Shearson Investment Grade Bond Fund of Smith
Barney Shearson Investment Funds Inc.), including the schedule of portfo-
lio investments, as of December 31, 1994, and the related statement of op-
erations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended and the financial high-
lights for each of the six years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and fi-
nancial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclo-
sures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1994 by correspondence with the custo-
dian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the over-
all financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of Smith Barney Investment Grade Bond Fund of Smith Barney Investment
Funds Inc. as of December 31, 1994, the results of its operations for the
year then ended, the changes in its net assets for each of the two years
in the period then ended and the financial highlights for each of the six
years in the period then ended, in conformity with generally accepted ac-
counting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 10, 1995
TAX INFORMATION (UNAUDITED)
FISCAL YEAR ENDED DECEMBER 31, 1994
The amount of long-term capital gains paid for the fiscal year ended
December 31, 1994, was $11,316,480.
In accordance with tax law, the Fund has elected to defer the recognition
of losses occurring between October 31 and December 31 until the first day
of the following fiscal year. The amount of such deferral is $859,600 of
capital losses. These losses for tax purposes will be deemed to occur on
January 1, 1995.
INVESTMENT GRADE BOND FUND
DIRECTORS
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Allan R. Johnson
Frank G. Hubbard
Heath B. McLendon
Ken Miller
John F. White
OFFICERS
Heath B. McLendon
Chairman of the Board
Jessica M. Bibliowicz
President
George E. Mueller Jr.
Investment Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Christina T. Sydor
Secretary
This report is submitted for the general information of the shareholders
of Smith Barney Investment Grade Bond Fund. It is not authorized for dis-
tribution 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 perti-
nent information.
SMITH BARNEY MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 104, 234, 242
FD0317 B5
<PAGE>
1994
ANNUAL
REPORT
[Small box above fund name showing 4 bars with the
words "growth companies" printed on top of them]
Smith Barney
SPECIAL
EQUITIES
FUND
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 1994
[LOGO OF SMITH BARNEY MUTUAL FUNDS APPEARS HERE]
Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Special Equities Fund
Dear Shareholder:
We are pleased to provide you with the Annual Report which includes the
portfolio of investments for Smith Barney Special Equities Fund for the
fiscal year ended December 31, 1994.
The year 1994 was marked by strong economic expansion, excellent corporate
profit growth, muted inflation and--paradoxically--disappointing performance
by most stock market measures. It was apparent that deepening concerns about
the potential effects of the Federal Reserve Board's barrage of interest rate
increases, coupled with the financial problems of Orange County, California,
weighed heavily on investors' minds.
We believe, however, that 1995 will provide the equity markets with a far
more hospitable environment than in 1994, especially within the small-cap
area. We anticipate that companies will continue to report
better-than-expected earnings within a somewhat less ebullient economic
landscape. While the future actions of the Fed are always unknown, we think
that its major moves have already been made and that the markets already
reflect most of the anticipated outcomes. In short, it is our view that the
inherent investment dynamics are now altered. In 1994 it was important to be
defensively positioned and to protect one's investment capital; in 1995,
investors potentially could suffer an opportunity loss if money remains on
the sidelines when the markets turn more positive. We are not trying to
diminish the short-term risks associated with this highly fluid marketplace,
but our long-term optimism now considerably outweighs our concerns.
To conclude our summary of 1994, small-cap stocks underperformed the
larger-cap indices. The Dow Jones Industrial Average and the Standard &
Poor's 500 Stock Index, on a total return basis, finished the year up 5.02%
and 1.31%, respectively, while the NASDAQ and the Russell 2000 indices were
off 3.20% and 1.82%, respectively, on price only (excluding dividend
reimbursements).
Furthermore, the divergence within the Russell 2000 (a popular measure of the
stock price performance of small companies) was significant; the leader was
the technology sector which finished the year up 11.88% while the real estate
investment trust (REIT) and consumer discretionary sectors ended the year
down 13.94% and 11.01%, respectively. Due to the Fund's heavy investment in
the consumer sector (a sector the Fund has favored for a number of years
now), the year ended with disappointing results in relation to our full-cycle
goals.
1
<PAGE>
The small cap markets should benefit from the political and economic
prospects we envision for 1995, which include a new Republican congressional
agenda and a low inflationary-growth economy. We continue to focus our
investment attention on the ownership of good quality stocks with the intent
of holding them for as long as their fundamental growth prospects remain
intact. Put another way, stock selection remains the most critical component
of our overall investment process.
We appreciate your confidence during the difficult investment environment of
1994, and join you in looking forward to a more benign 1995. Should you have
any questions about your investment in the Fund or how other Smith Barney
mutual funds may help you reach your financial goals, please speak with your
Smith Barney Financial Consultant.
Sincerely,
/s/ Heath B. McLendon /s/ George V. Novello
Heath B. McLendon George V. Novello
Chairman of the Board Investment Officer
and Investment Officer
February 13, 1995
2
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
December 31 Beginning End Distributed Paid Return*
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
11/6/92 -
12/31/92 $14.13 $15.47 -- $ -- 9.48%
- --------------------------------------------------------------------------------
1993 15.47 20.23 $0.33 -- 32.90
- --------------------------------------------------------------------------------
1994 20.23 19.10 -- -- (5.59)
- --------------------------------------------------------------------------------
Total $0.33 --
- --------------------------------------------------------------------------------
Cumulative Total Return from 11/6/92 through 12/31/94 37.38%
- --------------------------------------------------------------------------------
</TABLE>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the sales
charge (maximum 5.00%).
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS
AND CAPITAL GAINS, IF ANY, ANNUALLY.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Average Annual Total Return -- Class A Shares**
- --------------------------------------------------------------------------------
Without Sales Charge With Sales Charge***
- --------------------------------------------------------------------------------
<S> <C> <C>
Year Ended 12/31/94 (5.59)% (10.31)%
- --------------------------------------------------------------------------------
Inception 11/6/92
through 12/31/94 16.01% 13.26%
- --------------------------------------------------------------------------------
</TABLE>
** All average annual total return figures shown reflect the reinvestment
of dividends and capital gains at net asset value.
*** Average annual total return figures shown assume the deduction of the
maximum 5.00% front-end sales charge.
Note: The Fund began offering Class A shares on November 6, 1992. Class A
shares are subject to a maximum 5.00% front-end sales charge and an annual
service fee of 0.25% of the value of the average daily net assets
attributable to that class.
3
<PAGE>
Growth of $10,000 Invested in Class A Shares of Smith Barney Special Equities
Fund vs. The Standard & Poor's 500 Stock Index+
- --------------------------------------------------------------------------------
November 6, 1992 -- December 31, 1994
[GRAPH APPEARS HERE]
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Special Equities Fund
Class A shares on November 6, 1992 through December 31, 1994 as compared with
the growth of a $10,000 investment in Standard & Poor's Composite Stock Price
Index. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
Growth of $10,000
Investment in the
Growth of $10,000 Standard & Poor's
Invested in Class A shares Composite Stock
Month Ended of the Fund Price Index
<S> <C> <C>
10/31/92 - $10,000
11/10/92 $9,500 -
11/92 $10,139 $10,303
12/92 $10,401 $10,407
03/93 $10,865 $10,788
06/93 $12,068 $10,761
09/93 $14,542 $10,962
12/93 $13,823 $11,142
3/94 $12,730 $10,648
6/94 $11,691 $10,612
9/94 $12,921 $11,053
12/94 $13,051 $10,971
</TABLE>
+ Illustration of $10,000 invested in Class A shares on November 6, 1992
assuming deduction of a maximum 5.00% sales charge at the time of investment
and reinvestment of dividends and capital gains at net asset value through
December 31, 1994.
The Standard & Poor's 500 Stock Index ("S&P 500") is a market capitalization
index composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and over-the-counter market. The S&P 500 is
useful in depicting the general movement of the stock market, but because it
is unmanaged, it is not subject to the same management and trading expenses
as a mutual fund.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
Note: All figures cited here represent past performance and do not
guarantee future results.
For a glossary of terms, please turn to the end of this report.
4
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Return of Total
December 31 Beginning End Distributed Paid Capital Return*
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1985 $ 9.94 $13.15 -- $0.21 -- 35.17%
- ---------------------------------------------------------------------------------------
1986 13.15 13.02 $ 1.00 0.05 -- 7.05
- ---------------------------------------------------------------------------------------
1987 13.02 11.48 0.14 -- -- (10.91)
- ---------------------------------------------------------------------------------------
1988 11.48 12.04 0.30 0.55 -- 12.60
- ---------------------------------------------------------------------------------------
1989 12.04 13.77 -- 0.27 $0.24 18.60
- ---------------------------------------------------------------------------------------
1990 13.77 9.82 0.23 0.29 0.02 (24.71)
- ---------------------------------------------------------------------------------------
1991 9.82 14.18 -- -- 0.03 44.76
- ---------------------------------------------------------------------------------------
1992 14.18 15.47 -- -- -- 9.10
- ---------------------------------------------------------------------------------------
1993 15.47 20.08 0.33 -- -- 31.93
- ---------------------------------------------------------------------------------------
1994 20.08 18.82 -- -- -- (6.27)
- ---------------------------------------------------------------------------------------
Total $ 2.00 $1.37 $0.29
- ---------------------------------------------------------------------------------------
Cumulative Total Return from 1/1/85 through 12/31/94 153.15%
- ---------------------------------------------------------------------------------------
</TABLE>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the
contingent deferred sales charge ("CDSC").
- --------------------------------------------------------------------------------
Average Annual Total Return -- Class B Shares**
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without CDSC With CDSC***
With Without With Without
Expenses Expenses Expenses Expenses
Reimbursed Reimbursed Reimbursed Reimbursed
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended 12/31/94 (6.27)% N/A (10.96)% N/A
- ---------------------------------------------------------------------------------------
Five Years Ended 12/31/94 8.01 N/A 7.87 N/A
- ---------------------------------------------------------------------------------------
Ten Years Ended 12/31/94+ 9.73 9.73% 9.73 9.73%
- ---------------------------------------------------------------------------------------
</TABLE>
** All average annual total return figures shown reflect the reinvestment of
dividends and capital gains at net asset value. The Fund's investment
adviser, sub-investment adviser and administrator reimbursed expenses
during 1988. A shareholder's actual return for the period during which
reimbursements were in effect would be the higher of the two numbers
shown.
*** Average annual total return figures shown assume the deduction of the
maximum applicable CDSC which is described in the prospectus.
+ Class B shares automatically convert to Class A shares eight years
after date of original purchase. Thus, a shareholder's actual return for
the ten years ended December 31, 1994 would be different than that
reflected above.
Note: On November 6, 1992, existing shares of the Fund were designated
Class B shares. Class B shares are subject to a maximum 5.00% CDSC
and annual service and distribution fees of 0.25% and 0.75%, respectively,
of the value of the average daily net assets attributable to that class.
5
<PAGE>
Growth of $10,000 Invested in Class B Shares of Smith Barney Special Equities
Fund vs. The Standard & Poor's 500 Stock Index+
- --------------------------------------------------------------------------------
December 31, 1984 -- December 31, 1994
[GRAPH APPEARS HERE]
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Special Equities Fund
Class B shares on December 31, 1984 through December 31, 1994 as compared with
the growth of a $10,000 investment in Standard & Poor's Composite Stock Price
Index. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
Growth of $10,000
Investment in the
Growth of $10,000 Standard & Poor's
Invested in Class B shares Composite Stock
Month Ended of the Fund Price Index
<S> <C> <C>
12/84 $10,000 $10,000
03/85 $11,379 $10,918
06/85 $12,273 $11,720
09/85 $11,646 $11,240
12/85 $13,517 $13,174
03/86 $15,714 $15,032
06/86 $16,250 $15,919
09/86 $14,032 $14,808
12/86 $14,470 $15,634
03/87 $17,788 $18,973
06/87 $16,946 $19,924
09/87 $18,046 $21,239
12/87 $12,892 $16,457
03/88 $14,344 $17,391
06/88 $14,862 $18,548
09/88 $14,171 $18,611
12/88 $14,517 $19,183
03/89 $16,614 $20,542
06/89 $15,939 $22,354
09/89 $17,422 $24,743
12/89 $17,217 $25,252
03/90 $16,467 $24,493
06/90 $17,318 $26,032
09/90 $12,326 $22,458
12/90 $12,964 $24,468
03/91 $15,208 $28,015
06/91 $14,442 $27,948
09/91 $16,092 $29,441
12/91 $18,766 $31,906
03/92 $18,130 $31,101
06/92 $16,629 $31,690
09/92 $16,542 $32,691
12/92 $20,473 $34,335
03/93 $21,359 $35,835
06/93 $23,675 $36,005
09/93 $28,479 $36,934
12/93 $27,010 $37,792
3/94 $24,831 $36,364
6/94 $22,759 $36,513
9/94 $25,113 $38,295
12/94 $25,315 $38,286
</TABLE>
+ Illustration of $10,000 invested in Class B shares on December 31, 1984,
assuming reinvestment of dividends and capital gains at net asset value
through December 31, 1994.
The Standard & Poor's 500 Stock Index ("S&P 500") is a market capitalization
index composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and over-the-counter market. The S&P 500 is
useful in depicting the general movement of the stock market, but because it
is unmanaged, it is not subject to the same management and trading expenses
as a mutual fund.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
Note: All figures cited here represent past performance and do not
guarantee future results.
For a glossary of terms, please turn to the end of this report.
6
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
December 31 Beginning Ending Distributed Paid Return*
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
10/18/93-
12/31/93 $22.62 $20.08 $0.33 -- (9.77)%
- ---------------------------------------------------------------------------------------
1994 20.08 18.82 -- -- (6.27)
- ---------------------------------------------------------------------------------------
Total $0.33 --
- ---------------------------------------------------------------------------------------
Cumulative Total Return from 10/18/93 through 12/31/94 (15.43)%
- ---------------------------------------------------------------------------------------
</TABLE>
* Figures assume reinvestment of all dividends and capital gains
distributions at net asset value and do not assume deduction of the CDSC.
- --------------------------------------------------------------------------------
Average Total Return -- Class C Shares**
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without CDSC With CDSC***
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Year Ended 12/31/94 (6.27)% (7.21)%
- ---------------------------------------------------------------------------------------
Inception 10/18/93 through 12/31/94 (13.02)% (13.02)%
- ---------------------------------------------------------------------------------------
</TABLE>
** All average annual total return figures shown reflect the reinvestment
of dividends and capital gains at net asset value.
*** Average annual total return figures shown assume the deduction of the
maximum applicable CDSC which is described in the prospectus.
Note: The Fund began offering Class C shares on October 18, 1993. Class C
shares are subject to a maximum 1.00% CDSC and annual service and
distribution fees of 0.25% and 0.75%, respectively, of the value of the
average daily net assets attributable to that class.
7
<PAGE>
Growth of $10,000 Invested in Class C Shares of Smith Barney Special Equities
Fund vs. The Standard & Poor's 500 Stock Index+
- --------------------------------------------------------------------------------
October 18, 1993 -- December 31, 1994
[GRAPH APPEARS HERE]
A line graph depicting the total growth (including reinvestment of dividends and
capital gains) of a hypothetical investment of $10,000 in Special Equities Fund
Class C shares on October 18, 1993 through December 31, 1994 as compared with
the growth of a $10,000 investment in Standard & Poor's Composite Stock Price
Index. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
Growth of $10,000
Investment in the
Growth of $10,000 Standard & Poor's
Invested in Class C shares Composite Stock
Month Ended of the Fund Price Index
<S> <C> <C>
10/18/93 $10,000 -
10/93 $9,876 $10,000
11/93 $9,180 $9,905
12/93 $9,023 $10,025
3/94 $8,295 $9,646
6/94 $7,603 $9,686
9/94 $8,389 $10,158
12/94 $8,457 $10,156
</TABLE>
+ Illustration of $10,000 invested in Class C shares on October 18, 1993,
assuming reinvestment of dividends and capital gains at net asset value
through December 31, 1994.
The Standard & Poor's 500 Stock Index ("S&P 500") is a market capitalization
index composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and over-the-counter market. The S&P 500 is
useful in depicting the general movement of the stock market, but because it
is unmanaged, it is not subject to the same management and trading expenses
as a mutual fund.
Index information is available at month-end only; therefore, the closest
month-end to inception date of the Fund has been used.
Note: All figures cited here represent past performance and do not guarantee
future results.
For a glossary of terms, please turn to the end of this report.
8
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) December 31, 1994
- --------------------------------------------------------------------------------
Industry Breakdown
[PIE CHART APPEARS HERE]
Pie chart depicting the allocation of the Investment Funds Special Equities Fund
investment securities held at December 31, 1994 by industry classification. The
pie is broken in pieces representing industries in the following percentages:
<TABLE>
<CAPTION>
Industry Percentage
<S> <C>
Convertible Preferred Stock, Repurchase
Agreement and Net Other Assets and
Liabilities 7.3%
Other Common Stocks 13.2%
Consumer Durables 5.4%
Software 6.0%
Distributor 6.6%
Consumer Non-Durables 6.8%
Restaurants 7.6%
Technology 8.3%
Communications 8.7%
Entertainment and Leisure 11.0%
Retail Stores 19.1%
</TABLE>
Top Ten Holdings
<TABLE>
<CAPTION>
Percentage of
Company Net Assets
- --------------------------------------------------------------------------------
<S> <C>
Callaway Golf Company 8.4%
Sunglass Hut International, Inc. 5.9
Baby Superstore Inc. 5.4
Starbucks Corporation 5.2
PETsMART 5.0
Micro Warehouse Inc. 3.9
Gymboree Corporation 3.5
Williams Sonoma Inc. 3.1
Barnes and Noble Inc. 3.0
Boston Chicken Inc. 3.0
</TABLE>
9
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Portfolio of Investments December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value
Shares Note (1)
- --------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS -- 92.7%
Retail Stores -- 19.1%
230,000 Baby Superstore Inc.+ $10,522,500
190,000 Barnes and Noble Inc.+ 5,937,500
240,000 Gymboree Corporation+ 6,900,000
100,000 OfficeMax Inc.+ 2,650,000
500,000 Sunglass Hut International, Inc.+ 11,500,000
- --------------------------------------------------------------------------------------
37,510,000
- --------------------------------------------------------------------------------------
Entertainment and Leisure -- 11.0%
110,000 Aldila, Inc.+ 1,265,000
500,000 Callaway Golf Company 16,562,500
300,000 CML Group, Inc. 3,037,500
65,000 Coastcast Corporation+ 763,750
- --------------------------------------------------------------------------------------
21,628,750
- --------------------------------------------------------------------------------------
Communications -- 8.7%
120,000 Adtran Inc.+ 5,490,000
15,000 America Online Inc.+ 840,000
160,000 California Microwave Inc.+ 5,840,000
170,000 Commnet Cellular Inc.+ 4,930,000
8,595 Encore Marketing International Inc.+ 5,371
- --------------------------------------------------------------------------------------
17,105,371
- --------------------------------------------------------------------------------------
Technology -- 8.3%
90,000 Arrow Electronics Inc.+ 3,228,750
80,000 C-Cube Microsystems Inc.+ 1,520,000
140,000 LSI Logic Inc.+ 5,652,500
170,000 Medisense Inc. 3,931,250
50,000 Zebra Technologies Corporation, Class A+ 1,953,125
- --------------------------------------------------------------------------------------
16,285,625
- --------------------------------------------------------------------------------------
Restaurants -- 7.6%
340,000 Boston Chicken Inc.+ 5,907,500
320,000 Cheesecake Factory+ 5,040,000
80,000 Outback Steakhouse Inc.+ 1,880,000
100,000 Rock Bottom Restaurants Inc.+ 2,050,000
- --------------------------------------------------------------------------------------
14,877,500
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (continued) December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value
Shares Note (1)
======================================================================================
<C> <S> <C>
COMMON STOCKS (continued)
Consumer Non-Durables -- 6.8%
160,000 Brothers Gourmet Coffees Inc.+ $ 1,760,000
50,000 Franklin Quest Company+ 1,493,750
370,000 Starbucks Corporation+ 10,175,000
- --------------------------------------------------------------------------------------
13,428,750
- --------------------------------------------------------------------------------------
Distributor -- 6.6%
40,000 Corporate Express Inc.+ 780,000
220,000 Micro Warehouse Inc.+ 7,700,000
150,000 Viking Office Products Inc.+ 4,593,750
- --------------------------------------------------------------------------------------
13,073,750
- --------------------------------------------------------------------------------------
Software -- 6.0%
140,000 Acclaim Entertainment, Inc.+ 2,012,500
30,000 Alias Research Inc. 540,000
45,000 Applied Voice Technology Inc. 753,750
50,000 Macromedia Inc.+ 1,275,000
25,000 Parcplace Systems Inc.+ 568,750
100,000 Peoplesoft Inc.+ 3,775,000
40,000 Platinum Technology Inc.+ 905,000
50,000 Shiva Corporation 1,993,750
- --------------------------------------------------------------------------------------
11,823,750
- --------------------------------------------------------------------------------------
Consumer Durables -- 5.4%
150,000 Bed Bath & Beyond Inc.+ 4,537,500
200,000 Williams Sonoma Inc.+ 6,012,500
- --------------------------------------------------------------------------------------
10,550,000
- --------------------------------------------------------------------------------------
Pet Food -- 5.0%
285,000 PETsMART Inc.+ 9,832,500
- --------------------------------------------------------------------------------------
Publishing -- 2.7%
370,000 Marvel Entertainment Group+ 5,272,500
- --------------------------------------------------------------------------------------
Healthcare -- 1.4%
30,000 Invacare Corporation 1,027,500
67,500 Phycor Inc.+ 1,805,625
- --------------------------------------------------------------------------------------
2,833,125
- --------------------------------------------------------------------------------------
Electronics -- 1.3%
60,000 Checkpoint Systems Inc.+ 1,155,000
100,000 First Alert Inc. 1,462,500
- --------------------------------------------------------------------------------------
2,617,500
- --------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Portfolio of Investments (continued) December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value
Shares Note (1)
======================================================================================
<C> <S> <C> <C>
COMMON STOCKS (continued)
Manufacturing -- 1.3%
60,000 Cyrk Inc.+ $ 2,482,500
- --------------------------------------------------------------------------------------
Broadcasting -- 0.8%
35,000 Telewest Communications PLC+ 927,500
35,200 Young Broadcasting Inc., Class A+ 624,800
- --------------------------------------------------------------------------------------
1,552,300
- --------------------------------------------------------------------------------------
Transportation -- 0.6%
25,000 Fritz Companies, Inc.+ 1,175,000
- --------------------------------------------------------------------------------------
Insurance -- 0.1%
10 Berkshire Hathaway Inc.+ 204,000
- --------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $149,806,631) 182,252,921
- --------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK -- 0.1% (Cost $672,900)
75,000 Encore Marketing International, Series A 121,875
- --------------------------------------------------------------------------------------
Face Value
======================================================================================
REPURCHASE AGREEMENT -- 8.4% (Cost $16,472,000)
$16,472,000 Agreement with Citibank, N.A., 6.000% dated
12/30/94, to be repurchased at $16,482,981 on
01/03/95, collateralized by $15,950,000 U.S.
Treasury Note, 8.500% due 07/15/97 16,472,000
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $166,951,531*) 101.2% 198,846,796
OTHER ASSETS AND LIABILITIES (Net) (1.2) (2,346,166)
======================================================================================
NET ASSETS 100.0% $196,500,630
======================================================================================
</TABLE>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
See Notes to Financial Statements.
12
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $166,951,531)
See accompanying schedule $198,846,796
Cash 543
Receivable for investment securities sold 3,756,544
Receivable for Fund shares sold 736,028
Dividends receivable 250
- -------------------------------------------------------------------------------------------------
Total Assets 203,340,161
- -------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities purchased $6,207,545
Payable for Fund shares redeemed 293,451
Investment advisory fee payable (Note 2) 87,388
Distribution fee payable (Note 3) 58,602
Transfer agent fees payable (Note 2) 40,010
Service fee payable (Note 3) 39,722
Administration fee payable (Note 2) 31,777
Custodian fees payable (Note 2) 16,040
Accrued expenses and other payables 64,996
- -------------------------------------------------------------------------------------------------
Total Liabilities 6,839,531
- -------------------------------------------------------------------------------------------------
NET ASSETS $196,500,630
- -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (continued) December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
NET ASSETS consist of:
Accumulated net realized loss on investments sold $ (5,862,432)
Unrealized appreciation of investments 31,895,265
Par value 10,361
Paid-in capital in excess of par value 170,457,436
- -------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $196,500,630
- -------------------------------------------------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES
Net asset value and redemption price per share
($101,052,414 / 5,289,999 shares of common stock outstanding) $19.10
- -------------------------------------------------------------------------------------------------
Maximum offering price per share ($19.10 / 0.95)
(Based on sales charge of 5.00% of offering price
on December 31, 1994) $20.11
- -------------------------------------------------------------------------------------------------
CLASS B SHARES
Net asset value and offering price per share+
($93,920,227 / 4,989,720 shares of common stock outstanding) $18.82
- -------------------------------------------------------------------------------------------------
CLASS C SHARES
Net asset value and offering price per share+
($1,527,989 / 81,175 shares of common stock outstanding) $18.82
- -------------------------------------------------------------------------------------------------
</TABLE>
+ Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See Notes to Financial Statements.
14
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Statement of Operations
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31, 1994
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 765,033
Dividends 291,049
- -------------------------------------------------------------------------------------------------
Total Investment Income 1,056,082
- -------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 2) $1,052,635
Distribution fee (Note 3) 992,949
Transfer agent fees (Notes 2 and 4) 518,175
Service fee (Note 3) 478,470
Administration fee (Note 2) 382,776
Legal and audit fees 125,699
Custodian fees (Note 2) 67,927
Directors' fees and expenses (Note 2) 50,487
Other 136,374
- -------------------------------------------------------------------------------------------------
Total Expenses 3,805,492
- -------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS (2,749,410)
- -------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON
INVESTMENTS (Notes 1 and 5):
Net realized loss on investments sold during the year (5,296,726)
Net change in unrealized depreciation of investments
during the year (3,369,494)
- -------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (8,666,220)
- -------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(11,415,630)
- -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Year
Ended Ended
12/31/94 12/31/93
<S> <C> <C>
Net investment loss $ (2,749,410) $ (1,062,922)
Net realized gain/(loss) on investments sold
during the year (5,296,726) 11,887,764
Net unrealized appreciation/(depreciation) on
investments during the year (3,369,494) 15,305,261
- -------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting
from operations (11,415,630) 26,130,103
Distributions to shareholders from net realized
gain on investments:
Class A -- (201,416)
Class B -- (1,917,909)
Class C -- (2,961)
Net increase/(decrease) in net assets from
Fund share transactions (Note 6):
Class A 51,357,852 45,287,453
Class B (33,501,105) 40,880,321
Class C 1,352,466 207,013
- -------------------------------------------------------------------------------------
Net increase in net assets 7,793,583 110,382,604
NET ASSETS:
Beginning of year 188,707,047 78,324,443
- -------------------------------------------------------------------------------------
End of year $196,500,630 $188,707,047
- -------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a Class A share outstanding throughout each year.
<TABLE>
<CAPTION>
Year Year Period
Ended Ended Ended
12/31/94# 12/31/93# 12/31/92*
<S> <C> <C> <C>
Net Asset Value, beginning of year $20.23 $15.47 $14.13
- -------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.13) (0.08) (0.01)
Net realized and unrealized gain/(loss) on
investments (1.00) 5.17 1.35
- -------------------------------------------------------------------------------------
Total from investment operations (1.13) 5.09 1.34
- -------------------------------------------------------------------------------------
Distributions from net realized capital gains -- (0.33) --
- -------------------------------------------------------------------------------------
Net Asset Value, end of year $19.10 $20.23 $15.47
- -------------------------------------------------------------------------------------
Total return+ (5.59)% 32.90% 9.48%
- -------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $101,052 $50,121 $195
Ratio of operating expenses to average net assets 1.49% 1.67% 1.51%**
Ratio of net investment loss to average net assets (0.94)% (0.46)% (0.97)%**
Portfolio turnover rate 123% 112% 211%
- -------------------------------------------------------------------------------------
</TABLE>
* The Fund commenced selling Class A shares on November 6, 1992.
** Annualized.
+ Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charge.
# Per share amounts have been calculated using the monthly average shares
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
17
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a Class B share outstanding throughout each year.
<TABLE>
<CAPTION>
Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended
12/31/94# 12/31/93# 12/31/92* 12/31/91 12/31/90 12/31/89
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning of year $20.08 $15.47 $14.18 $9.82 $13.77 $12.04
- -------------------------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income/(loss) (0.27) (0.20) (0.26) (0.07) 0.29 0.28
Net realized and unrealized
gain/(loss) on investments (0.99) 5.14 1.55 4.46 (3.70) 1.96
- -------------------------------------------------------------------------------------------------------------------------------
Total from investment
operations (1.26) 4.94 1.29 4.39 (3.41) 2.24
Less distributions:
Distributions from net
investment income -- -- -- -- (0.29) (0.27)
Distributions from net
realized capital gains -- (0.33) -- -- (0.23) --
Distributions from capital -- -- -- (0.03) (0.02) (0.24)
- -------------------------------------------------------------------------------------------------------------------------------
Total distributions 0.00 (0.33) 0.00 (0.03) (0.54) (0.51)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, end of year $18.82 $20.08 $15.47 $14.18 $9.82 $13.77
- -------------------------------------------------------------------------------------------------------------------------------
Total return+ (6.27)% 31.93% 9.10% 44.76% (24.71)% 18.60%
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets/
supplemental data:
Net assets, end of
year (in 000's) $93,920 $138,401 $78,130 $81,618 $76,009 $141,630
Ratio of operating expenses
to average net assets 2.21% 2.34% 2.32% 2.31% 2.30% 2.34%
Ratio of net investment income/
(loss) to average net assets (1.66)% (1.13)% (1.77)% (0.74)% 2.12% 1.69%
Portfolio turnover rate 123% 112% 211% 379% 372% 228%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
** Annualized expense ratio before reimbursement of expenses by investment
adviser, sub-investment adviser and administrator for the year ended
December 31, 1988 was 2.39%.
+ Total return represents aggregate total return for the periods indicated and
does not reflect any applicable sales charge.
++ Net investment income before reimbursement of expenses by investment
adviser, sub-investment adviser and administrator for the year ended
December 31, 1988 was $0.70.
+++ Not covered by Coopers & Lybrand's report.
# Per share amounts have been calculated using the monthly average shares
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.
18
<PAGE>
<TABLE>
<CAPTION>
Year Year Year Year
Ended Ended Ended Ended
12/31/88+++ 12/31/87+++ 12/31/86+++ 12/31/85+++
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $11.48 $13.02 $13.15 $9.94
- -----------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income/(loss) 0.71++ (0.10) (0.05) 0.05
Net realized and unrealized
gain/(loss) on investments 0.70 (1.30) 0.97 3.37
- -----------------------------------------------------------------------------------------------
Total from investment
operations 1.41 (1.40) 0.92 3.42
Less distributions:
Distributions from net
investment income (0.55) -- (0.05) (0.21)
Distributions from net
realized capital gains (0.30) (0.14) (1.00) --
Distributions from capital -- -- -- --
- -----------------------------------------------------------------------------------------------
Total distributions (0.85) (0.14) (1.05) (0.21)
- -----------------------------------------------------------------------------------------------
Net Asset Value, end of year $12.04 $11.48 $13.02 $13.15
- -----------------------------------------------------------------------------------------------
Total return+ 12.60% (10.91)% 7.05% 35.17%
- -----------------------------------------------------------------------------------------------
Ratios to average net assets/
supplemental data:
Net assets, end of
year (in 000's) $169,983 $178,905 $214,419 $163,468
Ratio of operating expenses
to average net assets 2.32%** 2.09% 2.12% 2.20%
Ratio of net investment income/
(loss) to average net assets 5.23% (0.63)% (0.34)% 0.43%
Portfolio turnover rate 165% 148% 114% 146%
- -----------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a Class C share outstanding throughout each period.
<TABLE>
<CAPTION>
Year Period
Ended Ended
12/31/94# 12/31/93*#
<S> <C> <C>
Net Asset Value, beginning of period $20.08 $22.62
- ------------------------------------------------------------------------------------
Income from investment operations:
Net investment loss (0.25) (0.16)
Net realized and unrealized loss on investments (1.01) (2.05)
- ------------------------------------------------------------------------------------
Total from investment operations (1.26) (2.21)
- ------------------------------------------------------------------------------------
Distributions from net realized capital gains -- (0.33)
- ------------------------------------------------------------------------------------
Net Asset Value, end of period $18.82 $20.08
- ------------------------------------------------------------------------------------
Total return+ (6.27)% (9.77)%
- ------------------------------------------------------------------------------------
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $1,528 $185
Ratio of operating expenses to average net assets 2.15% 2.19%**
Ratio of net investment loss to average net assets (1.60)% (0.98)%**
Portfolio turnover rate 123% 112%
- ------------------------------------------------------------------------------------
</TABLE>
* The Fund commenced selling Class C shares (previously designated as Class D
shares) on October 18, 1993.
** Annualized.
+ Total return represents aggregate total return for the periods indicated
and does not reflect any applicable sales charge.
# Per share amounts have been calculated using the monthly average shares
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.
20
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Investment Funds Inc. (the "Company") (formerly known as Smith
Barney Shearson Investment Funds Inc.) 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 (the "Funds"): Smith Barney Investment
Grade Bond Fund, Smith Barney Government Securities Fund, Smith Barney Special
Equities Fund (the "Fund") and Smith Barney European Fund. Effective November 7,
1994, the Fund began offering Class Y shares and continued to offer Class A,
Class B and Class C shares (Class C shares were previously designated "Class D"
shares). As of December 31, 1994, no Class Y shares had been sold. Class A
shares are sold with a front-end sales charge. Class B and Class C shares may be
subject to a contingent deferred sales charge ("CDSC") upon redemption. Class B
shares will automatically convert to Class A shares eight years after the
original purchase date. Class Y shares are available to investors making an
initial investment of at least $5 million and are not subject to any sales
charges, distribution or service fees. 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 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 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. Short-term instruments maturing
within 60 days of the valuation date are valued at amortized cost.
21
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 Board of Directors,
reviews the value of the collateral and the creditworthiness of those banks and
dealers with which the Fund enters into repurchase agreements to evaluate
potential risks.
Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Dividend income is recorded on the ex-dividend
date. Interest income is recorded on the accrual basis. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Investment income and realized and unrealized gains and losses are allocated
based upon the relative net assets of each class of shares.
Dividends and distributions to shareholders: Distributions from net investment
income, if any, are determined on a class level and will be declared and paid at
least annually. Distributions from net realized capital gains, after utilization
of capital loss carryforwards, are determined on a Fund level and will be
distributed at least annually. Net short-term capital gains may be paid more
frequently, with the distribution of dividends from net investment income.
Additional distributions of net investment income and capital gains may be made
at the discretion of the Board of Directors to avoid the application of 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
22
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
on various investment securities held by the Fund, timing differences and
differing characterization of distributions made by the Fund as a whole.
Permanent differences incurred during the Fund's fiscal year resulting from the
acquisition of capital loss carryforwards have been reclassified to paid-in
capital at year end.
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.
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, formerly a division of Mutual
Management Corp., which has been transferred effective November 7, 1994 to Smith
Barney Mutual Funds Management Inc. ("SBMFM"). Mutual Management Corp. and SBMFM
are both wholly owned subsidiaries of 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 annual rate of 0.55% 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, SBMFM (formerly known as Smith,
Barney Advisers, Inc.) 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 and SBMFM entered into a
sub-administration agreement (the "Sub-Administration Agreement") with Boston
Advisors. Under the Sub-Administration Agreement, SBMFM pays Boston Advisors
a portion of its administration fee at a rate agreed upon from time to time
between SBMFM and Boston Advisors.
23
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
For the year ended December 31, 1994, the Fund incurred total brokerage
commissions of $217,269, of which $14,280 were paid to Smith Barney Inc. ("Smith
Barney").
For the year ended December 31, 1994, Smith Barney received $186,104 from
investors representing commissions (sales charges) on sales of Class A shares.
A CDSC is generally payable by a shareholder in connection with the redemption
of Class B shares within five years (eight years in the case of certain 401(k)
plans) after the date of purchase. In circumstances in which the charge is
imposed, the amount of the charge ranges between 5.00% and 1.00% 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). A CDSC may be payable
by a shareholder in connection with the redemption of Class C shares within one
year after the date of purchase. In circumstances in which the charge is
imposed, the amount of the charge is 1.00% of net asset value. For the year
ended December 31, 1994, Smith Barney received $288,013 from investors in CDSCs
on the redemption of Class B shares.
No officer, director or employee of Smith Barney or 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 officer, director or
employee of Smith Barney or any of its affiliates $16,000 per annum plus $2,500
per meeting attended and reimburses each such Director for travel and out-of-
pocket-expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, serves as the Fund's custodian. The Shareholder Services Group, Inc.,
a subsidiary of First Data Corporation, serves as the Fund's transfer agent.
3. DISTRIBUTION 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 C
shareholders, and covers expenses incurred in distributing Class B and Class C
24
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
shareholders, and covers expenses incurred in distributing Class B and Class C
shares. Smith Barney is paid an annual services fee with respect to Class A,
Class B and Class C 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 C shares
at the rate of 0.75% of the value of the average daily net assets attributable
to each respective class of shares. For the year ended December 31, 1994,
service fees for Class A, Class B and Class C shares were $147,488, $329,007 and
$1,975, respectively. For the year ended December 31, 1994, distribution fees
for Class B and Class C shares were $987,022 and $5,927, 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 year ended December 31, 1994, the Fund paid transfer
agent fees of $173,586, $342,973 and $1,616 for Class A, Class B and Class C
shares, respectively.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of securities, excluding short-term
investments, aggregated $237,005,277 and $215,906,657, respectively, for the
year ended December 31, 1994.
At December 31, 1994, aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $42,133,143, and
aggregate gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $10,237,878.
6. SHARES OF COMMON STOCK
At December 31, 1994, the Company had authorized on behalf of the Fund capital
of 3.15 billion shares of $.001 par value common stock divided into four classes
of shares, Class A, Class B, Class C and Class Y.
25
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Changes in the common stock outstanding were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/94 12/31/93
Class A shares: Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 6,100,691 $113,645,641 1,956,806 $ 32,135,851
Issued as reinvestment of dividends -- -- 9,933 199,734
Issued in exchange for shares of
Smith Barney Shearson Small
Capitalization Fund (Note 8) -- -- 1,707,528 34,338,381
Redeemed (3,288,861) (62,287,789) (1,208,680) (21,386,513)
- ------------------------------------------------------------------------------------------------------------
Net increase 2,811,830 $ 51,357,852 2,465,587 $45,287,453
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
12/31/94 12/31/93
Class B shares: Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 6,054,365 $113,219,270 6,238,027 $119,893,345
Issued as reinvestment of dividends -- -- 94,014 1,878,397
Issued in exchange for shares of
Smith Barney Shearson Small
Capitalization Fund (Note 8) -- -- 267,249 5,339,634
Redeemed (7,958,837) (146,720,375) (4,756,506) (86,231,055)
- ------------------------------------------------------------------------------------------------------------
Net increase/(decrease) (1,904,472) $(33,501,105) 1,842,784 $ 40,880,321
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended Period Ended
12/31/94 12/31/93*
Class C shares: Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sold 75,807 $1,423,144 9,085 $ 204,530
Issued as reinvestment of dividends -- -- 148 2,963
Issued in exchange for shares of
Smith Barney Shearson Small
Capitalization Fund (Note 8) -- -- 1 20
Redeemed (3,844) (70,678) (22) (500)
- ------------------------------------------------------------------------------------------------------------
Net increase 71,963 $1,352,466 9,212 $ 207,013
- ------------------------------------------------------------------------------------------------------------
</TABLE>
* The Fund commenced selling Class C shares on October 18, 1993.
As of December 31, 1994, no Class Y shares had been sold.
26
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
7. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Bank of America (formerly 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 25% of its net assets, adjusted
for purposes of the Agreement. However, pursuant to the Fund's prospectus, the
Fund may only borrow up to 5.00% of its total 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 year ended December 31, 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
Acquired Fund's total net assets are as follows:
<TABLE>
<CAPTION>
Shares Value of Total Acquired
Issued by Shares Total Net Assets Fund
Acquiring Acquired Acquiring Issued by Net Assets of Acquiring Unrealized
Fund Fund Fund Acquiring Fund of Fund Fund Appreciation
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Small
Capitalization
The Fund Fund 1,974,778 $39,678,035 $39,678,035 $131,829,124 $4,017,511
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The net assets of the Acquiring Fund immediately after the acquisition were
$171,507,159.
Acquired in the acquisition were capital loss carryforwards of $1,695,367, of
which $1,436,647 was utilized in the year ended December 31, 1993, and $258,720
is available to offset future gains.
9. CAPITAL LOSS CARRYFORWARDS
As of December 31, 1994, the Fund had available for Federal tax purposes unused
capital loss carryforwards of $258,726 and $5,603,706, expiring in the years
2001 and 2002, respectively.
27
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Report of Independent Accountants
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
SMITH BARNEY SPECIAL EQUITIES FUND OF
SMITH BARNEY INVESTMENT FUNDS INC.:
We have audited the accompanying statement of assets and liabilities of Smith
Barney Special Equities Fund of Smith Barney Investment Funds Inc. (formerly
Smith Barney Shearson Special Equities Fund of Smith Barney Shearson Investment
Funds Inc.), including the schedule of portfolio investments, as of December 31,
1994, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended and the financial highlights for each of the six years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Smith
Barney Special Equities Fund of Smith Barney Investment Funds Inc. as of
December 31, 1994, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the financial highlights for each of the six years in the period then ended, in
conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
February 10, 1995
28
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
Fiscal Year Ended December 31, 1994
Of the distributions made by the Fund, during the fiscal year ended December 31,
1994, 100% qualify for the dividends-received deduction available to corporate
shareholders.
29
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Participants
- --------------------------------------------------------------------------------
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
AND ADMINISTRATOR
Smith Barney Mutual
Funds Management Inc.
388 Greenwich Street
New York, New York 10013
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
COUNSEL
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
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
30
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Glossary of Commonly Used Mutual Fund Terms
- --------------------------------------------------------------------------------
CAPITAL GAIN (OR lOSS) This is the increase (or decrease) in the market value
(price) of a security in your portfolio. If a stock or bond appreciates in
price, there is a capital gain; if it depreciates, there is a capital loss. A
capital gain or loss is "realized" upon the sale of a security; if net capital
gains exceed net capital losses, there may be a capital gain distribution to
shareholders.
CDSC (CONTINGENT DEFERRED SALES CHARGE) One kind of back-end load, a CDSC is
imposed if shares are redeemed during the first few years of ownership. The CDSC
may be expressed as a percentage of either the original purchase price or the
redemption proceeds. Most CDSCs decline over time, and some will not be charged
if shares are redeemed after a certain period of time.
DISTRIBUTION RATE This is the rate at which a mutual fund pays out (or
distributes) interest, dividends and realized capital gains to shareholders. A
fund's distribution rate is usually expressed as an annualized percent of the
fund's offering price.
DIVIDEND This is income generated by securities in a portfolio and distributed
after expenses to shareholders.
FRONT-END SALES CHARGE This is the sales charge applied to an investment at
the time of initial purchase.
NET ASSET VALUE (NAV) Net Asset Value is the total market value of all
securities held by a fund, minus any liabilities, divided by the number of
shares outstanding. It is the value of a single share of a mutual fund on a
given day. The total value of your investment would by the NAV multiplied by the
number of shares you own.
SEC YIELD This standardized calculation of a mutual fund's yield is based
on a formula developed by the Securities and Exchange Commission (SEC) to
allow funds to be compared on an equal basis. It is an annualized yield based
on the portfolio's potential earnings from dividends, interest and yield to
maturity of its holdings, and it reflects the payments of all portfolio
expenses for the most recent 30-day period. Mutual funds are required to use
this figure when stating yield.
TOTAL RETURN Total return measures a fund's performance, taking into account
the combination of dividends paid and the gain or loss in the value of the
securities held in the portfolio. It may be expressed on an average annual basis
or cumulative basis (total change over a given period). In addition, total
return may be expressed with or without the effects of sales charges or the
reinvestment of dividends and capital gains.
Whenever a fund reports any type of performance, it must also report the average
annual total return according to the standardized calculation developed by the
SEC. The SEC average annual total return calculation includes the effects of all
fees and sales charges and assumes the reinvestment of all dividends and capital
gains.
31
<PAGE>
Smith Barney
Special Equities Fund
- --------------------------------------------------------------------------------
Investor Benefits
- --------------------------------------------------------------------------------
AUTOMATIC REINVESTMENT
You may reinvest your dividends and/or capital gains automatically in additional
shares of your fund at the current net asset value.
UNLIMITED EXCHANGES
If your investment goals change, you may exchange into another Smith Barney
mutual fund with the same sales charge structure without incurring a sales
charge.*
SYSTEMATIC INVESTMENT PLAN
This program allows you to invest equal dollar amounts automatically on a
regular basis, monthly or quarterly.
AUTOMATIC CASH
WITHDRAWAL PLAN
With this plan, you may withdraw money on a regular basis while maintaining your
investment.
MUTUAL FUND
EVALUATION SERVICE
Through your Financial Consultant, you may obtain a free personalized analysis
of how your fund has performed for you, taking into account the effect of every
transaction. The analysis is based upon month-end data from CDA Investment
Technologies, Inc., a widely recognized mutual fund information service. An
evaluation also gives you other important facts and figures about your
investment.
For more information about these benefits, or if you have any other questions,
please call your Financial Consultant or write:
MUTUAL FUND POLICY GROUP
SMITH BARNEY INC.
388 GREENWICH STREET 37TH FLOOR
NEW YORK, NY 10013
* After written notification, exchange privilege may be modified or terminated
at any time.
32
<PAGE>
SPECIAL
EQUITIES FUND
DIRECTORS
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank G. Hubbard
Allan R. Johnson
Heath B. McLendon
Ken Miller
John F. White
OFFICERS
Heath B. McLendon
Chairman of the Board
Jessica M. Bibliowicz
President
George V. Novello
Investment Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Christina T. Sydor
Secretary
SMITH BARNEY
A Member of TravelersGroup [LOGO APPEARS HERE]
This report is submitted for the general information of the shareholders of
Smith Barney 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
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 102, 193, 253
FD 0313 C5
1994
ANNUAL
REPORT
DESCRIPTION OF ART WORK ON REPORT COVER
Small box above fund name showing the globe of the world with a three-di-
mensional picture of Europe.
SMITH BARNEY
EUROPEAN
FUND
DECEMBER 31, 1994
Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURES.
EVERY DAY.
EUROPEAN FUND
DEAR SHAREHOLDER:
We are pleased to provide the annual report for Smith Barney European
Fund. During the twelve months ended December 31, 1994, the net asset
value per share of Class A and Class B shares of the Fund declined 2.42%
and 3.13%, respectively, against an increase of 0.17% for Morgan Stanley
Capital International European Index ("MSCI European Index").
On May 10, 1994, portfolio management of the Fund was assumed by Smith,
Barney Advisers, Inc. The new portfolio management team has extensive ex-
perience in global equity management with well over 125 years of experi-
ence among the team's principals. The team employs a strategy focused on
companies with strong earnings growth balanced by broad portfolio diversi-
fication. They have repositioned the Fund's portfolio more in line with
other global portfolios under its management. For instance, they reduced
the weighting in the United Kingdom ("U.K.") to 16.5% of the total portfo-
lio compared to 28.3% on May 10, 1994, initiated a 7% weighting in Austria
and 5% in Finland, and reduced the total number of positions in the port-
folio from 64 on May 10, 1994 to 47 by December 31, 1994. From May 10,
1994 to December 31, 1994, the value of Class A and Class B shares of the
portfolio declined 1.4% and 1.8%, respectively, versus a minor 0.6% rise
for the MSCI European Index. Since November 7, 1994, Smith Barney Mutual
Funds Management Inc. (formerly known as Smith, Barney Advisers, Inc.) has
served as investment adviser to the Fund.
Actually, most European equity markets declined 10%-20% from their highs
reached in early February 1994, as long-term interest rates rose between
200-350 basis points in most countries during the last ten months. Thus,
the sharp sell-off in the European bond markets affected the European eq-
uity markets rather badly during this period. Since the beginning of 1994
the European Financial Times Index dropped 8.8% in local currency terms,
but only 0.4% in dollar terms.
After three years of recession, many European economies have shown signs
of modest improvement in 1994. While twelve months ago the consensus eco-
nomic forecast for Europe was a real GDP growth of only 0.5%, it is cur-
rently apparent that 2.5% real growth has been achieved last year and 3%
is predicted for 1995 as well as 1996. In several ways, the overall eco-
nomic 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 compa-
nies have been forced to implement cost reduction programs 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 restructurings will be re-
flected in strong earnings comparisons over the next two years. Another
similarity is evidenced by the huge flow of funds moving out of low-
interest money market funds into the equity markets. The trend towards
privatization in many European countries should be another boost for equi-
ties. One of the risks in Europe is that the stronger economic environment
forces the Bundesbank to start tightening, but the increased bond yields
last year have, in our opinion, discounted this risk to some extent.
In terms of investment strategy, the European Fund is heavily under-
weighted in the U.K. (16.5% versus 35% for the MSCI European Index), as
the British economic cycle is about 12 months ahead of Continental Europe
and, therefore, interest rates, short and long, have already gone up.
Moreover, we feel the corporate earnings cycle should be more explosive on
the Continent. Ireland is overweighted as the economic conditions are by
far superior compared to the U.K. We also tend to overweight Austria, as a
means of participating in the exciting new developments in Eastern Europe.
Germany's weighting has been upgraded to neutral, as Mr. Kohl's Christian
Democrats (CDU) have been reelected and the German economic recovery is
doing much better than anticipated nine months ago. Switzerland is neu-
trally weighted, as the price/earnings ratios are relatively favorable,
the Swiss conservative accounting is being adjusted towards more liberal
European rules, and Swiss corporate management seems to become more inter-
ested in improving shareholder values.
The Finnish equity market was the best performing, up 51% last year, pro-
pelled by the excellent performance of one of our largest holdings in
Nokia (cellular phones) and the "yes" vote in the EU referendum. Although
the newly-elected Swedish Government has not yet proved its commitment to
tackling the huge budget deficit, we have positions in three large export-
oriented companies. Equity valuations in France are more reasonably priced
compared to neighbor Germany, but France remains slightly underweighted 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 '95
Presidential elections. The Netherlands is overweighted, due to invest-
ments in a few attractive special situations (Hoogovens and Grolsch-beer).
The Fund and the MSCI European Index's country weightings expressed as a
percentage of total net assets held at December 31, 1994 are outlined
below:
<TABLE>
<CAPTION>
SMITH BARNEY MSCI
EUROPEAN FUND EUROPEAN INDEX
<S> <C> <C>
Austria 6.9% 0.8%
Belgium 1.1 2.3
Denmark -- 1.7
Finland 5.0 1.2
France 12.1 13.2
Germany 13.7 13.9
Hungary/Poland 1.2 --
Ireland 1.6 0.6
Italy 5.5 4.7
Netherlands 14.4 7.9
Norway -- 0.9
Portugal -- --
Spain 5.2 3.8
Sweden 5.5 3.7
Switzerland 9.2 10.1
United Kingdom 16.5 35.2
</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 Jeffrey Russell
Heath B. McLendon Jeffrey Russell
Chairman of the Board Investment Officer
February 13, 1995
HISTORICAL PERFORMANCE -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
YEAR ENDED CAPITAL GAINS DIVIDENDS TOTAL
DECEMBER 31 BEGINNING ENDING DISTRIBUTED PAID RETURN*
<S> <C> <C> <C> <C> <C>
11/6/92 - 12/31/92 $11.52 $11.72 -- -- 1.74%
1993 11.72 14.47 -- -- 23.46
1994 14.47 14.12 -- -- (2.42)%
Total -- --
Cumulative Total Return from 11/06/92 through 12/31/94 22.57%
<FN>
* Figures assume reinvestment of all dividends and capital gains distri-
butions at net asset value and do not assume deduction of the sales
charge (maximum 5%).
</TABLE>
THE FUND'S POLICY IS TO DISTRIBUTE DIVIDENDS
AND CAPITAL GAINS, IF ANY, ANNUALLY.
AVERAGE ANNUAL TOTAL RETURN -- CLASS A SHARES**
<TABLE>
<CAPTION>
WITHOUT SALES CHARGE WITH SALES CHARGE***
<S> <C> <C>
Year Ended 12/31/94 (2.42)% (7.30)%
Inception 11/6/92 through
12/31/94 9.98% 7.38%
<FN>
** All average annual total return figures shown reflect the reinvest-
ment of dividends and capital gains at net asset value.
*** Average annual total return figures assume the deduction of the max-
imum 5% front-end sales charge.
NOTE: The Fund began offering Class A shares on November 6, 1992.
Class A shares are subject to a maximum 5% front-end sales charge
and an annual service fee of 0.25% of the value of the average daily
net assets attributable to that class.
</TABLE>
GROWTH OF $10,000 INVESTED IN CLASS A SHARES
OF SMITH BARNEY EUROPEAN FUND VS.
MORGAN STANLEY CAPITAL INTERNATIONAL EUROPEAN INDEX+
November 6, 1992 -- December 31, 1994
DESCRIPTION OF MOUNTAIN CHART IN
SMITH BARNEY COVERS (CLASS A)
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in Euro-
pean Fund Class A shares on November 6, 1992 through December 31, 1994 as
compared with the growth of a $10,000 investment in Morgan Stanley Capital
International European Index. The plot points used to draw the line graph
were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 MORGAN STANLEY
MONTH INVESTED IN CLASS A CAPITAL INTERNATIONAL
ENDED SHARES OF THE FUND EUROPEAN INDEX
<S> <C> <C>
10/31/92 -- $10,000
11/10/92 $ 9,500 --
11/92 $ 9,549 $ 9,999
12/92 $ 9,665 $10,232
03/93 $10,077 $10,912
06/93 $ 9,987 $11,119
09/93 $10,902 $12,109
12/93 $11,993 $13,280
3/94 $11,669 $13,093
6/94 $11,636 $12,930
9/94 $11,702 $13,495
12/94 $11,644 $13,633
<FN>
+ Illustration of $10,000 invested in Class A shares on November 6, 1992,
assuming deduction of the maximum 5% sales charge at the time of in-
vestment and reinvestment of dividends and capital gains at net asset
value through December 31, 1994.
The Morgan Stanley Capital International European Index includes 619
companies representing thirteen countries currently comprising the Eu-
rope, Australia, Far East ("EAFE") Index. Dividends
are reinvested monthly, net after withholding taxes for foreigners.
Index information is available at month-end only; therefore, the clos-
est month-end to inception date of the Fund has been used.
NOTE: All figures cited here represent past performance and do not
guarantee future results.
</TABLE>
HISTORICAL PERFORMANCE -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
YEAR ENDED CAPITAL GAINS DIVIDENDS RETURN OF TOTAL
DECEMBER 31 BEGINNING ENDING DISTRIBUTED PAID CAPITAL RETURN*
<S> <C> <C> <C> <C> <C> <C>
11/6/87 - 12/31/87 $10.00 $10.44 -- -- -- 4.40%
1988 10.44 11.32 $0.27 $0.12 -- 12.28
1989 11.32 13.29 0.48 0.05 $0.02 22.26
1990 13.29 12.97 0.31 0.16 -- 1.17
1991 12.97 12.80 -- 0.27 0.01 0.88
1992 12.80 11.72 -- -- -- (8.44)
1993 11.72 14.40 -- -- -- 22.87
1994 14.40 13.95 -- -- -- (3.13)
Total $1.06 $0.60 $0.03
Cumulative Total Return from 11/06/87 through 12/31/94 59.42%
<FN>
* Figures assume reinvestment of all dividends and capital gains distri-
butions at net asset value and do not assume deduction of the contin-
gent deferred sales charge ("CDSC").
</TABLE>
AVERAGE ANNUAL TOTAL RETURN -- CLASS B SHARES**
<TABLE>
<CAPTION>
WITHOUT CDSC WITH CDSC***
WITH WAIVER WITHOUT WAIVER WITH WAIVER WITHOUT WAIVER
AND EXPENSES AND EXPENSES AND EXPENSES AND EXPENSES
REIMBURSED REIMBURSED REIMBURSED REIMBURSED
<S> <C> <C> <C> <C>
Year Ended
12/31/94 (3.13)% N/A (7.97)% N/A
Five Years Ended
12/31/94 2.15% N/A 1.97% N/A
Inception 11/6/87
through 12/31/94 6.74% 4.70% 6.74% 4.70%
<FN>
** All average annual total return figures shown reflect the reinvest-
ment of dividends and capital gains at net asset value. The Fund's
investment adviser and administrator waived fees and reimbursed ex-
penses from November 1987 to December 1989. A shareholder's actual
return for the period during which waivers and reimbursements were
in effect would be the higher of the two numbers shown.
*** Average annual total return figures shown assume the deduction of
the maximum applicable CDSC which is described in the prospectus.
NOTE: As of November 6, 1992, existing shares of the Fund were des-
ignated Class B shares. Class B shares are subject to a maximum 5%
CDSC and annual service and distribution fees of 0.25% and 0.75%,
respectively, of the value of the average daily net assets attribut-
able to that class.
</TABLE>
GROWTH OF $10,000 INVESTED IN CLASS B SHARES
OF SMITH BARNEY EUROPEAN FUND VS.
MORGAN STANLEY CAPITAL INTERNATIONAL EUROPEAN INDEX+
November 6, 1987 -- December 31, 1994
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in Euro-
pean Fund Class A shares on November 6, 1992 through December 31, 1994 as
compared with the growth of a $10,000 investment in Morgan Stanley Capital
International European Index. The plot points used to draw the line graph
were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 MORGAN STANLEY
MONTH INVESTED IN CLASS A CAPITAL INTERNATIONAL
ENDED SHARES OF THE FUND EUROPEAN INDEX
<S> <C> <C>
10/31/92 -- $10,000
11/10/92 $ 9,500 --
11/92 $ 9,549 $ 9,999
12/92 $ 9,665 $10,232
03/93 $10,077 $10,912
06/93 $ 9,987 $11,119
09/93 $10,902 $12,109
12/93 $11,993 $13,280
3/94 $11,669 $13,093
6/94 $11,636 $12,930
9/94 $11,702 $13,495
12/94 $11,644 $13,633
</TABLE>
DESCRIPTION OF MOUNTAIN CHART IN
SMITH BARNEY COVERS (CLASS B)
A line graph depicting the total growth (including reinvestment of divi-
dends and capital gains) of a hypothetical investment of $10,000 in Euro-
pean Fund Class B shares on November 6, 1987 through December 31, 1994 as
compared with the growth of a $10,000 investment in the Morgan Stanley
Capital International European Index. The plot points used to draw the
line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 MORGAN STANLEY
MONTH INVESTED IN CLASS B CAPITAL INTERNATIONAL
ENDED SHARES OF THE FUND EUROPEAN INDEX
<S> <C> <C>
10/31/87 -- $10,000
11/06/87 $10,000 --
11/87 $ 9,820 $ 9,564
12/87 $10,440 $10,124
03/88 $10,380 $10,576
06/88 $10,694 $10,478
09/88 $11,038 $10,582
12/88 $11,723 $11,781
03/89 $11,723 $12,169
06/89 $12,147 $12,368
09/89 $13,348 $13,901
12/89 $14,332 $15,203
03/90 $14,547 $15,025
06/90 $15,789 $16,390
09/90 $13,688 $13,592
12/90 $14,499 $14,691
03/91 $14,231 $15,425
06/91 $13,739 $14,411
09/91 $14,791 $16,179
12/91 $14,627 $16,697
03/92 $14,193 $16,190
06/92 $15,187 $17,739
09/92 $14,068 $16,790
12/92 $13,393 $15,987
03/93 $13,965 $17,049
06/93 $13,839 $17,373
09/93 $15,073 $18,920
12/93 $16,456 $20,750
3/94 $16,056 $20,457
6/94 $15,976 $20,203
9/94 $16,045 $21,085
12/94 $15,942 $21,302
<FN>
+ Illustration of $10,000 invested in Class B shares on November 6, 1987,
assuming reinvestment of dividends and capital gains at net asset value
through December 31, 1994.
The Morgan Stanley Capital International European Index includes 619
companies representing thirteen countries currently comprising the Eu-
rope, Australia, Far East ("EAFE") Index. Dividends are reinvested
monthly, net after withholding taxes for foreigners.
Index information is available at month-end only; therefore, the clos-
est month-end to inception date of the Fund has been used.
NOTE: All figures cited here represent past performance and do not
guarantee future results.
</TABLE>
HISTORICAL PERFORMANCE -- CLASS C SHARES (UNAUDITED)
<TABLE>
<CAPTION>
NET ASSET VALUE
YEAR ENDED CAPITAL GAINS DIVIDENDS TOTAL
DECEMBER 31 BEGINNING ENDING DISTRIBUTED PAID RETURN*
<S> <C> <C> <C> <C> <C>
11/08/94 -
12/31/94 $14.41 $13.95 -- -- (3.19)%
Total -- --
Cumulative Total Return from 11/08/94 through 12/31/94 (3.19)%
<FN>
* Figures assume reinvestment of all dividends and capital gains distri-
butions at net asset value and do not assume deduction of the CDSC.
</TABLE>
CUMULATIVE TOTAL RETURN -- CLASS C SHARES**
<TABLE>
<CAPTION>
WITHOUT CDSC WITH CDSC***
<S> <C> <C>
Inception 11/8/94
through 12/31/94 (3.19)% (4.19)%
<FN>
** All average annual total return figures shown reflect the reinvest-
ment of dividends and capital gains at net asset value.
*** Average annual total return figures shown assume deduction of the
maximum applicable CDSC which is described in the prospectus.
NOTE: The Fund began offering Class C shares on January 29, 1993.
Class C shares are subject to a maximum 1.00% CDSC and annual ser-
vice and distribution fees of 0.25% and 0.75%, respectively, of the
value of the average daily net assets attributable to that class.
</TABLE>
PORTFOLIO HIGHLIGHTS (UNAUDITED) DECEMBER 31, 1994
INDUSTRY BREAKDOWN
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Pie chart depicting the allocation of the Investment Portfolios European
Fund investment securities held at December 31, 1994 by industry classifi-
cation. The pie is broken in pieces representing industries in the follow-
ing percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Manufacturing 6.1%
Retail 6.9%
Oil and Gas 8.2%
Engineering and Construction 8.7%
Technology 8.8%
Financial Services 9.3%
Preferred Stocks, Warrants, Commercial Paper, and Net Other Assets and
Liabilities 10.2%
Other Common Stocks 14.9%
Basic Industries 3.5%
Iron and Steel 4.2%
Consumer Non-Durables 4.5%
Utilities 4.7%
Communication 4.8%
Consumer Durables 5.2%
</TABLE>
TOP TEN HOLDINGS
<TABLE>
<CAPTION>
PERCENTAGE OF
COMPANY NET ASSETS
<S> <C>
HOOGOVENS 4.2%
NOKIA 4.2
NORWEB 3.5
INTERNATIONAL NEDERLANDEN GROUP 3.4
BARCLAYS BANK 3.4
ROYAL DUTCH PETROLEUM 3.2
VA-TECHNOLOGY AG 2.9
GUILBERT SA 2.7
TOTAL CIE FRANCAISE DES PETROLES, SERIES B 2.7
BAYER AG 2.7
</TABLE>
PORTFOLIO OF INVESTMENTS DECEMBER 31, 1994
<TABLE>
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
<S> <C> <C>
COMMON STOCKS -- 88.5%
UNITED KINGDOM -- 16.5%
124,004 Barclays Bank $ 1,187,306
114,942 BTR 528,690
50,000 Carlton Communications 701,678
92,000 Norweb 1,234,953
85,157 Prudential Corporation 419,668
138,607 TI Group 832,706
75,000 Wolseley 922,273
5,827,274
NETHERLANDS -- 14.4%
20,000 Grolsch NV 618,699
32,500 Hoogovens+ 1,475,315
25,635 International Nederlanden Group 1,210,940
20,000 NedLloyd Group NV+ 655,568
10,200 Royal Dutch Petroleum 1,110,548
5,071,070
FRANCE -- 12.1%
6,045 Castorama Dubois 754,918
7,626 Cie Generale des Eaux 741,040
11,314 Guilbert SA 965,958
23,200 Michelin Group+ 843,992
16,344 Total Cie Francaise Des Petroles, Series B 949,243
4,255,151
GERMANY -- 9.8%
4,000 Bayer AG 937,016
2,000 Buderus AG 855,705
1,430 Linde AG 835,151
3,000 Mannesmann AG 816,985
3,444,857
SWITZERLAND -- 9.2%
1,560 Ciba-Geigy AG 930,508
860 Landis & GYR AG 535,304
1,000 Magazine Zum Globus 595,715
500 Societe Generale 691,183
700 Sulzer AG 484,362
3,237,072
AUSTRIA -- 6.1%
23,000 Baumax Corporation AG+ 906,715
83,000 Fotex 251,112
10,000 VA-technology AG+ 1,006,647
2,164,474
ITALY -- 5.5%
130,000 Fiat S.p.A+ 482,640
10,000 Industrie Natuzzi S.p.A 340,000
320,600 Parmalat Finanziaria S.p.A 336,121
325,000 Stet di Risp 770,660
1,929,421
SWEDEN -- 5.5%
9,100 Asea AB Free, Series A 664,998
19,100 Astra AB Free, Class A 493,530
15,000 Hennes and Mauritz 769,122
1,927,650
SPAIN -- 4.4%
5,000 Banco Popular de Espanol 594,492
67,400 Iberdrola I SA Ord 415,793
20,560 Repsol SA 557,639
1,567,924
IRELAND -- 1.6%
100,000 CRH 548,546
BELGIUM -- 1.2%
10,000 Delhaize 406,162
FINLAND -- 0.9%
16,600 Outokumpu Oy+ 304,838
UNITED STATES -- 0.8%
10,000 Repsol, ADR 272,500
CANADA -- 0.5%
242,957 International UNP Holdings+ 164,540
TOTAL COMMON STOCKS (Cost $28,187,994) 31,121,479
PREFERRED STOCKS -- 9.5%
7,000 BAU Holdings AG 506,991
2,875 GEA AG 912,816
1,000 Moebel Walther AG 480,124
10,000 Nokia AB 1,473,320
TOTAL PREFERRED STOCKS (Cost $2,758,981) 3,373,251
WARRANT -- 0.0% (Cost $1,910)
3,482 BTR PLC, expire 12/31/98+ 1,770
FACE VALUE
COMMERCIAL PAPER -- 0.3% (Cost $126,000)
$126,000 Prudential Securities, 5.800% due 1/3/95 126,000
TOTAL INVESTMENTS (Cost $31,074,885*) 98.3% 34,622,500
OTHER ASSETS AND LIABILITIES (NET) 1.7 607,905
NET ASSETS 100.0% $ 35,230,405
<FN>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
</TABLE>
See Notes to Financial Statements.
SCHEDULE OF FORWARD FOREIGN EXCHANGE CONTRACTS DECEMBER 31, 1994
<TABLE>
<CAPTION>
CONTRACT VALUE MARKET VALUE
DATE (NOTE 1)
<S> <C> <C>
FORWARD FOREIGN EXCHANGE CONTRACTS TO SELL
(Contract Amount $23,010)
93,297 French Francs 1/3/95 $(17,468)
3,635 British Pounds 1/6/95 (5,687)
$(23,155)
</TABLE>
See Notes to Financial Statements.
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $31,074,885) (Note 1)
See accompanying schedule $34,622,500
Currency, at value (Cost $604,707) 601,493
Dividends and interest receivable 186,042
Receivable for forward foreign exchange contracts to sell 23,010
Receivable for Fund shares sold 9,282
Receivable for investment securities sold 5,617
TOTAL ASSETS 35,447,944
LIABILITIES:
Accrued legal and audit fees $49,350
Payable for Fund shares redeemed 43,706
Forward foreign exchange contracts to sell, at value
(Contract cost $23,010) (Note 1)
See accompanying schedule 23,155
Investment advisory fee payable (Note 2) 20,911
Custodian fees payable (Note 2) 17,900
Distribution fee payable (Note 3) 17,721
Accrued shareholder report expense 14,000
Transfer agent fees payable (Note 2) 11,700
Service fee payable (Note 3) 7,468
Administration fee payable (Note 2) 5,975
Accrued Directors' fees and expenses (Note 2) 500
Accrued expenses and other payables 5,153
TOTAL LIABILITIES 217,539
NET ASSETS $35,230,405
NET ASSETS CONSIST OF:
Accumulated net investment loss $ (10,271)
Accumulated net realized loss on securities, forward foreign
exchange contracts and foreign currency transactions (1,253,910)
Net unrealized appreciation of securities, forward foreign
exchange contracts, foreign currencies and net other as-
sets 3,544,459
Par value 2,520
Paid-in capital in excess of par value 32,947,607
TOTAL NET ASSETS $35,230,405
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE and redemption price per share
($7,309,670 / 517,734 shares of common stock outstanding) $ 14.12
Maximum offering price per share ($14.12 / .95)
(based on maximum sales charge of 5% of the offering
price on December 31, 1994) $ 14.86
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($27,920,465 / 2,001,869 shares of common stock outstanding) $ 13.95
CLASS C SHARES:
NET ASSET VALUE, offering and price per share+
($270.05 / 19.360 shares of common stock outstanding) $ 13.95
<FN>
+ Redemption price per share is equal to net asset value less any applica-
ble contingent deferred sales charge.
</TABLE>
See Notes to Financial Statements.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $125,558) $ 844,891
Interest 99,963
TOTAL INVESTMENT INCOME 944,854
EXPENSES:
Investment advisory fee (Note 2) $ 278,074
Distribution fee (Note 3) 268,322
Transfer agent fees (Notes 2 and 4) 110,592
Legal and audit fees 105,818
Service fee (Note 3) 99,273
Custodian fees (Note 2) 95,732
Administration fee (Note 2) 79,367
Shareholder reports expense 74,834
Registration and filing fees 66,822
Directors' fees and expenses (Note 2) 47,375
Other 10,988
TOTAL EXPENSES 1,237,197
NET INVESTMENT LOSS (292,343)
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities transactions 670,987
Forward foreign exchange contracts (213,626)
Foreign currency transactions 152,464
Net realized gain on investments during the year 609,825
Net change in unrealized appreciation/(depreciation) of:
Securities (1,450,701)
Forward foreign exchange contracts (145)
Foreign currencies and net other assets 5,373
Net unrealized depreciation of investments during the year (1,445,473)
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS (835,648)
NET DECREASE ON NET ASSETS RESULTING FROM OPERATIONS $(1,127,991)
</TABLE>
See Notes to Financial Statements.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
12/31/94 12/31/93
<S> <C> <C>
Net investment loss $ (292,343) $ (62,834)
Net realized gain on securities, forward foreign
exchange contracts and foreign currency trans-
actions during the year 609,825 468,820
Net unrealized appreciation/(depreciation) of
securities, forward foreign exchange contracts,
foreign currencies and net other assets during
the year (1,445,473) 5,754,584
Net increase/(decrease) in net assets resulting
from operations (1,127,991) 6,160,570
Net increase/(decrease) in net assets from Fund
share transactions (Note 6):
Class A 5,884,800 1,389,860
Class B (6,932,033) 6,688,242
Class C 263 14
Net increase/(decrease) in net assets (2,174,961) 14,238,686
NET ASSETS:
Beginning of year 37,405,366 23,166,680
End of year (including accumulated net invest-
ment loss of $10,271 at December 31, 1994) $ 35,230,405 $37,405,366
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
12/31/94+# 12/31/93# 12/31/92*
<S> <C> <C> <C>
Net Asset Value, beginning of year $14.47 $11.72 $11.52
Income from investment operations:
Net investment income/(loss) (0.02) 0.07 0.00**
Net realized and unrealized gain/(loss) on
investments (0.33) 2.68 0.20
Total from investment operations (0.35) 2.75 0.20
Net Asset Value, end of year $14.12 $14.47 $11.72
Total return++ (2.42)% 23.46% 1.74%
Ratios to average net assets/supplemental
data:
Net assets, end of year (in 000's) $7,310 $1,707 $46
Ratio of operating expenses to average net
assets 2.50% 2.32% 1.87%+++
Ratio of net investment income/(loss) to
average net assets (0.12)% 0.48% (0.04)%+++
Portfolio turnover rate 69% 68% 108%
<FN>
* The Fund commenced selling Class A shares on November 6, 1992.
+ As of May 10, 1994, the Fund changed its investment adviser from Leh-
man Brothers Global Asset Management Limited to its current adviser.
++ Total return represents aggregate total return for the periods indi-
cated and does not reflect any
applicable sales charge.
+++ Annualized.
# Per share amounts have been calculated using the monthly average shares
method which more appropriately presents the per share data for the period
since the use of the undistributed method does not accord with the results
of operations.
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/94+## 12/31/93## 12/31/92 12/31/91
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $ 14.40 $ 11.72 $ 12.80 $ 12.97
Income from investment operations:
Net investment income/(loss) (0.12) (0.03) (0.12) 0.19
Net realized and unrealized gain/
(loss) on investments (0.33) 2.71 (0.96) (0.08)
Total from investment operations (0.45) 2.68 (1.08) 0.11
Less distributions:
Distributions from net investment
income -- -- -- (0.27)
Distributions from net realized
gains -- -- -- --
Distributions from capital -- -- -- (0.01)
Total distributions -- -- -- (0.28)
Net Asset Value, end of year $ 13.95 $ 14.40 $ 11.72 $ 12.80
Total return++ (3.13)% 22.87% (8.44)% 0.88%
Ratios to average net assets/sup-
plemental data:
Net assets, end of year (in 000's) $27,920 $35,698 $23,120 $28,634
Ratio of operating expenses to av-
erage net assets 3.19% 3.05% 2.68% 2.55%
Ratio of net investment income/
(loss) to average net assets (0.80)% (0.25)% (0.85)% 1.49%
Portfolio turnover rate 69% 68% 108% 94%
<FN>
+ As of May 10, 1994, the Fund changed its investment adviser from Leh-
man Brothers Global Asset Management Limited to its current adviser.
++ Total return represents aggregate total return for the periods indi-
cated and does not reflect any applicable sales charge.
## Per share amounts have been calculated using the monthly average shares
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.
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS (continued)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH YEAR.
<TABLE>
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
12/31/90 12/31/89 12/31/88(1) 12/31/87*(1)
<S> <C> <C> <C> <C>
Net Asset Value, beginning of year $ 13.29 $11.32 $10.44 $ 10.00
Income from investment operations:
Net investment income/(loss) 0.24 0.14# (0.06)# 0.05#
Net realized and unrealized gain/
(loss) on investments (0.09) 2.38 1.33 0.39
Total from investment operations 0.15 2.52 1.27 0.44
Less distributions:
Distributions from net investment
income (0.16) (0.05) (0.12) --
Distributions from net realized
gains (0.31) (0.48) (0.27) --
Distributions from capital -- (0.02) -- --
Total distributions (0.47) (0.55) (0.39) --
Net Asset Value, end of year $ 12.97 $13.29 $11.32 $10.44
Total return++ 1.17% 22.26% 12.28% 4.40%
Ratios to average net assets/supple-
mental data:
Net assets, end of year (in 000's) $28,017 $7,445 $2,287 $ 1,708
Ratio of operating expenses to aver-
age net assets 2.92% 2.37%+++ 2.51%+++ 4.30%**+++
Ratio of net investment in-
come/(loss) to average net assets 2.21% 0.97% (0.71)% 4.73%**
Portfolio turnover rate 118% 109% 105% 167%
<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.
# 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.
(1) Not covered by Cooper & Lybrand's report.
</TABLE>
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
FOR A CLASS C SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
12/31/94*+#
<S> <C>
Net Asset Value, beginning of period $14.41
Income from investment operations:
Net investment loss (0.03)
Net realized and unrealized gain on investments (0.43)
Total from investment operations (0.46)
Net Asset Value, end of period $13.95
Total return++ 2.05%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $ 0
Ratio of operating expenses to average net assets+++ 3.29%
Ratio of net investment loss to average net assets+++ (0.91)%
Portfolio turnover rate 69%
<FN>
* The Fund commenced selling Class C shares (formerly Class D shares) on
November 8, 1994.
** 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.
++ Total return represents aggregate total return for the periods indi-
cated and does not reflect any applicable sales charge.
+++ Annualized.
# Per share amounts have been recalculated using the monthly average
shares method which more appropriately presents the per share data for
the period since the use of the undistributed method does not accord
with the results of operations.
</TABLE>
See Notes to Financial Statements.
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Investment Funds Inc. (the "Company") (formerly known as
Smith Barney Shearson Investment Funds Inc.) 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 di-
versified open-end management investment company. The Company is composed
of four managed investment funds (the "Funds"): Smith Barney Investment
Grade Bond Fund, Smith Barney Government Securities Fund, Smith Barney
Special Equities Fund, and Smith Barney European Fund (the "Fund"). Effec-
tive November 7, 1994, the Fund began offering Class Y shares and contin-
ued to offer Class A, Class B and Class C shares (Class C shares were pre-
viously designated "Class D" shares). As of December 31, 1994, no Class Y
shares had been sold. Class A shares are sold with a front-end sales
charge. Class B and Class C shares may be subject to a contingent deferred
sales charge ("CDSC") upon redemption. Class B shares will automatically
convert to Class A shares eight years after the original purchase date.
Class Y shares are available to investors making an initial investment of
at least $5 million and are not subject to any sales charges, distribution
and service fees. All classes of shares have identical rights and privi-
leges except with respect to the effect of the respective sales charges to
each class, the distribution and/or service fees borne by each class, ex-
penses allocable exclusively to each class, voting rights on matters af-
fecting a single class, the exchange privilege of each class and the con-
version feature of Class B shares. The following is a summary of signifi-
cant 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 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 quota-
tions and may be valued on the basis of prices provided by a pricing ser-
vice, 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.
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. Permanent differences
incurred during the Fund's fiscal year resulting from net investment loss
and different book and tax accounting treatment of foreign currency have
been reclassified to paid-in capital at year end.
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.
2. INVESTMENT ADVISORY FEES, ADMINISTRATION FEE
AND OTHER TRANSACTIONS
As of the close of business on April 8, 1994, the Fund entered into an in-
vestment advisory agreement (the "Advisory Agreement") with Smith, Barney
Advisers, Inc., formerly a division of Mutual Management Corp., which has
been transferred effective November 7, 1994 to Smith Barney Mutual Funds
Management Inc. ("SBMFM"). Mutual Management Corp. and SBMFM are both
wholly owned subsidiaries of Smith Barney Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of The Travelers Inc. The new Advi-
sory Agreement contains substantially the same terms and conditions, in-
cluding the level of fees, as the predecessor agreement.
Prior to April 8, 1994, the Fund had entered into an investment advisory
agreement with Lehman Brothers Global Asset Management Limited, a wholly
owned subsidiary of Lehman Brothers Holdings Inc. 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 based on
an annual rate of 0.70% of the value of its 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, SBMFM (formerly known as
Smith, Barney Advisers, Inc.) succeeded Boston Advisors as the Fund's ad-
ministrator. 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 and SBMFM entered
into a sub-administration agreement (the "Sub-Administration Agreement")
with Boston Advisors. Under the Sub-Administration Agreement, SBMFM pays
Boston Advisors a portion of its administration fee at a rate agreed upon
from time to time between SBMFM and Boston Advisors.
For the year ended December 31, 1994, Smith Barney received $6,080 from
investors 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 5.00%
and 1.00% 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 3.00% charge is imposed for the eight year period after
the date of the purchase). A CDSC may be payable by a shareholder in con-
nection with the redemption of Class C shares within one year after the
date of purchase. In circumstances in which the charge is imposed, the
amount of the charge is 1.00%. For the year ended December 31, 1994, Smith
Barney received $87,384 from investors in 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
$16,000 per annum plus $2,500 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 C shareholders, and covers expenses incurred in distrib-
uting Class B and Class C shares. Smith Barney is paid an annual service
fee with respect to Class A, Class B and Class C 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 dis-
tribution fee with respect to Class B and Class C shares at the rate of
0.75% of the value of the average daily net assets of each respective
class of shares. For the year ended December 31, 1994, service fees for
Class A and Class B shares were $9,832 and $89,441, respectively. For the
year ended December 31, 1994, distribution fees for Class B shares were
$268,322. For the year ended December 31, 1994, the Fund paid no service
or distribution fees for Class C shares.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any
class of shares are prorated among the classes based upon the relative net
assets of each class. Operating expenses directly attributable to a class
of shares are charged to that class' operations. In addition to the above
servicing and distribution fees, class specific operating expenses include
transfer agent fees. For the year ended December 31, 1994, the Fund in-
curred transfer agent fees of $13,452 and $97,140 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 $25,193,794 and $25,280,447, respectively,
for the year ended December 31, 1994.
At December 31, 1994, aggregate gross unrealized appreciation for all se-
curities in which there was an excess of value over tax cost was
$4,505,830, and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over value was $958,215.
6. SHARES OF COMMON STOCK
At December 31, 1994, the Company had authorized on behalf of the Fund
capital of 2.25 billion shares of $.001 par value common stock divided
into four classes, Class A, Class B, Class C and Class Y.
Changes in common stock outstanding were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
12/31/94 12/31/93
CLASS A SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 1,041,259 $15,156,401 1,006,830 $12,641,308
Redeemed (641,546) (9,271,601) (892,758) (11,251,448)
Net increase 399,713 $5,884,800 114,072 $1,389,860
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
12/30/94 12/31/93
CLASS B SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 2,781,395 $40,576,539 2,857,156 $36,736,827
Redeemed (3,258,566) (47,508,572) (2,351,504) (30,048,585)
Net increase/decrease (477,171) $(6,932,033) 505,652 $6,688,242
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
12/31/94* 12/31/93
CLASS C SHARES: Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Sold 18 $263 1 $ 14
Net increase 18 $ 263 1 $ 14
<FN>
* The Fund commenced selling Class C shares (formerly Class D shares) on
November 8, 1994.
</TABLE>
As of December 31, 1994, no Class Y shares had been sold.
7. CAPITAL LOSS CARRYFORWARDS
At December 31, 1994, the Fund had available for federal tax purposes
unused capital loss carryforwards of $634,728 and $619,182 expiring in
1999 and 2000, respectively.
8. FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments in-
volves special risks and considerations not typically associated with in-
vesting 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 Bank of America (formerly 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 re-
quests that otherwise might require the untimely disposition of securi-
ties. Under this Agreement, the Fund may borrow up to the lesser of $25
million or 25% of its net assets, adjusted for purposes of the Agreement.
However, pursuant to the Fund's prospectus, the Fund may only borrow up to
10% of its net assets. Interest is payable either at the bank's Money Mar-
ket 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 Agree-
ment of no less than 5 to 1. During the year ended December 31, 1994, the
Fund had an average outstanding daily balance of $49,315 with interest
rates ranging from 5.196% to 6.717%. Interest expense totalled $2,886 for
the year ended December 31, 1994. At December 31, 1994, the Fund had no
outstanding borrowings under the Agreement.
10. PROPOSED REORGANIZATION
On December 20, 1994, the Board of Directors of the Company approved the
proposed reorganization of the Fund with and into Smith Barney World
Funds, Inc. -- European Portfolio. Subject to the approval of the Fund's
shareholders, the reorganization will take place on or about April 21,
1995.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
SMITH BARNEY EUROPEAN FUND OF
SMITH BARNEY INVESTMENT FUNDS INC.:
We have audited the accompanying statement of assets and liabilities of
Smith Barney European Fund of Smith Barney Investment Funds Inc., includ-
ing the schedule of portfolio investments, as of December 31, 1994, and
the related statement of operations for the year then ended, the statement
of changes in net assets for each of the two years in the period then
ended and the financial highlights for each of the six years in the period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and fi-
nancial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclo-
sures in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1994 by correspondence with the custo-
dian and brokers. An audit also includes assessing the accounting princi-
ples used and significant estimates made by management, as well as evalu-
ating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of Smith Barney European Fund of Smith Barney Investment Funds Inc. as of
December 31, 1994, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then
ended and the financial highlights for each of the six years in the period
then ended, in conformity with generally accepted accounting principles.
Coopers & Lybrand, L.L.P.
Boston, Massachusetts
February 10, 1995
ADDITIONAL INFORMATION (UNAUDITED)
On May 10, 1994, a special meeting of the shareholders of the Fund was
held for the purpose of voting on the following matter:
1. To approve or disapprove a new investment advisory agreement between
the Fund and Smith, Barney Advisers, Inc. containing substantially the
same terms and conditions as the Fund's current investment advisory
agreement ("Proposal 1").
The results of the vote on Proposal 1 were as follows:
<TABLE>
<CAPTION>
% OF % OF
VOTE NO. OF SHARES OUTSTANDING SHARES SHARES VOTED
<S> <C> <C> <C>
Affirmative 1,325,136.756 46.255% 90.859%
Against 32,259.226 1.126 2.211
Abstain 101,056.438 3.527 6.930
Total 1,458,452.420 50.908% 100.00%
</TABLE>
EUROPEAN
FUND
DIRECTORS
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank G. Hubbard
Allan R. Johnson
Heath B. McLendon
Ken Miller
John F. White
OFFICERS
Heath B. McLendon
Chairman of the Board
Jessica M. Bibliowicz
President
Jeffrey Russell
Investment Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Christina T. Sydor
Secretary
Recycled
Recyclable
SMITH BARNEY
A Member of Travelers Group
This report is submitted for the general information of the shareholders
of Smith Barney European Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by an effective Pro-
spectus for the Fund, which contains information concerning the Fund's in-
vestment policies, fees and expenses as well as other pertinent informa-
tion.
SMITH BARNEY
MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
Fund 109, 203, 255, 446
FD0315 B5
