<PAGE>
ANNUAL REPORT
1995
1995
1995
1995
1995
Smith Barney
Government
Securities
Fund
________________________________
December 31, 1995
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
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Smith Barney Government Securities Fund
Dear Shareholder:
We are pleased to provide the annual report for the year ended December 31, 1995
for Smith Barney Government Securities Fund. For your convenience, we have
summarized the period's prevailing economic and market conditions and outlined
our portfolio strategy. A more detailed summary of performance and current
holdings can be found in the appropriate sections that follow in the annual
report.
What goes up, must come down. The simple wisdom behind this adage presents
investment opportunities. This was the case for the fixed income markets in
1995. It was the third consecutive year of dramatic interest rate moves in
different directions. The chart below demonstrates the changes in interest
rates:
1/93 1/94 1/95 1/96
---- ---- ---- ----
3 months 3.14% 3.08% 5.68% 5.07%
5 year 5.89 5.89 7.83 5.37
10 year 6.57 5.91 7.83 5.57
30 year 7.32 6.42 7.88 5.95
The noticeable and significant difference is that yields on shorter maturities
are still relatively high. This should be the focal point for 1996 in terms of
what may be expected for investment returns and the behavior of investors. Of
course, 1995 was filled with many important monetary, economic and political
events.
When 1995 began, the Federal Reserve had already raised interest rates six times
in 1994. The year started with signs that the U.S. economy, as measured by gross
domestic product (GDP), would continue its recovery. Economic indicators were
strong and the U.S. economy was growing at an annual rate of roughly 5.0%. This
rapid growth, combined with strong employment, was seen by the Federal Reserve
as a sign of a possible increase in the rate of inflation. In an effort to head
off any such increase, the Federal Reserve raised the federal funds rate from
5.50% to 6.00% in early 1995, effectively slowing economic growth. (The federal
funds rate represents the rate banks charge each other for overnight loans and
affects all other interest rates.)
As early as March, automobile manufacturers, for example, began reporting
sluggish demand and responded with production cuts. This contributed to slower
economic growth and the Federal Reserve Board's concerns were allayed. The
Federal Reserve eased monetary policy on July 6, 1995 by lowering the federal
funds rate from 6.00% to 5.75%. Following its July
1
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meeting, the Federal Reserve held firm and did not lower short-term interest
rates until its final meeting of the year. Citing subdued inflation, the Federal
Reserve lowered the federal funds rate another 25 basis points to 5.50% in
December.
Market Outlook
The financial markets should find their direction during 1996 from any federal
budget deficit agreement and Federal Reserve actions in response to new economic
statistics. The continued downsizing of corporate America, combined with
changing consumer attitudes away from spending and more towards saving, should,
in our view, provide the necessary fuel for lower rates. We believe the low
rates of 1993 will most likely be surpassed during the coming year.
Fund Performance Update
The Smith Barney Government Securities Fund's performance in 1995 was based on a
portfolio composition of approximately 50% in 9% mortgage securities and 50% in
a changing mix of five- and ten-year coupon Treasuries and longer-dated strip
Treasuries. While the Fund's mortgage securities did not appreciate as much as
Treasuries, the income earned was important to the dividend paid during the
year. The Treasury securities provided a complementing balance in the portfolio
from appreciation. Yet they did not have the inherent risk of 30-year bonds. The
chart below shows the Fund's relative performance versus various Treasury
indices:
Return
--------
3-month Treasury bills 5.79%
2-year Treasury notes 11.13%
3-year Treasury notes 13.83%
5-year Treasury notes 16.93%
10-year Treasury notes 23.58%
30-year Treasury bonds 34.08%
Smith Barney Government Securities Fund
Total Return (Class A shares) 14.50%
2
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In closing, we would like to thank you for your investment in Smith Barney
Government Securities Fund.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman and Vice President and
Chief Executive Officer Investment Officer
January 12, 1996
3
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<TABLE>
<CAPTION>
Smith Barney Government Securities Fund
Historical Performance -- Class A Shares
Net Asset Value
---------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
<S> <C> <C> <C> <C> <C> <C>
12/31/95 $ 9.17 $ 9.77 $0.69 $0.00 $0.00 14.50%
12/31/94 10.01 9.17 0.49 0.00 0.07 (2.76)
12/31/93 9.69 10.01 0.72 0.00 0.00 10.87
Inception* -
12/31/92 9.56 9.69 0.08 0.00 0.02 2.41+
Total $1.98 $ 0.00 $0.09
- --------------------------------------------------------------------------------------------
Historical Performance -- Class B Shares
Net Asset Value
---------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
12/31/95 $ 9.17 $ 9.81 $0.60 $0.00 $0.00 13.87%
12/31/94 10.01 9.17 0.45 0.00 0.07 (3.25)
12/31/93 9.68 10.01 0.67 0.00 0.00 10.45
12/31/92 9.81 9.68 0.53 0.00 0.11 5.45
12/31/91 9.11 9.81 0.63 0.00 0.08 16.28
12/31/90 9.25 9.11 0.68 0.00 0.06 6.99
12/31/89 8.75 9.25 0.70 0.00 0.03 14.58
12/31/88 8.90 8.75 0.74 0.00 0.00 6.75
12/31/87 10.41 8.90 0.51 0.45 0.00 (5.27)
12/31/86 10.20 10.41 0.84 0.29 0.00 13.62
Total $6.35 $0.74 $0.35
- --------------------------------------------------------------------------------------------
Historical Performance -- Class C Shares
Net Asset Value
---------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
12/31/95 $ 9.17 $ 9.81 $0.61 $0.00 $0.00 13.93%
12/31/94 10.01 9.17 0.45 0.00 0.07 (3.25)
Inception* -
12/31/93 9.90 10.01 0.61 0.00 0.00 7.36+
Total $1.67 $0.00 $0.07
- -------------------------------------------------------------------------------------------
</TABLE>
It is the Fund's policy to distribute dividends monthly and
capital gains, if any, annually.
4
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Smith Barney Government Securities Fund
Average Annual Total Return
<TABLE>
<CAPTION>
<S> <C>
Without Sales Charge(1)
-------------------------
Class A Class B Class C
Year Ended 12/31/95 14.50% 13.87% 13.93%
Five Years Ended 12/31/95 N/A 8.33 N/A
Ten Years Ended 12/31/95 N/A 7.71 N/A
Inception* through 12/31/95 7.73 8.61 5.97
- -------------------------------------------------------------------------------------------
With Sales Charge(2)
----------------------
Class A Class B Class C
Year Ended 12/31/95 9.37% 9.37% 12.93%
Five Years Ended 12/31/95 N/A 8.19 N/A
Ten Years Ended 12/31/95 N/A 7.71 N/A
Inception* through 12/31/95 6.16 8.61 5.97
- -------------------------------------------------------------------------------------------
Cumulative Total Return
Without Sales Charge(1)
-------------------------
Class A (Inception* through 12/31/95) 26.42%
Class B (12/31/85 through 12/31/95) 110.15
Class C (Inception* through 12/31/95) 18.34
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charge with respect to Class A shares or the applicable contingent
deferred sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 4.50% and Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed less than
one year from initial purchase. This CDSC declines by 0.50% the first year
after purchase and thereafter by 1.00% per year until no CDSC is incurred.
Class C shares reflect the deduction of a 1.00% CDSC, which applies if
shares are redeemed within the first year of purchase.
* Inception dates for Class A, B and C shares are November 6, 1992, March 20,
1984 and February 4, 1993, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
5
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Smith Barney Government Securities Fund
Historical Performance (unaudited)
Growth of $10,000 Invested in Class B Shares of
the Smith Barney Government Securities Fund
vs. Lehman Brothers Government Bond Index
and Lipper General U.S. Government Peer Group Average+
------------------------------------------------------------
December 1985 -- December 1995
[GRAPH APPEARS HERE]
+ Hypothetical illustration of $10,000 invested in Class B shares on December
31, 1985, assuming reinvestment of dividends and capital gains, if any, at net
asset value through December 31, 1995. The Lehman Brothers Government Bond
Index is a 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 Lipper General U.S. Government Peer Group Average is composed of
the Fund's peer group of 192 mutual funds investing in U.S. Government
securities as of December 31, 1995. The index is unmanaged and is not subject
to the same management and trading expenses as a mutual fund. The performance
of the Fund's other classes may be greater or less than the Class B shares'
performance indicated on this chart, depending on whether greater or lesser
sales charges and fees were incurred by shareholders investing in other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
value may be more or less than the original cost. No adjustment has been made
for shareholder tax liability on dividends or capital gains.
6
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Smith Barney Government Securities Fund
Portfolio Highlights (unaudited) December 31, 1995
Portfolio Breakdown
[GRAPH APPEARS HERE]
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.
Mortgage-Backed Securities are debt securities by the 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.
7
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Smith Barney Government Securities Fund
Schedule of Investments December 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
FACE
AMOUNT SECURITY VALUE
- ----------------------------------------------------------------------------------
MORTGAGE-BACKED SECURITIES -- 32.7%
$ 878 FNMA 30 Year, 8.000% due 6/1/07 $ 910
189,220 GNMA 30 Year, 11.000% due 10/15/10* 212,873
38,880 GNMA 30 Year, 10.000% due 3/15/16 42,635
76,673 GNMA 30 Year, 10.500% due 3/15/16 84,915
237,159,743 GNMA 30 Year, 9.000% due 12/15/17 254,427,253
424,822 GNMA 30 Year, 9.500% due 5/15/20* 456,018
- ----------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost -- $241,268,609) 255,224,604
U.S. TREASURY OBLIGATIONS -- 46.4%
30,000,000 U.S. Treasury Notes, 7.125% due 2/29/00 31,939,500
30,000,000 U.S. Treasury Notes, 6.250% due 8/31/00 31,041,900
96,000,000 U.S. Treasury Notes, 5.500% due 12/31/00 96,397,440
93,000,000 U.S. Treasury Notes, 6.500% due 5/15/05 98,969,670
4,000,000 U.S. Treasury Notes, 5.875% due 11/15/05 4,091,360
412,000,000 U.S. Treasury Strips, zero coupon due 2/15/19+ 99,073,640
- ----------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost-- $349,869,724) 361,513,510
- ----------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
AND U.S. TREASURY OBLIGATIONS
(Cost -- $591,138,333) 616,738,114
- ----------------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 20.9%
133,155,000 Morgan Stanley Group, Inc., 5.850% due 1/2/96;
Proceeds at maturity -- $133,241,550;
(Fully collateralized by U.S. Treasury Notes,
6.125% due 7/31/00;
Market value -- $135,818,100) 133,155,000
29,414,880 Morgan Stanley Group, Inc., 5.750% due 1/23/96;
Proceeds at maturity -- $29,602,808;
(Fully collateralized by FNMA 1994-C2 Class F,
6.244% due 1/25/24;
Market value -- $30,003,137) 29,414,880
- ----------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $162,569,880) 162,569,880
- ----------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $753,708,213)++ $ 779,307,994
- ----------------------------------------------------------------------------------
</TABLE>
* Date shown represents the last in range of maturity dates of mortgage
certficates owned.
+ Security has been partially segregated by custodian for reverse repurchase
agreements.
++ Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
8
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Smith Barney Government Securities Fund
Statement of Assets and Liabilities December 31, 1995
ASSETS:
Investments, at value (Cost -- $591,138,333) $ 616,738,114
Repurchase agreements (Cost -- $162,569,880) 162,569,880
Cash 340
Receivable for securities sold 113,622,525
Receivable for Fund shares sold 220,831
Interest receivable 4,255,097
Total Assets 897,406,787
- -------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 152,765,525
Reverse repurchase agreements (Note 6) 127,994,880
Dividends payable 3,397,659
Payable for Fund shares purchased 587,033
Interest payable 404,080
Distribution fees payable 198,495
Investment advisory fees payable 182,716
Administration fees payable 104,409
Accrued expenses and other liabilities 294,600
Total Liabilities 285,929,397
Total Net Assets $ 611,477,390
- -------------------------------------------------------------------------
NET ASSETS:
Par value of capital shares $ 62,538
Capital paid in excess of par value 804,474,220
Overdistributed net investment income (945,370)
Accumulated net realized loss on
security transactions and futures (217,713,779)
Net unrealized appreciation of investments 25,599,781
Total Net Assets $ 611,477,390
- -------------------------------------------------------------------------
Shares Outstanding
Class A 46,316,287
Class B 16,115,757
Class C 105,691
- -------------------------------------------------------------------------
Net Asset Value
Class A (and redemption price) $9.77
Class B* $9.81
Class C** $9.81
- -------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $10.23
- -------------------------------------------------------------------------
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if shares
are redeemed less than one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by 1.00% if shares are
redeemed within the first year of purchase.
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Government Securities Fund
Statement of Operations For the Year Ended December 31, 1995
INVESTMENT INCOME:
Interest $ 52,587,757
Less: Interest expense (Note 6) (2,633,226)
- -------------------------------------------------------------------------
Total Investment Income 49,954,531
- -------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 2,476,642
Investment advisory fees (Note 2) 2,287,647
Administration fees (Note 2) 1,307,227
Shareholder and system servicing fees 605,000
Shareholder communications 170,362
Directors' fees 57,000
Registration fees 40,000
Audit and legal fees 36,000
Custody 15,000
- -------------------------------------------------------------------------
Total Expenses 6,994,878
Net Investment Income 42,959,653
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS, FUTURES AND OPTIONS (NOTES 3, 7 AND 8):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 16,593,635
Futures contracts (4,901,067)
Options purchased 1,091,521
- -------------------------------------------------------------------------
Net Realized Gain 12,784,089
- -------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments:
Beginning of year (3,428,166)
End of year 25,599,781
Increase in Net Unrealized Appreciation 29,027,947
Net Gain on Investments, Futures and Options 41,812,036
Increase in Net Assets From Operations $84,771,689
- -------------------------------------------------------------------------
See Notes to Financial Statements
10
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Smith Barney Government Securities Fund
Statements of Changes in Net Assets For the Years Ended December 31,
1995 1994
---- ----
OPERATIONS:
Net investment income $ 42,959,653 $ 42,575,561
Net realized gain (loss) 12,784,089 (72,596,844)
Increase in net unrealized
appreciation 29,027,947 3,598,171
- ------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Operations 84,771,689 (26,423,112)
- ------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (43,905,023) (35,507,459)
Capital -- (5,366,293)
- ------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions To Shareholders (43,905,023) (40,873,752)
- ------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 25,672,666 540,309,244
Net asset value of shares issued for
reinvestment of dividends 29,237,388 26,128,047
Cost of shares reacquired (140,055,055) (702,014,862)
- ------------------------------------------------------------------------------
Decrease in Net Assets From Fund
Share Transactions (85,145,001) (135,577,571)
- ------------------------------------------------------------------------------
Decrease in Net Assets (44,278,335) (202,874,435)
NET ASSETS:
Beginning of year 655,755,725 858,630,160
- ------------------------------------------------------------------------------
End of year* $611,477,390 $655,755,725
- ------------------------------------------------------------------------------
* Includes overdistributed net
investment income of: $(945,370) --
- ------------------------------------------------------------------------------
See Notes to Financial Statements.
11
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Smith Barney Government Securities Fund
Notes to Financial Statements
1. Significant Accounting Policies
The Smith Barney Government Securities Fund ("Portfolio"), a separate
investment fund of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The Fund consists of
the Portfolio and four other separate investment portfolios: Smith Barney
Investment Grade Bond Fund, Smith Barney Special Equities Fund, Smith Barney
Managed Growth Fund and Smith Barney Growth Opportunity Fund. The financial
statements and financial highlights for the other portfolios are presented in
separate annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) securities transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price
on such markets; securities traded in the over-the-counter market and listed
securities for which no sales price was reported and U.S. Government and
Government Agency obligations are valued at bid price, or in the absence of a
recent bid price, at the bid equivalent obtained from one or more of the major
market makers; (c) short-term securities that have a maturity of more than 60
days are valued at prices based on market quotations for securities of similar
type, yield and maturity; (d) short-term investments and securities maturing
within 60 days are valued at cost plus accreted discount, or minus amortized
premium, as applicable; (e) dividend income is recorded on ex-dividend date and
interest income, adjusted for accretion of original issue discount, is recorded
on the accrual basis; (f) gains or losses on the sale of securities are
calculated using the specific identification method; (g) direct expenses are
charged to each portfolio and each class; management fees and general portfolio
expenses are allocated on the basis of the relative net assets; (h) the
Portfolio intends to comply with the applicable provisions of the Internal
Revenue Code of 1986, as amended, pertaining to regulated investment companies
and to make distributions of taxable income sufficient to relieve it from
substantially all Federal income and excise taxes; (i) the character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
December 31, 1995, reclassifications are made to the Fund's capital accounts to
reflect permanent book/tax differences and income and gains available for
distributions under income tax
12
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Smith Barney Government Securities Fund
Notes to Financial Statements (continued)
regulations. Accordingly, a portion of accumulated net realized losses amounting
to $391,564,060 has been reclassified to paid-in capital. Net investment income,
net realized gains and net assets were not affected by this change; and (j)
estimates and assumptions are required to be made regarding assets, liabilities
and changes in net assets resulting from operations when financial statements
are prepared. Changes in the economic environment, financial markets and any
other parameters used in determining these estimates could cause actual results
to differ from these amounts.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Fund. The
Portfolio pays SBMFM an advisory fee calculated at the following annual rates of
average daily net assets: 0.35% up to $2 billion, 0.30% of the next $2 billion,
0.25% of the next $2 billion, 0.20% of the next $2 billion and then 0.15% of the
remaining average daily net assets. This fee is calculated daily and paid
monthly.
SBMFM acts as the Fund's administrator for which the Portfolio pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
In addition, The Boston Company Advisors, Inc. ("Boston Advisors"), an
indirect wholly owned subsidiary of Mellon Bank Corporation, had entered into a
sub-administration agreement with the Fund and SBMFM. SBMFM paid Boston Advisors
a portion of its administration fee at a rate agreed upon from time to time
between SBMFM and Boston Advisors. As of August 18, 1995, this relationship was
terminated.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. For the year ended December 31, 1995, SB received sales charges of
approximately $63,000 on sales of the Portfolio's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
thereafter by 1.00% per year until no CDSC is incurred.
13
<PAGE>
Smith Barney Government Securities Fund
Notes to Financial Statements (continued)
Class C shares have a 1.00% CDSC, which applies if redemption occurs within the
first year of purchase. For the year ended December 31, 1995, CDSCs paid to SB
were:
Class B Class C
- ------------------------------------------------------------------------------
CDSCs $512,000 $1,000
- ------------------------------------------------------------------------------
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to Class A, B and C shares calculated at the annual rate of 0.25% of the
average daily net assets for each respective class. The Portfolio also pays a
distribution fee with respect to Class B and C shares calculated at the annual
rate of 0.50% and 0.45% of the average daily net assets for each class,
respectively. For the year ended December 31, 1995, total Distribution Plan fees
incurred were:
Class A Class B Class C
- -----------------------------------------------------------------------------
Distribution Plan Fees $1,212,522 $1,258,301 $5,819
All officers and one Director of the Fund are employees of SB.
3. Investments
During the year ended December 31, 1995, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
Purchases $1,848,476,814
Sales 1,873,283,051
- ------------------------------------------------------------------------------
At December 31, 1995, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
Gross unrealized appreciation $25,600,780
Gross unrealized depreciation (999)
Net unrealized appreciation $25,599,781
- ------------------------------------------------------------------------------
4. Capital Loss Carryforward
At December 31, 1995, the Portfolio had, for Federal tax purposes,
approximately $217,714,000 of unused capital loss carryforwards available to
offset future capital gains. To the extent that these carryforward losses are
used to offset capital gains, it is probable that the
14
<PAGE>
Smith Barney Government Securities Fund
Notes to Financial Statements (continued)
gains so offset will not be distributed. The amount and expiration of the
carryforwards are indicated below. Expiration occurs on December 31 of the year
indicated:
1996 2002 2003
- -----------------------------------------------------------------------------
Capital Loss Carryforward $148,463,000 $69,056,000 $195,000
- -----------------------------------------------------------------------------
5. Repurchase Agreements
The Portfolio purchases (and its custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
6. Reverse Repurchase Agreement
The Portfolio may enter into reverse repurchase agreement transactions for
leveraging purposes. A reverse repurchase agreement involves a sale by the
Portfolio of securities that it holds with an agreement by the Portfolio to
repurchase the same securities at an agreed upon price and date. The Portfolio
will establish a segregated account with its custodian, in which the Portfolio
will maintain cash, U.S. government securities or other liquid high grade debt
obligations equal in value to its obligations with respect to reverse repurchase
agreements.
At December 31, 1995, the Portfolio had the following open reverse
repurchase agreements:
FACE
AMOUNT SECURITY VALUE
$ 29,414,880 Reverse Repurchase Agreement with Morgan Stanley
Group, Inc., dated 12/14/95 bearing 5.25% to be
repurchased at $29,586,466 on 1/23/96,
collateralized by U.S. Treasury Strips, zero
coupon due 2/15/19 $ 29,414,880
98,580,000 Reverse Repurchase Agreement with Morgan Stanley
Group, Inc., dated 12/5/95 bearing 4.90% to be
repurchased at $98,995,953 on 1/5/96,
collateralized by U.S. Treasury Notes, 6.50%
due 5/15/05 98,580,000
TOTAL REVERSE REPURCHASE AGREEMENTS $127,994,880
- ------------------------------------------------------------------------------
15
<PAGE>
Smith Barney Government Securities Fund
Notes to Financial Statements (continued)
During the year ended December 31, 1995, the maximum and average amount of
reverse repurchase agreements outstanding were as follows:
_______________________________________________________________________________
Maximum amount outstanding $127,994,880
Average amount outstanding $ 60,974,839
Interest expense for the year ended December 31, 1995 on borrowings by the
Portfolio under reverse repurchase agreements totalled $2,633,226.
7. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recognized as assets due from the broker (the Portfolio's agent in acquiring the
futures position). During the period the futures contract is open, changes in
the value of the contract are recognized as unrealized gains or losses by
"marking to market" on a daily basis to reflect the market value of the contract
at the end of each day's trading. Variation margin payments are made or received
and recognized as assets due from or liabilities due to broker, depending upon
whether unrealized gains or losses are incurred. When the contract is closed,
the Portfolio records a realized gain or loss equal to the difference between
the proceeds from (or cost of) the closing transactions and the Portfolio's
basis in the contract.
At December 31, 1995, the Portfolio had no open futures contracts.
8. Options Contracts
Premiums paid when put or call options are purchased by the Portfolio
represent investments, which are marked-to-market daily. When a purchased option
expires, the Portfolio will realize a loss in the amount of the premium paid.
When the Portfolio enters into closing sales transaction, the Portfolio will
realize a gain or loss depending on whether the sales proceeds form the closing
sales transaction are greater or less than the premium paid for the option. When
the Portfolio 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 Portfolio exercises a call
option, the cost of the security which the Portfolio purchases upon exercise
will be increased by the premium originally paid.
At December 31, 1995, the Portfolio had no open options contracts.
16
<PAGE>
Smith Barney Government Securities Fund
Notes To Financial Statements (continued)
9. Capital Shares
At December 31, 1995, the Fund had ten billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
At December 31, 1995, total paid-in capital amounted to the following for
each class:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class A Class B Class C
Total Paid-in Capital $136,157,444 $667,880,176 $499,138
Transactions in shares of each class were as follows:
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
-------------------- -------------------
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Class A
Shares sold 695,391 $ 6,717,062 55,125,066 $ 509,930,623
Shares issued on
reinvestment 2,271,693 21,769,239 576,397 5,287,429
Shares redeemed (9,230,741) (87,994,409) (3,827,269) (35,091,360)
Net Increase (Decrease) (6,263,657) $(59,508,108) 51,874,194 $ 480,126,692
- -----------------------------------------------------------------------------------------------------
Class B
Shares sold 1,925,940 $ 18,365,201 3,129,510 $ 29,835,343
Shares issued on
reinvestment 774,634 7,419,294 2,182,177 20,819,966
Shares redeemed (5,409,406) (51,757,610) (71,498,609) (666,820,036)
Net Decrease (2,708,832) $(25,973,115) (66,186,922) $(616,164,727)
- -----------------------------------------------------------------------------------------------------
Class C
Shares sold 62,023 $ 590,403 58,124 $ 543,278
Shares issued on
reinvestment 5,077 48,855 2,201 20,652
Shares redeemed (31,879) (303,036) (11,143) (103,466)
Net Increase 35,221 $ 336,222 49,182 $ 460,464
- -----------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
Smith Barney Government Securities Fund
Financial Highlights
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Class A Shares 1995 1994 1993(1) 1992(2)
- ----------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $9.17 $10.01 $9.69 $9.56
Income (Loss) From Operations:
Net investment income (3) 0.67 0.52 0.81 0.10
Net realized and unrealized gain
(loss) 0.62 (0.80) 0.23 0.13
Total Income (Loss) From Operations 1.29 (0.28) 1.04 0.23
Less Distributions From:
Net investment income (0.69) (0.49) (0.72) (0.08)
Capital -- (0.07) -- (0.02)
Total Distributions (0.69) (0.56) (0.72) (0.10)
Net Asset Value, End of Year $9.77 $9.17 $10.01 $9.69
Total Return 14.50% (2.76)% 10.87% 2.41%++
Net Assets, End of Year (000s) $453,378 $482,404 $7,067 $275
Ratios to Average Net Assets:
Expenses (3)(4) 0.94% 1.00% 0.92% 0.68%
Net investment income 6.70 6.18 7.76 6.24
Portfolio Turnover Rate 294% 276% 540% 426%
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) 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.
(2) For the period from November 6, 1992 (inception date) to December 31, 1992.
(3) The Investment adviser waived a portion of its fees for the year ended
December 31, 1993. If such fees were not waived, the per share decrease of
net investment income would have been $0.10 and the expense ratio would
have been 1.12%.
(4) For the years ended December 31, 1994 and December 31, 1993 and the period
ended December 31, 1992, the expense ratios were calculated excluding
interest expense. The expense ratios including interest expense were 1.26%,
1.07% and 1.01% (annualized), respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
18
<PAGE>
Smith Barney Government Securities Fund
Financial Highlights (continued)
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Class B Shares 1995 1994 1993(1) 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $9.17 $10.01 $9.68 $9.81 $9.11
Income (Loss) From Operations:
Net investment income (2) 0.59 0.46 0.73 0.53 0.70
Net realized and unrealized gain
(loss) 0.65 (0.78) 0.27 (0.02) 0.71
Total Income (Loss) From
Operations 1.24 (0.32) 1.00 0.51 1.41
Less Distributions From:
Net investment income (0.60) (0.45) (0.67) (0.53) (0.63)
Capital -- (0.07) -- (0.11) (0.08)
Total Distributions (0.60) (0.52) (0.67) (0.64) (0.71)
Net Asset Value, End of
Year $ 9.81 $ 9.17 $ 10.01 $ 9.68 $ 9.81
Total Return 13.87% (3.25)% 10.45% 5.45% 16.28%
Net Assets, End of Year
(000s) $158,459 $172,705 $851,350 $1,046,921 $1,285,937
Ratios to Average Net
Assets:
Expenses (2)(3) 1.45% 1.48% 1.40% 1.45% 1.40%
Net investment income 6.19 5.69 7.28 5.47 6.80
Portfolio Turnover Rate 294% 276% 540% 426% 326%
</TABLE>
(1) 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.
(2) The Investment adviser waived a portion of its fees for the year ended
December 31, 1993. If such fees were not waived, the per share decrease of
net investment income would have been $0.01 and the expense ratio would
have been 1.61%.
(3) For the years ended December 31, 1994, December 31, 1993 and December 31,
1992, the expense ratios were calculated excluding interest expense. The
expense ratios including interest expense were 1.74%, 1.55% and 1.71%,
respectively.
19
<PAGE>
Smith Barney Government Securities Fund
Financial Highlights (continued)
For a share of each class of capital stock outstanding throughout each year:
Class C Shares 1995 1994 1993(1)(2)
- ------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $ 9.17 $ 10.01 $ 9.90
Income (Loss) From Operations:
Net investment income (3) 0.60 0.49 0.68
Net realized and unrealized gain (loss) 0.65 (0.81) 0.04
Total Income (Loss) From Operations 1.25 (0.32) 0.72
Less Distributions From:
Net investment income (0.61) (0.45) (0.61)
Capital -- (0.07) --
Total Distributions (0.61) (0.52) (0.61)
Net Asset Value, End of Year $ 9.81 $ 9.17 $ 10.01
Total Return 13.93% (3.25)% 7.36%++
Net Assets, End of Year (000s) $1,039 $ 646 $ 213
Ratios to Average Net Assets:
Expenses (3)(4) 1.37% 1.47% 1.40%+
Net investment income 6.27 5.71 7.28+
Portfolio Turnover Rate 294% 276% 540%
(1) 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.
(2) For the period from February 4, 1993 (inception date) to December 31, 1993.
(3) The Investment adviser waived a portion of its fees for the year ended
December 31, 1993. If such fees were not waived, the per share decrease of
net investment income would have been $0.13 and the expense ratio would
have been 1.61%.
(4) For the year ended December 31, 1994 and the period ended December 31,
1993, the expense ratios were calculated excluding interest expense. The
expense ratios including interest expense were 1.72% and 1.55%
(annualized), respectively.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
20
<PAGE>
Smith Barney Government Securities Fund
Independent Auditors' Report
The Shareholders and Board of Directors of
Smith Barney Investment Funds, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Barney Government Securities
Fund of Smith Barney Investment Funds Inc. as of December 31, 1995, and the
related statements of operations, changes in net assets and financial highlights
for the year 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
audit. The statement of changes in net assets for the year ended December 31,
1994 and the financial highlights for each of the years in the four-year period
then ended were audited by other auditors whose report thereon, dated February
10, 1995, expressed an unqualified opinion on that statement of changes in net
assets and those financial highlights.
We conducted our audit 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, 1995, by correspondence with the custodian. As to securities
purchased and sold but not received or delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Smith Barney Government
Securities Fund of Smith Barney Investment Funds Inc. as of December 31, 1995,
and the results of its operations, changes in its net assets and financial
highlights for the year then ended, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 16, 1996
21
<PAGE>
Smith Barney Government Securities Fund
Additional Information
Change in Independent Auditor: On October 20, 1994, based upon the
recommendation of the Audit Committee of the Fund, the Board of Directors
determined not to retain Coopers & Lybrand L.L.P. ("Coopers & Lybrand") as the
Fund's independent auditor and voted to appoint KPMG Peat Marwick LLP. During
the Fund's two most recent fiscal years, Coopers & Lybrand's audit reports
contained no adverse opinion or disclaimer of opinion; nor were the reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
Further, during this same period there were no disagreements with Coopers &
Lybrand on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Coopers & Lybrand, would have caused it to make reference
to the subject matter of such disagreements in connection with its audit
reports. The Fund has requested Coopers & Lybrand to provide a letter to the
Securities and Exchange Commission stating whether Coopers & Lybrand agrees with
the foregoing statements, and to provide the Fund with a copy of such letter. A
copy of this letter is available upon request by calling the Fund at (212) 723-
9218.
22
<PAGE>
Smith Barney SMITH BARNEY
Government ------------
Securities
Fund A Member of Travelers Group [LOGO]
Investment Adviser
Directors Smith Barney Mutual Funds
Paul R. Ades Management Inc.
Herbert Barg
Alger B. Chapman Distributor
Dwight B. Crane Smith Barney Inc.
Frank J. Hubbard
Allan R. Johnson Custodian
Heath B. McLendon, Chairman PNC Bank
Ken Miller
John F. White Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
Officers P.O. Box 9134
Heath B. McLendon Boston, MA 02205-9134
Chief Executive Officer
Jessica M. Bibliowicz
President This report is submitted for the general
information of the shareholders of Smith
Lewis E. Daidone Barney Government Securities Fund. It is
Senior Vice President not authorized for distribution to
and Treasurer prospective investors unless accompanied
or preceded by an effective Prospectus for
James E. Conroy the Fund, which contains information
Vice President and concerning the Fund's investment
Investment Officer policies and expenses as well as other
pertinent information.
Thomas M. Reynolds
Controller Smith Barney
Government
Christina T. Sydor Securities
Secretary Fund
388 Greenwich Street
New York, New York 10013
FD0316 2/96
-------------
ANNUAL REPORT
-------------
1995
1995
1995 [PHOTO]
1995
1995
Smith Barney
Investment
Grade Bond
Fund
------------------
December 31, 1995
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- ---------------------------------------
Smith Barney Investment Grade Bond Fund
- ---------------------------------------
Dear Shareholder:
We are pleased to provide the annual report for the year ended December 31, 1995
for Smith Barney Investment Grade Bond Fund. In this report, we summarize the
period's prevailing economic and market conditions and outline our portfolio
strategy. A more detailed summary of performance and current holdings can be
found in the appropriate sections that follow in the annual report.
A year ago in our shareholder letter we pointed out that true investment
decisions and returns are a multi-year proposition and the element of time helps
to level the peaks and valleys in the capital markets. We also wrote that the
pre-emptive actions taken by the Federal Reserve in raising short-term interest
rates in 1994 was the precursor for better times ahead. The motto of "no pain,
no gain" proved once again to be both timely and accurate. What follows are our
insights and explanations regarding the bond market's behavior in 1995 and how
Smith Barney Investment Grade Bond Fund performed in that environment.
As 1995 began, the U.S. economy was operating at higher than expected growth and
the Federal Reserve raised short-term rates to 6% at its first meeting of the
year. Of course, no one knew this would be the last rate increase and the
Federal Reserve would in fact reverse course and reduce short-term rates at
their meeting in July 1995. Economic activity did in fact slow down in 1995. In
addition, the fear of a possible resurgence of inflation dissipated throughout
the year, astonishing many investors who were not convinced that the Federal
Reserve would maintain its resolve and vigilance against inflation.
In this favorable environment of slower economic growth, tame inflation and the
prospect for a reduction in short-term rates, both the equity and fixed income
markets enjoyed banner years. Long-term 30-year government bond yields declined
200 basis points from 8% to 6%. The Federal Reserve acted again to lower
short-term rates again at their last meeting of the year held in December 1995.
We are pleased to report the Smith Barney Investment Grade Bond Fund
participated in the bond market rally of 1995. For the one-year period ended
December 31, 1995, the Fund's annual total return was 35.29% for Class A shares.
For the fiscal year ended December 31, 1995, Smith Barney Investment Grade Bond
Fund was a top performer in its Lipper Analytical Services, Inc. peer group
category. More importantly, Smith Barney Investment Grade Bond Fund's longer
term performance for the 3-year, 7-year and 10-year time periods,
1
<PAGE>
as reported by Lipper, earned the Fund a ranking within the first quartile of
its peers. (Lipper Analytical Services, Inc. is a major fund performance
tracking organization.)
The past year provided corporate bond investors with unique investment
opportunities. Against a backdrop of falling interest rates, corporate earnings
continued to show robust growth and credit spreads tightened for most of the
year before giving up some ground in the last quarter. In terms of spread
performance, the clear winners were led by the airline sector which had its
first profitable year in five years. The media sector was another strong
performer in 1995. We still believe both of these sectors offer investors
attractive long-term values.
A Look at the Year Ahead
The year 1996 began with a fair amount of uncertainty. Events in Washington D.C.
concerning the federal budget agreement and the upcoming Presidential election
have heightened investor concerns. We believe the rate of economic growth will
continue to slow in the first six months of the year and then accelerate
modestly in the second half. We expect both short-term and long-term interest
rates to drift lower in the first half of 1996. In our view, the amount of this
expected decrease will be less than in 1995 and probably take place in a more
volatile market environment.
At this point in time, we would like to thank you for your investment in Smith
Barney Investment Grade Bond Fund.
Sincerely,
/s/ Heath B. McLendon /s/ George E. Mueller, Jr.
Heath B. McLendon George E. Mueller, Jr.
Chairman and Investment Officer
Chief Executive Officer
January 18, 1996
2
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===========================================================================================
<C> <C> <C> <C> <C> <C> <C>
12/31/95 $10.67 $13.25 $0.89 $0.16 $0.00 35.29%
- -------------------------------------------------------------------------------------------
12/31/94 13.01 10.67 0.86 0.31 0.03 (8.95)
- -------------------------------------------------------------------------------------------
12/31/93 11.89 13.01 0.89 0.14 0.00 18.45
- -------------------------------------------------------------------------------------------
Inception*-12/31/92 11.67 11.89 0.14 0.00 0.01 3.25+
===========================================================================================
Total $2.78 $0.61 $0.04
===========================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
==========================================================================================
<C> <C> <C> <C> <C> <C> <C>
12/31/95 $10.67 $13.25 $0.83 $0.16 $0.00 34.63%
- ------------------------------------------------------------------------------------------
12/31/94 13.01 10.67 0.80 0.31 0.03 (9.41)
- ------------------------------------------------------------------------------------------
12/31/93 11.89 13.01 0.83 0.14 0.00 18.06
- ------------------------------------------------------------------------------------------
12/31/92 11.80 11.89 0.83 0.00 0.03 8.36
- ------------------------------------------------------------------------------------------
12/31/91 10.43 11.80 0.87 0.00 0.00 22.50
- ------------------------------------------------------------------------------------------
12/31/90 11.01 10.43 0.87 0.00 0.00 2.98
- ------------------------------------------------------------------------------------------
12/31/89 10.33 11.01 0.87 0.00 0.00 15.57
- ------------------------------------------------------------------------------------------
12/31/88 10.55 10.33 0.88 0.00 0.00 6.43
- ------------------------------------------------------------------------------------------
12/31/87 12.91 10.55 1.12 0.89 0.00 (2.83)
- ------------------------------------------------------------------------------------------
12/31/86 12.00 12.91 1.10 0.25 0.00 19.54
==========================================================================================
Total $9.00 $1.75 $0.06
==========================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
<CAPTION>
Net Asset Value
--------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
==========================================================================================
<C> <C> <C> <C> <C> <C> <C>
12/31/95 $10.67 $13.26 $0.83 $0.16 $0.00 34.74%
- ------------------------------------------------------------------------------------------
12/31/94 13.01 10.67 0.80 0.31 0.03 (9.41)
- ------------------------------------------------------------------------------------------
Inception*-12/31/93 12.56 13.01 0.69 0.14 0.00 10.38+
==========================================================================================
Total $2.32 $0.61 $0.03
==========================================================================================
</TABLE>
It is the Funds' policy to distribute dividends monthly and capital gains, if
any, annually.
3
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
-----------------------------------
Class A Class B Class C
================================================================================
Year Ended 12/31/95 35.29% 34.63% 34.74%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/95 N/A 13.81 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/95 N/A 10.11 N/A
- --------------------------------------------------------------------------------
Inception* through 12/31/95 13.88 12.32 11.04
================================================================================
With Sales Charge(2)
------------------------------------
Class A Class B Class C
================================================================================
Year Ended 12/31/95 29.24% 30.13% 33.73%
- --------------------------------------------------------------------------------
Five Years Ended 12/31/95 N/A 13.71 N/A
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/95 N/A 10.11 N/A
- --------------------------------------------------------------------------------
Inception* through 12/31/95 12.23 12.32 11.04
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 12/31/95) 50.63%
- --------------------------------------------------------------------------------
Class B (12/31/85 through 12/31/95) 161.88
- --------------------------------------------------------------------------------
Class C (Inception* through 12/31/95) 34.69
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charge with respect to Class A shares or the applicable contingent
deferred sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 4.50% and Class B shares reflect the
deduction of a 4.50% CDSC, which applies if shares are redeemed less than
one year from initial purchase. This CDSCdeclines by 0.50% the first year
after purchase and thereafter by 1.00% per year until no CDSCis incurred.
Class C shares reflect the deduction of a 1.00% CDSC, which applies if
shares are redeemed within the first year of purchase.
* Inception dates for Class A, B and C shares are November 6, 1992, January 4,
1982 and February 26, 1993, respectively.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
4
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares
of the Smith Barney Investment Grade
Bond Fund vs.
Lehman Brothers Long-Term Corporate Bond Index and
Lipper Corporate Debt A-Rated Average
- --------------------------------------------------------------------------------
December 1985 -- December 1995
[The following table was represented by a line chart in the printed material.]
Investment Fund Lehman Bros Lipper
--------------- ----------- ------
12/85 10000 10000 10000
12/86 11954 11872 11402
12/87 10820 12047 11528
12/88 11516 13311 12468
12/89 13308 15346 14022
12/90 13705 16341 14978
12/91 16788 19769 17485
12/92 18192 21615 18738
12/93 21477 24566 20840
12/94 19452 23150 19873
12/95 26188 29615 23530
+ Hypothetical illustration of $10,000 invested in Class B shares on December
31, 1985, assuming reinvestment of dividends and capital gains, if any, at
net asset value through December 31, 1995. The Lehman Brothers Long-Term
Corporate Bond Index is comprised of all publicly issued, fixed rate,
non-convertible, dollar-denominated investment-grade corporate debt from a
diverse range of industries with an average maturity of approximately 23
years. The Lipper Corporate Debt A-Rated Average is composed of the Fund's
peer group of 122 mutual funds as of December 31, 1995. The index is
unmanaged and is not subject to the same management and trading expenses as
a mutual fund. The performance of the Fund's other classes may be greater or
less than the Class B shares' performance indicated on this chart, depending
on whether greater or lesser sales charges and fees were incurred by
shareholders investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
5
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) December 31, 1995
- --------------------------------------------------------------------------------
Portfolio Breakdown
[The following table was represented by a pie chart in the printed material.]
Airlines 9.2%
Food and Beverage 21.6%
Entertainment 11.3%
Automobile 8.4%
Publishing 7.2%
Aerospace 6.2%
Yankee Bonds 9.3%
US. Gov't Agencies 2.3%
Other 24.5%
Top Ten Bond Holdings
Percentage of
Total Investments
================================================================================
Hershey Foods Corp. 4.6%
General Motors Corp. 4.4
Time Warner, Inc. 4.3
Ford Motor Co. 4.0
Seagrams Ltd. 3.8
Boeing Co. 3.7
Hydro Quebec, Series HH 3.5
Ralston Purina Co. 3.5
Loral Corp. 3.4
Walt Disney Co. 3.2
================================================================================
6
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1995
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
U.S. CORPORATE BONDS AND NOTES --88.4%
Aerospace -- 6.2%
$18,500,000 AA Boeing Co., Debentures, 6.875% due 10/15/43 $ 19,170,625
10,000,000 A+ United Technologies Corp., Debentures,
8.750% due 3/1/21 12,562,500
- --------------------------------------------------------------------------------
31,733,125
- --------------------------------------------------------------------------------
Airlines -- 9.3%
AMR Corp., Debentures:
4,500,000 Baa3* 9.880% due 6/15/20 5,551,875
12,500,000 Baa3* 9.000% due 9/15/16 14,140,625
Delta Air Lines, Inc., Debentures:
10,735,000 BB 9.000% due 5/15/16 12,331,831
5,000,000 BB 9.750% due 5/15/21 6,193,750
7,650,000 Baa3* United Airlines, Inc., Debentures,
9.750% due 8/15/21 9,180,000
- --------------------------------------------------------------------------------
47,398,081
- --------------------------------------------------------------------------------
Apparel -- 1.2%
6,000,000 BBB+ Fruit of the Loom, Inc., Debentures,
7.375% due 11/15/03 5,910,000
- --------------------------------------------------------------------------------
Automobile -- 8.4%
18,400,000 A+ Ford Motor Co., Debentures, 7.750% due 6/15/43 20,585,000
21,000,000 A- General Motors Corp., Notes, 7.400% due 9/1/25 22,470,000
- --------------------------------------------------------------------------------
43,055,000
- --------------------------------------------------------------------------------
Banking -- 2.0%
10,000,000 A- NationsBank Corp., Sub. Notes, 7.250%
due 10/15/25 10,400,000
- --------------------------------------------------------------------------------
Computers -- 2.2%
11,000,000 A IBM Corp., Debentures, 7.000% due 10/30/45 11,385,000
- --------------------------------------------------------------------------------
Electronics -- 3.8%
2,000,000 A Johnson Controls Inc., Debentures,
6.950% due 12/1/45 2,042,500
17,500,000 BBB Loral Corp., Sr. Debentures, 7.000% due 9/15/23 17,412,500
- --------------------------------------------------------------------------------
19,455,000
- --------------------------------------------------------------------------------
Entertainment -- 11.1%
17,500,000 BB CBS Inc., Sr. Notes, 7.125% due 11/1/23 16,257,500
10,500,000 BBB+ Harcourt General, Inc., Debentures,
8.875% due 6/1/22 12,390,000
12,000,000 BB+ Paramount Communications, Inc., Sr. Debentures,
7.500% due 7/15/23 11,640,000
15,000,000 AA- Walt Disney Co., Debentures, 7.550% due 7/15/93 16,425,000
- --------------------------------------------------------------------------------
56,712,500
- --------------------------------------------------------------------------------
Food and Beverage -- 21.6%
14,000,000 A American Brands Inc., Debentures,
7.875% due 1/15/23 15,715,000
5,000,000 AA- Anheuser Busch Co., Debentures,
7.000% due 12/1/25 5,168,750
16,750,000 BBB- Borden Inc., Debentures, 7.875% due 2/15/23 16,310,313
12,000,000 AA- Coca Cola Enterprises Inc., Debentures,
6.750% due 9/15/23 12,225,000
See Notes to Financial Statements.
7
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Food and Beverage -- 21.6% (continued)
$18,645,000 AA- Hershey Foods Corp., Debentures,
8.800% due 2/15/21 $ 23,749,069
16,000,000 A- Ralston Purina Co., Debentures,
8.125% due 2/1/23 17,980,000
16,800,000 A Seagrams Ltd., Debentures, 8.350% due 1/15/22 19,698,000
- --------------------------------------------------------------------------------
110,846,132
- --------------------------------------------------------------------------------
Metals -- 2.2%
10,000,000 BBB Asarco Inc., Debentures, 8.500% due 5/1/25 11,425,000
- --------------------------------------------------------------------------------
Oil & Gas -- 2.3%
10,000,000 A- Burlington Resources, Inc., Debentures,
8.200% due 3/15/25 11,775,000
- --------------------------------------------------------------------------------
Paper Products -- 1.5%
Georgia-Pacific Corp., Debentures:
500,000 BBB- 9.625% due 3/15/22 586,875
7,000,000 BBB- 7.375% due 12/1/25 7,070,000
- --------------------------------------------------------------------------------
7,656,875
- --------------------------------------------------------------------------------
Publishing -- 7.2%
15,000,000 BBB News America Holdings Inc., Sr. Notes,
7.750% due 12/1/45 15,300,000
19,000,000 BBB- Time Warner, Inc., Debentures,
9.150% due 2/1/23 21,778,750
- --------------------------------------------------------------------------------
37,078,750
- --------------------------------------------------------------------------------
Retail Stores -- 2.1%
10,000,000 BBB- Woolworth Corp., Debentures, 8.500% due 1/15/22 10,875,000
- --------------------------------------------------------------------------------
Super National Entity -- 5.9%
International Bank for Reconstruction
and Development:
110,000,000 Aaa* Zero coupon due 3/1/26 16,225,000
70,000,000 Aaa* Zero coupon due 3/1/28 8,925,000
42,860,000 Aaa* Zero coupon due 7/15/29 4,875,325
- --------------------------------------------------------------------------------
30,025,325
- --------------------------------------------------------------------------------
Timber Products -- 1.3%
6,000,000 A Weyerhaeuser Co., Debentures, 7.125% due 7/15/23 6,412,500
- --------------------------------------------------------------------------------
TOTAL U.S. CORPORATE BONDS AND NOTES
(Cost -- $401,356,080) 452,143,288
================================================================================
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
YANKEE BONDS -- 9.3%
Hydro-Quebec, Debentures:
$ 1,600,000 A+ Series HE, 8.625% due 6/15/29 $ 1,910,000
15,000,000 A+ Series HH, 8.500% due 12/1/29 17,681,250
1,000,000 A+ Series HK, 9.375% due 4/15/30 1,287,500
5,000,000 BBB+ Newfoundland, Province of Canada, Debentures,
7.320% due 10/13/23 5,200,000
Nova Scotia, Province of Canada:
3,000,000 A- 9.125% due 5/1/21 3,772,500
8,500,000 A- 8.750% due 4/1/22 10,359,375
6,500,000 A- 8.250% due 7/30/22 7,540,000
- --------------------------------------------------------------------------------
TOTAL YANKEE BONDS
(Cost -- $40,471,144) 47,750,625
================================================================================
U.S. GOVERNMENT AGENCIES AND OBLIGATIONS -- 1.6%
2,500,000 Aaa* U.S. Treasury Bonds, 6.875% due 8/15/25 2,819,975
Financing Corp. Strips, Series 19:
2,400,000 NR 9.000% due 12/6/18 545,160
21,400,000 NR 9.000% due 6/6/19 4,663,702
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES AND
OBLIGATIONS (Cost -- $5,983,545) 8,028,837
================================================================================
REPURCHASE AGREEMENT -- 0.7%
3,772,000 Citibank, 5.796% due 1/2/96;
Proceeds at maturity --
$3,774,429; (Fully collateralized by
U.S. Treasury Notes, 6.750% due 11/15/98;
Market value -- $3,847,440)
(Cost -- $3,772,000) 3,772,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $451,582,769)++ $511,694,750
================================================================================
++ Aggregate cost for Federal income tax purposes is substantially the same.
See page 10 for definition of ratings.
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Bond Ratings
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Corporation ("Standard &Poor's"), except
those identified by an asterisk (*) are rated by Moody's Investors Services
("Moody's"). The definitions of the applicable rating symbols are set forth
below:
Standard & Poor's -- Ratings from "AA" to "BBB" may be modified by the addition
of a plus (+) or a minus (-) sign to show relative standings within the major
rating categories.
AAA --Debt rated "AAA"' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA --Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issue only in
small degree.
A --Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB --Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB,B --Debt rated "BB" and "B" is regarded, on balance, as predominantly
and CCC speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB
represents a lower degree of speculation than B, and CCC the
highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse
conditions.
Moody's --Numerical modifiers 1, 2, and 3 may be applied to each generic
rating from "Aa" to "Baa," where 1 is the highest and 3 the
lowest rating within its generic category.
Aaa --Bonds that are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa --Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A --Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which suggest
a susceptibility to impairment some time in the future.
Baa --Bonds that are rated "Baa" are considered as medium grade
obligations,i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
NR --Indicates that the bond is not rated by Standard & Poor's or
Moody's.
10
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1995
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $451,582,769) $ 511,694,750
Cash 664
Receivable for Fund shares sold 1,226,536
Interest receivable 9,543,343
- --------------------------------------------------------------------------------
Total Assets $522,465,293
- --------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 2,787,123
Payable for Fund shares purchased 292,652
Distribution fees payable 230,846
Investment advisory fees payable 195,513
Administration fees payable 86,894
Accrued expenses 197,186
- --------------------------------------------------------------------------------
Total Liabilities 3,790,214
- --------------------------------------------------------------------------------
Total Net Assets $518,675,079
================================================================================
NET ASSETS:
Par value of capital shares $ 39,146
Capital paid in excess of par value 462,292,919
Overdistributed net investment income (2,108,093)
Accumulated net realized loss on security transactions (1,660,874)
Net unrealized appreciation of investments 60,111,981
- --------------------------------------------------------------------------------
Total Net Assets $518,675,079
================================================================================
Shares Outstanding:
Class A 17,084,579
- --------------------------------------------------------------------------------
Class B 21,776,728
- --------------------------------------------------------------------------------
Class C 284,247
- --------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $13.25
- --------------------------------------------------------------------------------
Class B* $13.25
- --------------------------------------------------------------------------------
Class C** $13.26
- --------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $13.87
================================================================================
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if shares
are redeemed less than one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 36,631,716
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 2,434,167
Investment advisory fees (Note 2) 2,067,222
Administration fees (Note 2) 918,765
Shareholder and system servicing fees 400,000
Shareholder communications 60,000
Custody 60,000
Directors' fees 57,000
Audit and legal 40,000
Registration fees 40,000
Other 175,228
- --------------------------------------------------------------------------------
Total Expenses 6,252,382
- --------------------------------------------------------------------------------
Net Investment Income 30,379,334
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 223,289,025
Cost of securities sold 217,962,193
- --------------------------------------------------------------------------------
Net Realized Gain 5,326,832
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments:
Beginning of year (41,529,392)
End of year 60,111,981
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 101,641,373
- --------------------------------------------------------------------------------
Net Gain on Investments 106,968,205
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $137,347,539
================================================================================
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
===================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 30,379,334 $ 29,760,763
Net realized gain 5,326,832 2,616,051
Increase in net unrealized appreciation
(depreciation) 101,641,373 (76,397,864)
- -----------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 137,347,539 (44,021,050)
- -----------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (32,487,427) (29,548,682)
Net realized gains (6,128,106) (11,316,480)
Capital -- (1,123,430)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions To Shareholders (38,615,533) (41,988,592)
- -----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 87,249,088 250,302,839
Net asset value of shares issued for
reinvestment of dividends 25,423,076 30,259,678
Cost of shares reacquired (96,181,787) (277,452,690)
- -----------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 16,490,377 3,109,827
- -----------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 115,222,383 (82,899,815)
NET ASSETS:
Beginning of year 403,452,696 486,352,511
- -----------------------------------------------------------------------------------
End of year* $518,675,079 $403,452,696
===================================================================================
* Includes overdistributed net investment income of: $(2,108,093) --
===================================================================================
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Investment Grade Bond Fund ("Portfolio"), a separate
investment fund of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The Fund consists of
the Portfolio and four other separate investment portfolios: Smith Barney
Government Securities Fund, Smith Barney Special Equities Fund, Smith Barney
Managed Growth Fund, and Smith Barney Growth Opportunity Fund. The financial
statements and financial highlights for the other portfolios are presented in
separate annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) securities transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets; securities traded in the over-the-counter market and listed securities
for which no sales price were reported are valued at bid price, or in the
absence of a recent bid price, at the bid equivalent obtained from one or more
of the major market makers; (c) short-term securities that have a maturity of
more than 60 days are valued at prices based on market quotations for securities
of similar type, yield and maturity; (d) short-term investments and securities
maturing within 60 days are valued at cost plus accreted discount, or minus
amortized premium, as applicable; (e) dividend income is recorded on ex-dividend
date and interest income is recorded on the accrual basis; (f) gains or losses
on the sale of securities are calculated using the specific identification
method; (g) direct expenses are charged to each portfolio and each class;
management fees and general portfolio expenses are allocated on the basis of
relative net assets; (h) the Portfolio intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
and (i) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ from these amounts.
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT
AND OTHER TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment adviser to the Fund. The
Portfolio pays SBMFM an advisory fee calculated at an annual rate of 0.45% of
14
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
the average daily net assets up to $500 million and 0.42% of the average daily
net assets thereafter. This fee is calculated daily and paid monthly.
SBMFM also acts as the Fund's administrator for which the Portfolio pays a
fee calculated at an annual rate of 0.20% of the average daily net assets up to
$500 million and 0.18% of the average daily net assets thereafter. This fee is
calculated daily and paid monthly.
In addition, The Boston Company Advisors, Inc. ("Boston Advisors"), an
indirect wholly owned subsidiary of Mellon Bank Corporation, had entered into a
sub-administration agreement with the Fund and SBMFM. SBMFM paid Boston Advisors
a portion of its administration fee at a rate agreed upon from time to time
between SBMFM and Boston Advisors. As of August 18, 1995, this relationship was
terminated.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. For the year ended December 31, 1995, SB received sales charges of
approximately $181,000 on sales of the Portfolio's Class A shares.
There is a contingent deferred sales charge ("CDSC") of 4.50% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
thereafter by 1.00% per year until no CDSC is incurred. Class C shares have a
1.00% CDSC, which applies if redemption occurs within the first year of
purchase. For the year ended December 31, 1995, CDSCs paid to SB were
approximately:
Class B Class C
================================================================================
CDSCs $541,000 $5,000
================================================================================
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to Class A, B and C shares calculated at the annual rate of 0.25% of the
average daily net assets for each respective class. The Portfolio also pays a
distribution fee with respect to Class B and C shares calculated at the annual
rate of 0.50% and 0.45% of the average daily net assets for each class,
respectively. For the year ended December 31, 1995, total Distribution Plan fees
incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $505,094 $1,914,881 $14,192
================================================================================
All officers and one Director of the Fund are employees of SB.
15
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
3. INVESTMENTS
During the year ended December 31, 1995, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $227,304,054
- --------------------------------------------------------------------------------
Sales 223,289,025
================================================================================
At December 31, 1995, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
================================================================================
Gross unrealized appreciation $60,362,840
Gross unrealized depreciation (250,859)
- --------------------------------------------------------------------------------
Net unrealized appreciation $60,111,981
================================================================================
4. REPURCHASE AGREEMENTS
The Portfolio purchases (and its custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day), at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. CAPITAL SHARES
At December 31, 1995, the Fund had ten billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
At December 31, 1995, total paid-in capital amounted to the following for
each class:
Class A Class B Class C
===============================================================================
Total Paid-in Capital $190,889,106 $268,029,734 $3,413,22
===============================================================================
16
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995 December 31, 1994
------------------------ ---------------------------
Shares Amount Shares Amount
==================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,607,785 $19,821,590 16,784,949 $186,110,299
Shares issued on reinvestment 1,002,331 12,111,574 679,207 7,334,475
Shares redeemed (2,523,526) (30,346,445) (1,245,217) (13,850,662)
- --------------------------------------------------------------------------------------------------
Net Increase 86,590 $1,586,719 16,218,939 $179,594,112
==================================================================================================
Class B
Shares sold 5,310,407 $63,978,854 5,403,618 $63,270,474
Shares issued on reinvestment 1,087,231 13,196,188 1,992,592 22,870,952
Shares redeemed (5,346,794) (64,605,561) (23,258,589) (263,491,413)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) 1,050,844 $12,569,481 (15,862,379) $(177,349,987)
==================================================================================================
Class C
Shares sold 283,140 $3,448,644 82,608 $922,066
Shares issued on reinvestment 9,409 115,314 4,936 54,251
Shares redeemed (101,992) (1,229,781) (9,852) (110,615)
- --------------------------------------------------------------------------------------------------
Net Increase 190,557 $2,334,177 77,692 $865,702
==================================================================================================
</TABLE>
17
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1995(1) 1994(1) 1993(1) 1992(2)
========================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.67 $13.01 $11.89 $11.67
- --------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.83 0.74 0.88 0.14
Net realized and unrealized gain (loss) 2.80 (1.88) 1.27 0.23
- --------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.63 (1.14) 2.15 0.37
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.89) (0.86) (0.88) (0.14)
Overdistribution of net investment income -- -- (0.01) --
Net realized gains (0.16) (0.31) (0.14) --
Capital -- (0.03) -- (0.01)
- --------------------------------------------------------------------------------------------------------
Total Distributions (1.05) (1.20) (1.03) (0.15)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.25 $10.67 $13.01 $11.89
- --------------------------------------------------------------------------------------------------------
Total Return 35.29% (8.95)% 18.45% 3.25%++
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $226,373 $181,334 $10,136 $933
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.11% 1.11% 1.11% 1.03%+
Net investment income 7.02 7.35 6.67 7.53+
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 49% 18% 65% 47%
========================================================================================================
</TABLE>
(1) 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.
(2) For the period from November 6, 1992 (inception date) to December 31, 1992.
(3) For the year ended December 31, 1992, the expense ratio excludes interest
expense. The expense ratio including interest expense would have been 1.04%
(annualized).
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
18
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class B Shares 1995(1) 1994(1) 1993(1) 1992 1991
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $10.67 $13.01 $11.89 $11.80 $10.43
- ------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.77 0.82 0.80 0.83 0.86
Net realized and unrealized gain (loss) 2.80 (2.02) 1.29 0.12 1.38
- ------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.57 (1.20) 2.09 0.95 2.24
- ------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.83) (0.80) (0.82) (0.83) (0.87)
Overdistribution of investment net income -- -- (0.01) -- --
Net realized gains (0.16) (0.31) (0.14) -- --
Capital -- (0.03) -- (0.03) --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.99) (1.14) (0.97) (0.86) (0.87)
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.25 $10.67 $13.01 $11.89 $11.80
- ------------------------------------------------------------------------------------------------------------------------------
Total Return 34.63% (9.41)% 18.06% 8.36% 22.50%
- ------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $288,533 $221,120 $476,088 $431,783 $413,878
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 1.61% 1.57% 1.58% 1.57% 1.53%
Net investment income 6.51 6.89 6.20 6.99 7.90
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 49% 18% 65% 47% 82%
==============================================================================================================================
</TABLE>
(1) 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.
(2) For the year ended December 31, 1992, the expense ratio excludes interest
expense. The expense ratio including interest expense was1.58%.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
19
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Class C Shares 1995(1) 1994(1) 1993(1)(2)
================================================================================
Net Asset Value, Beginning of Year $10.67 $13.01 $12.56
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.78 0.75 0.63
Net realized and unrealized gain (loss) 2.80 (1.95) 0.65
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.58 (1.20) 1.28
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.83) (0.80) (0.68)
Overdistribution of net investment income -- -- (0.01)
Net realized gains (0.16) (0.31) (0.14)
Capital -- (0.03) --
- --------------------------------------------------------------------------------
Total Distributions (0.99) (1.14) (0.83)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $13.26 $10.67 $13.01
- --------------------------------------------------------------------------------
Total Return 34.74% (9.41)% 10.38%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $3,769 $999 $208
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.56% 1.57% 1.61%+
Net investment income 6.55 6.89 6.17+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 49% 18% 65%
================================================================================
(1) 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.
(2) For the period from February 26, 1993 (inception date) to December 31, 1993.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
20
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Smith Barney Investment Funds Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Smith Barney Investment Grade Bond Fund of
Smith Barney Investment Funds Inc. as of December 31, 1995, and the related
statements of operations, changes in net assets, and financial highlights for
the year 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
audit. The statement of changes in net assets for the year ended December 31,
1994 and the financial highlights for each of the years in the four-year period
then ended were audited by other auditors whose report thereon, dated February
10, 1995, expressed an unqualified opinion on that statement of changes in net
assets and those financial highlights.
We conducted our audit 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, 1995, by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Smith Barney Investment
Grade Bond Fund of Smith Barney Investment Funds Inc. as of December 31, 1995,
and the results of its operations, changes in its net assets and financial
highlights for the year then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
New York, New York
February 16, 1996
21
<PAGE>
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
Change in Independent Auditor: On October 20, 1994, based upon the
recommendation of the Audit Committee of the Fund, the Board of Directors
determined not to retain Coopers &Lybrand L.L.P. ("Coopers &Lybrand") as the
Fund's independent auditor and voted to appoint KPMGPeat Marwick LLP. During the
Fund's two most recent fiscal years, Cooper's & Lybrand's audit reports
contained no adverse opinion or disclaimer of opinion; nor were the reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
Further, during this same period there were no disagreements with Coopers
&Lybrand on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of Coopers & Lybrand, would have caused it to
make reference to the subject matter of such disagreements in connection with
its audit reports. The Fund has requested Coopers & Lybrand to provide a letter
to the Securities and Exchange Commission stating whether Coopers &Lybrand
agrees with the foregoing statements, and to provide the Fund with a copy of
such letter. A copy of this letter is available upon request by calling the Fund
at (212) 723-9218.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
The amount of long-term capital gains paid by the Portfolio to its
shareholders for the fiscal year ended December 31, 1995, was $3,104,547.
22
<PAGE>
Smith Barney SMITH BARNEY
Investment ------------
Grade Bond A Member of Travelers Group [LOGO]
Fund
Directors
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Allan R. Johnson
Frank G. Hubbard
Heath B. McLendon, Chairman
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
George E. Mueller Jr.
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Investment Grade Bond Fund. It is not authorized for distribution
to prospective investors unless accompanied or preceded by a current Prospectus
for the Fund, which contains information concerning the Fund's investment
policies and expenses as well as other pertinent information.
Smith Barney
Investment
Grade Bond
Fund
388 Greenwich Street
New York, New York 10013
FD0317 2/96
-------------
ANNUAL REPORT
-------------
1995
1995
1995
1995
1995
Smith Barney
Special
Equities Fund
-------------------------
December 31, 1995
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- ----------------------------------
Smith Barney Special Equities Fund
- ----------------------------------
Dear Shareholder:
We are pleased to provide you with the annual report and audited financial
statements for Smith Barney Special Equities Fund for the year ended December
31, 1995. In this report, we outline our investment strategy and discuss stock
market conditions in 1995. A more detailed summary of performance and current
holdings can be found in the appropriate sections that follow in the annual
report.
The year 1995 began slowly, rose to a loud crescendo, tapered off a bit and
ended strongly. Coming into 1995, analyst expectations about both the equity
markets and the economy were less than spectacular. Many investment
professionals had expected a difficult year for the stock market. Yet what
unfolded in 1995 has to be considered one of the "great" years for the markets,
much like a classic "great" wine.
In the early part of the year, when investor concerns about economic growth,
inflation and the direction of interest rates prevailed, the equity markets were
essentially calm. Then, as the economy slowed down, interest rates declined and
inflation concerns subsided, the equity markets began to hit new highs with such
frequency it soon became the norm. All of the major stock market indices
participated: The Dow Jones Industrial Average and the Standard & Poor's
500-Stock Price Index finished the year up 36.94% and 37.53%, respectively. The
NASDAQ Composite Index and the Russell 2000 Index rose 39.92% and 28.45%,
respectively.
The stock market rally, led by a huge concentration of investors in technology
stocks, began to falter in August with the announcement of a slight
disappointment in earnings from Intel. This earnings report from Intel raised a
red flag to investors about other technology stocks which began a sharp decline
from their highs. This sell-off in technology stocks affected the markets,
especially the universe of small-capitalization stocks. Small-capitalization
stocks underperformed large-capitalization stocks over the full year. Then, in
mid-December, technology stocks rebounded, causing a strong finish for all the
major stock market averages. Because Smith Barney Special Equities invests in
small, emerging growth companies, its holdings are generally not affected by
broad economic and market conditions. For the one-year period ended December 31,
1995, Smith Barney Special Equities Fund posted a cumulative total return (which
excludes the effects of all sales charges) of 63.48% for Class A shares.
1
<PAGE>
Fund's Investment Strategy
In the past year, Smith Barney Special Equities Fund continued to buy stocks of
companies with strong fundamentals and above-average growth prospects with the
intention of holding them. We do not focus on short-term price fluctuations as
long as the Fund believes a company's fundamentals remain viable and growth can
be sustained over a full market cycle. At year end, the Fund's top-five holdings
were:
- -- Ascend Communications Inc.
- -- Macromedia Inc.
- -- Baby Superstore Inc.
- -- Starbucks Corp.
- -- Callaway Golf Co.
For 1996, we expect the early part of the year to be challenging for
small-capitalization stocks. However, we believe the relative performance of
small-capitalization stocks may improve as the year progresses.
At this time, we would like to thank you for your investment in Smith Barney
Special Equities Fund.
Sincerely,
/s/ Heath B. McLendon /s/ George V. Novello
Heath B. McLendon George V. Novello
Chairman and Investment Officer
Chief Executive Officer
January 30, 1996
2
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
========================================================================================
<C> <C> <C> <C> <C> <C> <C>
12/31/95 $19.10 $30.44 $0.00 $0.76 $0.00 63.48%
- ----------------------------------------------------------------------------------------
12/31/94 20.23 19.10 0.00 0.00 0.00 (5.59)
- ----------------------------------------------------------------------------------------
12/31/93 15.47 20.23 0.00 0.33 0.00 32.90
- ----------------------------------------------------------------------------------------
Inception* - 12/31/92 14.13 15.47 0.00 0.00 0.00 9.48+
========================================================================================
Total $0.00 $1.09 $0.00
========================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
========================================================================================
<C> <C> <C> <C> <C> <C> <C>
12/31/95 $18.82 $29.76 $0.00 $0.76 $0.00 62.30%
- ----------------------------------------------------------------------------------------
12/31/94 20.08 18.82 0.00 0.00 0.00 (6.27)
- ----------------------------------------------------------------------------------------
12/31/93 15.47 20.08 0.00 0.33 0.00 31.93
- ----------------------------------------------------------------------------------------
12/31/92 14.18 15.47 0.00 0.00 0.00 9.10
- ----------------------------------------------------------------------------------------
12/31/91 9.82 14.18 0.00 0.00 0.03 44.76
- ----------------------------------------------------------------------------------------
12/31/90 13.77 9.82 0.29 0.23 0.02 (24.71)
- ----------------------------------------------------------------------------------------
12/31/89 12.04 13.77 0.27 0.00 0.24 18.60
- ----------------------------------------------------------------------------------------
12/31/88 11.48 12.04 0.55 0.30 0.00 12.60
- ----------------------------------------------------------------------------------------
12/31/87 13.02 11.48 0.00 0.14 0.00 (10.91)
- ----------------------------------------------------------------------------------------
12/31/86 13.15 13.02 0.05 1.00 0.00 7.05
========================================================================================
Total $1.16 $2.76 $0.29
========================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
==========================================================================================
<C> <C> <C> <C> <C> <C> <C>
12/31/95 $18.82 $29.77 $0.00 $0.76 $0.00 62.35%
- ------------------------------------------------------------------------------------------
12/31/94 20.08 18.82 0.00 0.00 0.00 (6.27)
- ------------------------------------------------------------------------------------------
Inception* - 12/31/93 22.62 20.08 0.00 0.33 0.00 (9.77)+
==========================================================================================
Total $0.00 $1.09 * $0.00
==========================================================================================
</TABLE>
3
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
- --------------------------------------------------------------------------------
<TABLE>
Net Asset Value
------------------
Beginning End Income Capital Gain Return Total
Year Ende of Year of Year Dividends Distributions of Capital Returns(1)
============================================================================
<S> <C> <C> <C> <C> <C> <C>
Inception* - 12/31/95 $26.49 $30.46 $0.00 $0.76 $0.00 17.95%+
===========================================================================
</TABLE>
It is the Funds' policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Average Annual Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
----------------------------------------
Class A Class B Class C Class Z
================================================================================
Year Ended 12/31/95 63.48% 62.30% 62.35% N/A
- --------------------------------------------------------------------------------
Five Years Ended 12/31/95 N/A 25.95 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/95 N/A 11.76 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 12/31/95 29.39 11.98 15.48 17.95%+
================================================================================
With Sales Charge(2)
---------------------------------------
Class A Class B Class C Class Z
================================================================================
Year Ended 12/31/95 55.31% 57.30% 61.35% N/A
- --------------------------------------------------------------------------------
Five Years Ended 12/31/95 N/A 25.87 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/95 N/A 11.76 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 12/31/95 27.30 11.98 15.48 17.95%+
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 12/31/95) 124.59%
- --------------------------------------------------------------------------------
Class B (12/31/85 through 12/31/95) 203.96
- --------------------------------------------------------------------------------
Class C (Inception* through 12/31/95) 37.29
- --------------------------------------------------------------------------------
Class Z (Inception* through 12/31/95) 17.95+
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charge with respect to Class A shares or the applicable contingent
deferred sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed less than
one year from initial purchase and declines thereafter by 1.00% per year
until no CDSCis incurred. Class C shares reflect the deduction of a 1.00%
CDSC, which applies if shares are redeemed within the first year of
purchase.
* Inception dates for Class A, B, C and Z shares are November 6, 1992,
December 13, 1982, October 18, 1993 and October 2, 1995, respectively.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
4
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growthof $10,000 Invested in Class B Shares
of the Smith Barney Special Equities
Fund vs.
Standard & Poor's 500 Index+
- --------------------------------------------------------------------------------
December 1985 -- December 1995
[The following table was represented by a line chart in the printed material.]
Smith Barney Special Equities Fund S&P 500 Index
---------------------------------- -------------
12/85 10,000 10,000
12/86 10,705 11,687
12/87 9,538 12,490
12/88 10,740 14,559
12/89 12,738 19,165
12/90 9,591 18,569
12/91 13,883 24,216
12/92 15,146 26,059
12/93 19,983 28,678
12/94 18,729 29,056
12/95 30,396 39,961
+ Hypothetical illustration of $10,000 invested in Class B shares on December
31, 1985, assuming reinvestment of dividends and capital gains, if any, at
net asset value through December 31, 1995. The Standard & Poor's 500 Index
is composed of widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and the over-the-counter market. Figures
for the index include reinvestment of dividends. The index is unmanaged and
is not subject to the same management and trading expenses as a mutual fund.
The performance of the Fund's other classes may be greater or less than the
Class B shares' performance indicated on this chart, depending on whether
greater or lesser sales charges and fees were incurred by shareholders
investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
5
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) December 31, 1995
- --------------------------------------------------------------------------------
Portfolio Breakdown
[The following table was represented by a pie chart in the printed material.]
Retail 17.2%
Communications 14.8%
Software 12.1%
Restaurant 9.3%
Healthcare 8.2%
Semi-conductor and Electronics 7.7%
Technology 6.8%
Office Products 6.6%
Other Common Stocks 7.5%
Repurchase Agreements 9.8%
Top Ten Common Stock Holdings
Percentage of
Total Investments
================================================================================
Ascend Communications Inc. 7.1%
Macromedia Inc. 5.7
Baby Superstore Inc. 5.0
Starbucks Corp. 4.5
Callaway Golf Co. 4.0
Boston Chicken Inc. 3.9
PETsMart Inc. 3.6
Adtran Inc. 3.5
Sunglass Hut International Inc. 3.5
C-Cube Microsystems Inc. 3.4
================================================================================
6
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1995
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 90.2%
Advertising -- 0.7%
65,000 CKS Group Inc.* $ 2,535,000
- --------------------------------------------------------------------------------
Brewers -- 0.9%
80,000 Boston Beer Co. Inc.* 1,900,000
50,000 Redhook Ale Brewery Inc.* 1,300,000
- --------------------------------------------------------------------------------
3,200,000
- --------------------------------------------------------------------------------
Business Services -- 0.5%
50,000 Corestaff Inc.* 1,825,000
- --------------------------------------------------------------------------------
Communications -- 14.8%
220,000 Adtran Inc.* 11,948,750
150,000 America Online Inc.* 5,625,000
100,000 Arch Communications Group Inc.* 2,400,000
300,000 Ascend Communications Inc.* 24,337,152
200,000 Aspect Telecommunications Corp.* 6,700,000
- --------------------------------------------------------------------------------
51,010,902
- --------------------------------------------------------------------------------
Entertainment and Leisure -- 4.0%
600,000 Callaway Golf Co. 13,575,000
- --------------------------------------------------------------------------------
Healthcare -- 8.2%
35,000 HCIA Inc.* 1,636,250
45,000 Henry Schein Inc.* 1,327,500
50,000 IDX Systems Corp.* 1,737,500
80,000 Occusystems Inc.* 1,600,000
150,000 Phycor Inc.* 7,584,375
60,000 Physicians Sales & Service Inc.* 1,710,000
100,000 Steris Corp.* 3,225,000
220,000 Target Therapeutics Inc.* 9,405,000
- --------------------------------------------------------------------------------
28,225,625
- --------------------------------------------------------------------------------
Office Products -- 6.6%
200,000 Corporate Express Inc.* 6,025,000
200,000 Micro Warehouse Inc.* 8,650,000
150,000 Officemax Inc.* 3,356,250
100,000 Viking Office Products Inc.* 4,650,000
- --------------------------------------------------------------------------------
22,681,250
- --------------------------------------------------------------------------------
Pharmaceuticals -- 1.2%
85,000 Biochem Pharma Inc.* 3,410,625
25,000 Centocor Inc.* 771,875
- --------------------------------------------------------------------------------
4,182,500
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
7
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Restaurant -- 9.3%
420,000 Boston Chicken Inc.* $13,492,500
164,000 Manhattan Bagel Co.* 2,952,000
740,000 Starbucks Corp.* 15,540,000
- --------------------------------------------------------------------------------
31,984,500
- --------------------------------------------------------------------------------
Retail -- 17.2%
300,000 Baby Superstore Inc.* 17,100,000
60,000 De Rigo S.p.A. ADR* 1,365,000
100,000 Global DirectMail Corp.* 2,750,000
285,000 The Mens Wearhouse Inc.* 7,338,750
60,000 MSC Industrial Direct Co.* 1,635,000
130,000 Oakley Inc.* 4,420,000
405,000 PETsMART Inc.* 12,555,000
500,000 Sunglass Hut International Inc.* 11,875,000
- --------------------------------------------------------------------------------
59,038,750
- --------------------------------------------------------------------------------
Semi-Conductor and Electronics -- 7.7%
185,000 C-Cube Microsystems Inc.* 11,562,500
170,000 Discreet Logic Inc.* 4,250,000
105,000 Gemstar International Group Ltd.* 2,979,375
175,000 LSI Logic Corp.* 5,731,250
90,000 Zoran Corp.* 1,867,500
- --------------------------------------------------------------------------------
26,390,625
- --------------------------------------------------------------------------------
Software -- 12.1%
100,000 Baan Co. NV* 4,525,000
100,000 Datalogix International Inc.* 1,262,500
50,000 Davidson & Associates Inc.* 1,100,000
375,000 Macromedia Inc.* 19,593,750
100,000 Maxis Inc.* 3,800,000
265,000 Peoplesoft Inc.* 11,395,000
- --------------------------------------------------------------------------------
41,676,250
- --------------------------------------------------------------------------------
Technology -- 6.8%
120,000 Avant Corp.* 2,310,000
70,000 Harbinger Corp.* 1,610,000
80,000 Metatools Inc.* 2,080,000
30,000 Objective Systems Integrators Inc.* 1,642,500
75,000 Premenos Technology Corp.* 1,978,125
130,000 Shiva Corp.* 9,457,500
100,000 Verity Inc.* 4,425,000
- --------------------------------------------------------------------------------
23,503,125
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Transportation -- 0.2%
20,000 Eagle USA Airfreight Inc.* $ 525,000
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $180,428,567) 310,353,527
================================================================================
WARRANT -- 0.0%
696 Jan Bell Marketing Inc., Expires 12/16/98 348
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENTS -- 9.8%
$33,762,000 Morgan Stanley Group, Inc., 5.844% due 1/2/96;
Proceeds at maturity -- $33,783,924; (Fully
collateralized by U.S. Treasury Notes,
5.125% due 4/30/98; Market value -- $34,446,971) 33,762,000
76,000 Goldman Sachs & Co., 5.649% due 1/2/96; Proceeds
at maturity -- $76,048; (Fully collateralized by
U.S. Treasury Notes,
5.375% due 11/30/97; Market value -- $77,555) 76,000
- --------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $33,838,000) 33,838,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $214,266,567)++ $344,191,875
================================================================================
* Non-income producing security.
++ Aggregate cost for Federal income tax purposes is $214,745,389.
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1995
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $214,266,567) $ 344,191,875
Cash 1,067
Receivable for securities sold 308,750
Receivable for Fund shares sold 5,004,240
Interest receivable 16,479
- --------------------------------------------------------------------------------
Total Assets 349,522,411
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 2,871,875
Payable for Fund shares purchased 614,072
Investment advisory fees payable 151,195
Distribution fees payable 107,420
Administration fees payable 54,980
Accrued expenses 544,664
- --------------------------------------------------------------------------------
Total Liabilities 4,344,206
- --------------------------------------------------------------------------------
Total Net Assets $345,178,205
================================================================================
NET ASSETS:
Par value of capital shares $ 11,476
Capital paid in excess of par value 209,932,095
Accumulated net realized gain on security transactions 5,309,326
Net unrealized appreciation of investments 129,925,308
- --------------------------------------------------------------------------------
Total Net Assets $345,178,205
================================================================================
Shares Outstanding:
Class A 5,234,499
- --------------------------------------------------------------------------------
Class B 5,748,436
- --------------------------------------------------------------------------------
Class C 316,409
- --------------------------------------------------------------------------------
Class Z 176,117
- --------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $30.44
- --------------------------------------------------------------------------------
Class B* $29.76
- --------------------------------------------------------------------------------
Class C** $29.77
- --------------------------------------------------------------------------------
Class Z (and redemption price) $30.46
- --------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $32.04
================================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed less than one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 810,146
Dividends 165,805
- --------------------------------------------------------------------------------
Total Investment Income 975,951
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 1,457,522
Investment advisory fees (Note 2) 1,276,355
Administration fees (Note 2) 464,129
Shareholder and system servicing fees 449,230
Registration fees 90,000
Shareholder communications 72,000
Audit and legal 50,400
Directors' fees 50,000
Custody 40,000
Other 221,944
- --------------------------------------------------------------------------------
Total Expenses 4,171,580
- --------------------------------------------------------------------------------
Net Investment Loss (3,195,629)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 252,991,730
Cost of securities sold 231,031,531
- --------------------------------------------------------------------------------
Net Realized Gain 21,960,199
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 31,895,265
End of year 129,925,308
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 98,030,043
- --------------------------------------------------------------------------------
Net Gain on Investments 119,990,242
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $116,794,613
================================================================================
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
===================================================================================
<S> <C> <C>
OPERATIONS:
Net investment loss $ (3,195,629) $ (2,749,410)
Net realized gain (loss) 21,960,199 (5,296,726)
Increase in net unrealized appreciation
(depreciation) 98,030,043 (3,369,494)
- -----------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 116,794,613 (11,415,630)
- -----------------------------------------------------------------------------------
DISTRIBUTION TO
SHAREHOLDERS FROM:
Net realized gains (7,592,812) --
- -----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions To Shareholders (7,592,812) --
- -----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 237,931,179 228,288,055
Net asset value of shares issued for
reinvestment of dividends 7,348,955 --
Cost of shares reacquired (205,804,360) (209,078,842)
- -----------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 39,475,774 19,209,213
- -----------------------------------------------------------------------------------
Increase in Net Assets 148,677,575 7,793,583
NET ASSETS:
Beginning of year 196,500,630 188,707,047
- -----------------------------------------------------------------------------------
End of year $345,178,205 $196,500,630
===================================================================================
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Special Equities Fund ("Portfolio"), a separate investment
fund of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland corporation,
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund consists of the
Portfolio and four other separate investment portfolios: Smith Barney Government
Securities Fund, Smith Barney Managed Growth Fund, Smith Barney Investment Grade
Bond Fund and Smith Barney Growth Opportunity Fund. The financial statements and
financial highlights for the other portfolios are presented in separate annual
reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) securities transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets; securities traded in the over-the-counter market and listed securities
for which no sales price were reported are valued at the bid price, or in the
absence of a recent bid price, at the bid equivalent obtained from one or more
of the major market makers; (c) short-term securities that have a maturity of
more than 60 days are valued at prices based on market quotations for securities
of similar type, yield and maturity; (d) short-term investments and securities
maturing within 60 days are valued at cost plus accreted discount, or minus
amortized premium, which approximates market value; (e) dividend income is
recorded on ex-dividend date and interest income is recorded on the accrual
basis; (f) gains or losses on the sale of securities are calculated using the
specific identification method; (g) direct expenses are charged to each
portfolio and each class; management fees and general portfolio expenses are
allocated on the basis of relative net assets; (h) the Portfolio intends to
comply with the applicable provisions of the Internal Revenue Code of 1986, as
amended, pertaining to regulated investment companies and to make distributions
of taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (i) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At December 31, 1995,
reclassifications were made to the Portfolio's capital accounts to reflect
permanent book/tax differences and income and gains available for distributions
under income tax regulations. Net investment income, net realized gains and net
assets were not affected by this change; and (j) estimates and assumptions are
required to be made regarding assets, liabilities and changes in net assets
resulting from operations when financial statements are prepared. Changes in
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ from these
amounts.
13
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
2. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT
AND OTHER TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment advisor to the Fund. The
Portfolio pays SBMFM an investment advisory fee calculated at an annual rate of
0.55% of the average daily net assets. This fee is calculated daily and paid
monthly.
SBMFM also acts as the Fund's administrator for which the Portfolio pays a
fee calculated at an annual rate of 0.20% of the average daily net assets. This
fee is calculated daily and paid monthly.
In addition, The Boston Company Advisors, Inc. ("Boston Advisors"), an
indirect wholly owned subsidiary of Mellon Bank Corporation, had entered into a
sub-administration agreement with the Fund and SBMFM. SBMFM paid Boston Advisors
a portion of its administration fee at a rate agreed upon from time to time
between SBMFM and Boston Advisors. As of August 18, 1995, this relationship was
terminated.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
year ended December 31, 1995, SB received brokerage commissions of $11,052 and
sales charges of approximately $347,000 on sales of the Portfolio's Class A
shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase and declines thereafter by 1.00% per year until no CDSC is incurred.
Class C shares have a 1.00% CDSC, which applies if redemption occurs within the
first year of purchase. For the year ended December 31, 1995, CDSCs paid to SB
were approximately:
Class B Class C
================================================================================
CDSCs $379,000 $1,000
================================================================================
14
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to its Class A, B and C shares calculated at an annual rate of 0.25% of
the average daily net assets of each respective class. The Portfolio also pays a
distribution fee with respect to its Class B and C shares calculated at an
annual rate of 0.75% of the average daily net assets for each class,
respectively. For the year ended December 31, 1995, total Distribution Plan fees
incurred by the Portfolio were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $286,910 $1,135,911 $34,701
================================================================================
All officers and one Director of the Fund are employees of SB.
3. INVESTMENTS
During the year ended December 31, 1995, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $261,742,233
- --------------------------------------------------------------------------------
Sales 252,991,730
================================================================================
At December 31, 1995, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
================================================================================
Gross unrealized appreciation $134,056,607
Gross unrealized depreciation (4,610,121)
- --------------------------------------------------------------------------------
Net unrealized appreciation $129,446,486
================================================================================
4. REPURCHASE AGREEMENTS
The Portfolio purchases (and its custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day), at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. CAPITAL SHARES
At December 31, 1995, the Fund had ten billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical interest
15
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
At December 31, 1995, total paid-in capital amounted to the following for
each class:
Class A Class B Class C Class Z
================================================================================
Total Paid-in Capital $98,872,747 $98,223,631 $7,872,898 $4,974,295
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1995* December 31, 1994
---------------------- ----------------------
Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 6,906,656 $158,758,785 6,100,691 $113,645,641
Shares issued on reinvestment 116,734 3,420,305 -- --
Shares redeemed (7,078,890) (159,234,258) (3,288,861) (62,287,789)
- ------------------------------------------------------------------------------------------------
Net Increase (Decrease) (55,500) $2,944,832 2,811,830 $51,357,852
================================================================================================
Class B
Shares sold 2,715,135 $66,677,618 6,054,365 $113,219,270
Shares issued on reinvestment 128,647 3,689,606 -- --
Shares redeemed (2,085,066) (45,134,660) (7,958,837) (146,720,375)
- ------------------------------------------------------------------------------------------------
Net Increase (Decrease) 758,716 $25,232,564 (1,904,472) $(33,501,105)
================================================================================================
Class C
Shares sold 296,498 $7,602,541 75,807 $1,423,144
Shares issued on reinvestment 5,282 151,484 -- --
Shares redeemed (66,546) (1,429,942) (3,844) (70,678)
- ------------------------------------------------------------------------------------------------
Net Increase 235,234 $6,324,083 71,963 $1,352,466
================================================================================================
Class Z
Shares sold 173,310 $4,892,235 -- --
Shares issued on reinvestment 2,986 87,560 -- --
Shares redeemed (179) (5,500) -- --
- ------------------------------------------------------------------------------------------------
Net Increase 176,117 $4,974,295 -- --
================================================================================================
</TABLE>
* For Class Z shares, transactions are for the period from October 2, 1995
(inception date) to December 31, 1995.
16
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1995 1994(1) 1993(1) 1992(2)
========================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $19.10 $20.23 $15.47 $14.13
- --------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.27) (0.13) (0.08) (0.01)
Net realized and unrealized gain (loss) 12.37 (1.00) 5.17 1.35
- --------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 12.10 (1.13) 5.09 1.34
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains (0.76) -- (0.33) --
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.76) -- (0.33) --
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $30.44 $19.10 $20.23 $15.47
- --------------------------------------------------------------------------------------------------------
Total Return 63.48% (5.59)% 32.90% 9.48%++
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $159,316 $101,052 $50,121 $195
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.43% 1.49% 1.67% 1.51%+
Net investment loss (1.05) (0.94) (0.46) (0.97)+
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 113% 123% 112% 211%
========================================================================================================
Average commissions paid on
equity security transactions (3) $0.06 -- -- --
===========================================================================================================================
<CAPTION>
Class B Shares 1995 1994(1) 1993(1) 1992 1991
========================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $18.82 $20.08 $15.47 $14.18 $9.82
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.37) (0.27) (0.20) (0.26) (0.07)
Net realized and unrealized gain (loss) 12.07 (0.99) 5.14 1.55 4.46
- ------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 11.70 (1.26) 4.94 1.29 4.39
- ------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains (0.76) -- (0.33) -- --
Capital -- -- -- -- (0.03)
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.76) -- (0.33) -- (0.03)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $29.76 $18.82 $20.08 $15.47 $14.18
- ------------------------------------------------------------------------------------------------------------------------
Total Return 62.30% (6.27)% 31.93% 9.10% 44.76%
- ------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $171,081 $93,920 $138,401 $78,130 $81,618
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.04% 2.21% 2.34% 2.32% 2.31%
Net investment loss (1.61) (1.66) (1.13) (1.77) (0.74)
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 113% 123% 112% 211% 379%
========================================================================================================================
Average commissions paid on
equity security transactions (3) $0.06 -- -- -- --
========================================================================================================================
</TABLE>
(1) The per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year since
use of the undistributed method did not accord with results of operations.
(2) For the period from November 6, 1992 (inception date) to December 31, 1992.
(3) New SEC disclosure guidelines require that average commissions per share be
calculated and presented for the current year only. ++Total return is not
annualized, as it may not be representative of the total return for the
year.
+ Annualized.
17
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares Class Z Shares
------------------------------ --------------
1995 1994(1) 1993(1)(2) 1995(3)
======================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $18.82 $20.08 $22.62 $26.49
- -----------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.42) (0.25) (0.16) (0.06)
Net realized and unrealized gain (loss) 12.13 (1.01) (2.05) 4.79
- -----------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 11.71 (1.26) (2.21) 4.73
- -----------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains (0.76) -- (0.33) (0.76)
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.76) -- (0.33) (0.76)
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $29.77 $18.82 $20.08 $30.46
- -----------------------------------------------------------------------------------------------------
Total Return 62.35% (6.27)% (9.77)%++ 17.95++
- -----------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $9,417 $1,528 $185 $5,364
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.25% 2.15% 2.19%+ 1.10%+
Net investment loss (1.79) (1.60) (0.98)+ (0.86)+
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 113% 123% 112% 113%
=====================================================================================================
Average commissions paid on
equity security transactions (4) $0.06 -- -- $0.06
=====================================================================================================
</TABLE>
(1) The per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year since
use of the undistributed method did not accord with results of operations.
(2) For the period from October 18, 1993 (inception date) to December 31, 1993.
(3) For the period from October 2, 1995 (inception date) to December 31, 1995.
(4) New SEC disclosure guidelines require that average commissions per share be
calculated and presented for the current year only. ++Total return is not
annualized, as it may not be representative of the total return for the
year.
+ Annualized.
18
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
Smith Barney Investment Funds Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Barney statement of Special
Equities Fund of Smith Barney Investment Funds Inc. as of December 31, 1995, and
the related statement of operations, statement of changes in net assets, and
financial highlights for the year 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 audit. The statement of changes in net assets
for the year ended December 31, 1994 and the financial highlights for each of
the years in the four-year period then ended were audited by other auditors
whose report thereon, dated February 10, 1995, expressed an unqualified opinion
on that statement of changes in net assets and those financial highlights.
We conducted our audit 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, 1995, by correspondence with the custodian. As to securities
purchased and sold but not received or delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Smith Barney Special
Equities Fund of Smith Barney Investment Funds as of December 31, 1995, and the
results of its operations, changes in its net assets and its financial
highlights for the year then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
New York, New York
February 16, 1996
19
<PAGE>
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
Change in Independent Auditor: On October 20, 1995, based upon the
recommendation of the Audit Committee of the Fund, the Board of Directors
determined not to retain Coopers & Lybrand L.L.P. ("Coopers & Lybrand") as the
Fund's independent auditor and voted to appoint KPMG Peat Marwick LLP. During
the Fund's two most recent fiscal years, Coopers & Lybrand's audit reports
contained no adverse opinion or disclaimer of opinion; nor were the reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
Further, during this same period there were no disagreements with Coopers &
Lybrand on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements, if not resolved
to the satisfaction of Coopers & Lybrand, would have caused it to make reference
to the subject matter of such disagreements in connection with its audit
reports. The Fund has requested Coopers & Lybrand to provide a letter to the
Securities and Exchange Commission stating whether Coopers & Lybrand agrees with
the foregoing statements, and to provide the Fund with a copy of such letter. A
copy of this letter is available upon request by calling the Fund at (212)
723-9218.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
The amount of long-term capital gains paid by the Fund to its shareholders
for the fiscal year ended December 31, 1995, was $7,592,812.
20
<PAGE>
Smith Barney SMITH BARNEY
Special Equities ------------
Fund A Member of Travelers Group [LOGO]
Directors
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank G. Hubbard
Allan R. Johnson
Heath B. McLendon, Chairman
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
George V. Novello
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder
Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Special Equities Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by a current Prospectus for
the Fund, which contains information concerning the Fund's investment policies
and expenses as well as other pertinent information.
Smith Barney
Special Equities Fund
388 Greenwich Street
New York, New York 10013
FD0313 2/96
<PAGE>
A N N U A L R E P O R T
1995
1995
1995
1995
1995
[PHOTO APPEARS HERE]
Smith Barney
Managed Growth
Fund
------------------------------------------
December 31, 1995
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Dear Shareholder:
We would like to extend a warm welcome to you as a shareholder in the Smith
Barney Managed Growth Fund. We believe an important part of serving your
investment needs is keeping you informed about the Fund. We are therefore
pleased to provide the first annual report and audited financial statements for
the period ended December 31, 1995. In this report, we outline our investment
philosophy and current portfolio strategy. A more detailed summary of
performance and current holdings can be found in the appropriate sections that
follow in the annual report.
Smith Barney Managed Growth Fund began on June 30, 1995. After raising more
than $440 million in the offering, the Fund was closed to give us a sufficient
amount of time to identify and invest in companies we believe represent good
long-term investment opportunities. In October 1995, Smith Barney Managed
Growth Fund opened for a few days and attracted a significant amount of new
assets. The Fund closed again and re-opened for good on January 8, 1996.
Many shareholders have asked why it took so long to invest the Fund's
assets. When Smith Barney Managed Growth Fund began, the stock market was
reaching new highs and heading higher. Because of the Fund's disciplined
investment approach that focuses on out-of-favor companies trading at or near
their 52-week price lows, it was difficult for us to find enough companies that
fit our strictly defined parameters all at once. (A more detailed discussion of
the Fund's investment approach can be found in the next section.) When the Fund
started up, our primary goal was to position it to capitalize on future
investment opportunities. We believe that goal has been achieved and we thank
you for your patience during this time.
Fund's Investment Approach
We are contrarian investors by nature. We do not rely on technical analysis
and do not attempt to time the market. We apply a disciplined valuation process
for each company we evaluate. Our biggest consideration is the price of a
stock. Second, we look for companies with a good franchise or a sustainable
competitive advantage where it's unlikely competitors will make any inroads.
Whereas most value investors look for companies with low price/earnings ratios
(P/Es), other factors such as price-to-free-cash flow, price-to-book, market
cap-to-sales and relative earnings multiples are generally more important
considerations for us.
1
<PAGE>
We look to buy companies that, for one reason or another, have fallen out of
favor and are trading at or near their 52-week price lows. We favor companies
with good franchises or ones that generate a lot of free cash flow. Then we try
to ascertain where the downside protection has been historically and where
these companies have bottomed out in prior troughs. Our approach is to evaluate
companies as businesses as opposed to stock plays. Typically, our turnover rate
is lower than many other mutual funds and we generally like to own a stock for
at least two years.
In our view, out-of-favor stocks can offer upside potential without undue
risk. There are many good companies in the market whose stock prices have been
beaten down for no good reason. In addition, out-of-favor companies can often
provide some degree of downside protection. Although no one can predict when a
market downturn will occur, it has been our experience that many good companies
who have already experienced a significant decrease in their stock price tend
to hold up better in difficult markets.
Smith Barney Managed Growth Fund also employs a disciplined sell process.
When a mature company hits a specific price target, the stock is usually sold
unless there is a compelling reason not to sell such as consolidation within an
industry. We are generally more flexible with our selling price targets for
young companies because they often have better long-term growth potential.
Portfolio Update
In 1995, both the equity and fixed income markets enjoyed banner years,
making it a challenging year for the Fund's contrarian approach to investing.
As of January 15, 1996, Smith Barney Managed Growth Fund was 79% invested in 77
companies, with 21% of its assets in cash. Since it began, the Fund has only
sold two major positions and one small position in a new company.
We are pleased to report that some of the companies purchased by the Fund in
July, August and September have performed well. When Smith Barney Managed
Growth Fund began in July, the financial and technology sectors were the
hottest areas of the stock market. However, over the last three months, the
financial and technology sectors have since been the worst two sectors out of
the eleven we measure on our baseline system. We would rather be early entering
the out-of-favor sectors than to be late in getting into the market's hot
sectors.
One stock that has been a good performer for the Smith Barney Managed Growth
Fund was Helene Curtis, the first company purchased by the Fund and, as of this
writing, the number-one performer on the New York Stock Exchange so far in
1996. This stock did not rise immediately which allowed us the opportunity to
accumulate over 3% of the company's outstanding shares at very favorable prices.
2
<PAGE>
The table below shows some of Smith Barney Managed Growth Fund's holdings as
of January 15, 1996 broken down by sector and select companies:
Percentage
Sector of Portfolio Select Companies
- --------------------- ------------ -------------------------------------------
Health Care Services 6.4% Value Health, U.S. Healthcare, Quantum
Health Resources
Oil 6.4% Amerada Hess, Pennzoil and Holly
Corporation
Household Furnishings
& Appliances 5.8% Maytag, Ethan Allen, Duracraft, and
Sunbeam
Chemicals 5.0% Schulman Corp., and NCH
Retail 4.2% TBC Corp, Blair, and Strawbridge &
Clothier
Publishing 3.8% McClatchy Newspapers
Electrical Equipment 3.5% Lincoln Electric, Cherry Corporation, Union
Switch & Signal
Food 3.2% Archer-Daniels, Dean Foods
Trucking 2.6% Yellow Corp., Frozen Food Express,
Builders Transport
Textile 2.4% Russell, Haggar
Smith Barney Managed Growth Fund is currently underweighted in financial
services (although some of these companies have performed poorly as of late)
and has no exposure in regional banks, electric utilities, insurance companies,
long-distance telephone companies or soft drinks. All of these industries have
a relatively large representation in the broad market averages.
Market Outlook
Because of our disciplined, contrarian approach to investing, we never try
to forecast the direction of the stock market. The most we can say about the
future is that it will provide us with new out-of-favor companies to consider.
At this time, we would like to thank you for your investment in Smith Barney
Managed Growth Fund.
Sincerely,
/s/ Heath B. McLendon /s/ Douglas Johnson
Heath B. McLendon Douglas Johnson
Chairman and Vice President and
Chief Executive Officer Investment Officer
January 15, 1996
3
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Inception* - 12/31/95 $12.00 $12.03 $0.15 $0.00 1.53%+
- -----------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Inception* - 12/31/95 $12.00 $12.02 $0.11 $0.00 1.16%+
- -----------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Inception* - 12/31/95 $12.00 $12.03 $0.11 $0.00 1.16%+
- -----------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Inception* - 12/31/95 $11.83 $12.03 $0.16 $0.00 3.06%+
- -----------------------------------------------------------------------------------
</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
4
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Average Annual Total Return+
- --------------------------------------------------------------------------------
Without Sales Charge(1)
-------------------------------------
Class A Class B Class C Class Z
- -------------------------------------------------------------------------
Inception* through 12/31/95 1.53% 1.16% 1.16% 3.06%
- -------------------------------------------------------------------------
With Sales Charge(2)
-------------------------------------
Class A Class B Class C Class Z
- -------------------------------------------------------------------------
Inception* through 12/31/95 (3.54)% (3.84)% 0.16% 3.06%
- -------------------------------------------------------------------------
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charge with respect to Class A shares or the applicable contingent
deferred sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; Class B shares reflect the
deduction of a 5.00% CDSC, which applies if shares are redeemed less than
one year from initial purchase and declines thereafter by 1.00% per year
until no CDSC is incurred. Class C shares reflect the deduction of a 1.00%
CDSC, which applies if shares are redeemed within the first year of
purchase.
* Inception date for Class A, B, and C shares is June 30, 1995. Inception
date for Class Z shares is October 2, 1995.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
5
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of
the Smith Barney Managed Growth Fund
vs. Standard & Poor's 500 Index+
- --------------------------------------------------------------------------------
June 1995 -- December 1995
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Smith Barney/Managed S&P 500
(Fiscal year Covered) Growth Fund Index
- --------------------- -------------------- --------
<S> <C> <C>
Measurement PT -
6/30/95 $ 9,501 $ 10,000
7/95 $ 9,557 $ 10,331
8/95 $ 9,525 $ 10,357
9/95 $ 9,414 $ 10,794
10/95 $ 9,066 $ 10,755
11/95 $ 9,375 $ 11,226
12/95 $ 9,670 $ 11,443
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class A shares at inception
on June 30, 1995, assuming deduction of the maximum 5.00% sales charge at the
time of investment and reinvestment of dividends and capital gains, if any, at
net asset value through December 31, 1995. The Standard & Poor's 500 Index is
composed of widely held common stocks listed on the New York Stock Exchange,
American Stock Exchange and over-the-counter market. Figures for the index
include reinvestment of dividends. The index is unmanaged and it is not
subject to the same management and trading expenses of a mutual fund. The
performance of the Fund's other classes may be greater or less than the Class
A shares' performance indicated on this chart, depending on whether greater or
lesser sales charges and fees were incurred by shareholders investing in other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
value may be more or less than the original cost. No adjustment has been made
for shareholder tax liability on dividends or capital gains.
6
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) December 31, 1995
- --------------------------------------------------------------------------------
Portfolio Breakdown
[PIE GRAPH APPEARS HERE]
U.S. Government and Agency Obligations - 19.5%
Healthcare & Drugs - 8.8%
Oil Products & Marketing - 7.4%
Retail-Specialty - 6.8%
Chemicals - 5.0%
Furniture/Home Products - 5.6%
Publishing/Printing - 3.8%
Food & Beverage - 3.2%
Electric - 3.0%
Building & Construction - 2.8%
Auto-Related - 2.7%
Iron/Steel - 2.6%
Truckers 2.6%
Transportation 2.4%
Mining/Metal - 2.2%
Repurchase Agreement - 1.1%
Other Common Stock 20.5%
Top Ten Holdings
Percentage of
Company Total Investments
- ----------------------------------------------------------
Federal Home Loan Bank (Bond) 19.5%
Value Health Inc. 2.7
A. Schulman Inc. 2.5
U.S. Healthcare Inc. 2.5
Amerada Hess Corp. 2.3
Worthington Industries Inc. 2.2
Century Telephone Enterprises Inc. 2.1
NCH Corp. 2.1
UST Inc. 2.1
Pennzoil Inc. 1.9
- ----------------------------------------------------------
7
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1995
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 79.4%
Auto Related -- 2.7%
515,000 Stant Corp. $ 5,021,250
345,000 Stewart & Stevenson Services Inc. 8,711,250
- --------------------------------------------------------------------------------
13,732,500
- --------------------------------------------------------------------------------
Building and Construction -- 2.8%
450,000 Cameron Ashley Building Products Inc.* 4,612,500
425,000 Giant Cement Holdings Inc.* 4,887,500
200,000 Louisiana Pacific Corp. 4,850,000
- --------------------------------------------------------------------------------
14,350,000
- --------------------------------------------------------------------------------
Chemicals -- 5.0%
575,000 A. Schulman Inc. 12,937,500
139,600 Crompton & Knowles Corp. 1,849,700
188,000 NCH Corp. 10,857,000
- --------------------------------------------------------------------------------
25,644,200
- --------------------------------------------------------------------------------
Commercial Services -- 0.2%
52,000 Personnel Group of America Inc.* 760,500
- --------------------------------------------------------------------------------
Computer Software -- 1.8%
250,000 Intersolv* 3,218,750
225,000 Santa Cruz Operations Inc.* 1,406,250
350,000 Scitex Corp. 4,768,750
- --------------------------------------------------------------------------------
9,393,750
- --------------------------------------------------------------------------------
Computers -- 1.4%
200,000 Stratus Computer Inc.* 6,925,000
- --------------------------------------------------------------------------------
Cosmetics -- 1.9%
308,800 Helene Curtis Industries 9,765,800
- --------------------------------------------------------------------------------
Electric -- 3.0%
575,000 Cherry Corp., Class A Shares* 5,606,250
10,000 Cherry Corp., Class B Shares* 95,000
382,500 Lincoln Electric Co., Class A Shares 9,180,000
125,000 Quality Semiconductor Inc.* 703,125
- --------------------------------------------------------------------------------
15,584,375
- --------------------------------------------------------------------------------
Environmental Control -- 0.7%
250,000 Safety-Kleen Corp. 3,906,250
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Financial Services -- 0.5%
400,000 Phoenix Duff & Phelps Corp. $ 2,750,000
- --------------------------------------------------------------------------------
Food and Beverage -- 3.2%
315,000 Archer-Daniel-Midland Co. 5,670,000
175,000 Dean Foods Co. 4,812,500
93,000 Golden Enterprises Inc. 755,625
305,000 Lance Inc. 4,994,375
- --------------------------------------------------------------------------------
16,232,500
- --------------------------------------------------------------------------------
Forest Products and Paper -- 1.0%
375,000 Crown Vantage Inc.* 5,343,750
- --------------------------------------------------------------------------------
Furniture/Home Product -- 5.6%
800,000 Ekco Group Inc. 4,700,000
354,700 Ethan Allen Interiors Inc.* 7,227,013
200,000 Forschner Group Inc.* 2,475,000
460,000 Maytag Corp. 9,315,000
325,000 Sunbeam Corp. 4,956,250
- --------------------------------------------------------------------------------
28,673,263
- --------------------------------------------------------------------------------
Healthcare and Drugs -- 8.8%
110,000 Forest Labs Inc., Class A Shares* 4,977,500
205,000 Neuromedical Systems Inc.* 4,125,625
200,000 Perrigo Co.* 2,375,000
730,000 Quantum Health Resources Inc.* 7,163,125
275,000 U.S. Healthcare Inc. 12,787,500
500,000 Value Health Inc.* 13,750,000
- --------------------------------------------------------------------------------
45,178,750
- --------------------------------------------------------------------------------
Iron/Steel -- 2.6%
200,000 Flex Steel Industries Inc. 2,050,000
535,000 Worthington Industries Inc. 11,134,688
- --------------------------------------------------------------------------------
13,184,688
- --------------------------------------------------------------------------------
Manufacturing -- 1.1%
225,000 Duracraft Corp.* 5,653,125
10,000 Lesco Inc. 150,000
- --------------------------------------------------------------------------------
5,803,125
- --------------------------------------------------------------------------------
Manufactured Housing -- 0.7%
180,000 Skyline Corp. 3,735,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Mining/Metals -- 2.2%
300,000 Ashland Coal Inc. $ 6,412,500
150,000 Trinity Industries Inc. 4,725,000
- --------------------------------------------------------------------------------
11,137,500
- --------------------------------------------------------------------------------
Office Equipment and Supplies -- 0.6%
171,300 Hunt Manufacturing Co. 2,976,337
- --------------------------------------------------------------------------------
Oil Products and Marketing -- 7.4%
225,000 Amerada Hess Corp. 11,925,000
260,000 J. Ray McDermott, S.A.* 4,647,500
300,000 Holly Corp. 6,787,500
232,200 Pennzoil Co. 9,810,450
51,500 RPC Inc.* 469,937
356,000 Wiser Oil Co. 4,272,000
- --------------------------------------------------------------------------------
37,912,387
- --------------------------------------------------------------------------------
Publishing/Printing -- 3.8%
125,000 Houghton Mifflin Co. 5,375,000
370,000 McClatchy Newspapers Inc., Class A Shares 8,463,750
1,500 New York Times Co., Class A Shares 44,438
336,400 Torstar Corp., Class B Shares 5,672,850
- --------------------------------------------------------------------------------
19,556,038
- --------------------------------------------------------------------------------
Railroad Equipment -- 1.1%
225,000 Brenco Inc. 2,306,250
480,000 Union Switch & Signal Inc.* 3,120,000
- --------------------------------------------------------------------------------
5,426,250
- --------------------------------------------------------------------------------
Retail-General Merchandising -- 1.4%
30,500 Amway Asia Pacific Ltd. 1,086,562
250,000 Strawbridge & Clothier, Class A Shares 6,000,000
- --------------------------------------------------------------------------------
7,086,562
- --------------------------------------------------------------------------------
Retail-Specialty -- 6.8%
410,000 Armor All Products Corp. 7,431,250
492,000 Bell Microproducts Inc.* 3,567,000
230,000 Blair Corp. 7,273,750
1,000,000 TBC Corp.* 8,625,000
1,020,000 Stride Rite Corp. 7,650,000
- --------------------------------------------------------------------------------
34,547,000
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
10
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Specialized Services -- 1.5%
350,000 Rollins Inc. $ 7,743,750
- --------------------------------------------------------------------------------
Telephone -- 2.1%
342,900 Century Telephone Enterprises Inc. 10,887,075
- --------------------------------------------------------------------------------
Textile -- 2.4%
295,000 Haggar Corp. 5,310,000
255,000 Russell Corp. 7,076,250
- --------------------------------------------------------------------------------
12,386,250
- --------------------------------------------------------------------------------
Tobacco -- 2.1%
320,000 UST Inc. 10,680,000
- --------------------------------------------------------------------------------
Transportation -- 2.4%
250,000 Airborne Freight Corp. 6,656,250
10,000 Offshore Logistics Inc.* 126,250
174,200 Pittston Services Group 5,465,525
- --------------------------------------------------------------------------------
12,248,025
- --------------------------------------------------------------------------------
Truckers -- 2.6%
315,000 Builders Transport Inc.* 2,401,875
450,000 Frozen Foods Express Industries, Inc. 3,937,500
570,000 Yellow Corp.* 7,053,750
- --------------------------------------------------------------------------------
13,393,125
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $393,886,298) 406,943,750
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 19.5%
$100,000,000 Federal Home Loan Bank, 5.750% due 1/2/96
(Cost -- $99,984,028) 99,984,028
================================================================================
REPURCHASE AGREEMENT--1.1%
5,401,000 Chemical Securities, Inc., 5.80% due 1/2/96;
Proceeds at maturity -- $5,404,480;
(Fully collateralized by U.S. Treasury Notes,
6.125% due 5/31/97; Market value -- $5,509,162)
(Cost -- $5,401,000) 5,401,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $499,271,326)++ $512,328,778
================================================================================
* Non-income producing security.
++ Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Schedule of Assets and Liabilities December 31, 1995
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $499,271,326) $512,328,778
Cash 603
Receivable for Fund shares sold 1,701,567
Dividends and interest receivable 356,110
Other assets 198,348
- --------------------------------------------------------------------------------
Total Assets 514,585,406
- --------------------------------------------------------------------------------
LIABILITIES:
Management fees payable 381,070
Payable for securities purchased 343,750
Distribution fees payable 319,386
Payable for Fund shares purchased 256,976
Dividends payable 140,790
Accrued expenses 86,891
- --------------------------------------------------------------------------------
Total Liabilities 1,528,863
- --------------------------------------------------------------------------------
Total Net Assets $513,056,543
================================================================================
NET ASSETS:
Par value of capital shares $ 42,665
Capital paid in excess of par value 510,860,398
Undistributed net investment income 59,723
Accumulated net realized loss on security transactions (10,963,695)
Net unrealized appreciation of investments 13,057,452
- --------------------------------------------------------------------------------
Total Net Assets $513,056,543
================================================================================
Shares Outstanding:
Class A 13,345,672
Class B 24,948,202
Class C 3,536,103
Class Z 834,527
Net Asset Value:
Class A (and redemption price) $12.03
Class B * $12.02
Class C ** $12.03
Class Z (and redemption price) $12.03
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $12.66
================================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if
shares are redeemed less than one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Statement of Operations For the Period Ended December 31, 1995 (a)
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 7,084,425
Dividends 2,222,287
- --------------------------------------------------------------------------------
Total Investment Income 9,306,712
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 2,022,754
Distribution fees (Note 2) 1,786,128
Shareholder and system servicing fees 80,345
Registration fees 50,875
Shareholder communications 35,520
Custody 24,235
Audit and legal 7,215
Directors' fees 5,550
Other 3,515
- --------------------------------------------------------------------------------
Total Expenses 4,016,137
- --------------------------------------------------------------------------------
Net Investment Income 5,290,575
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 16,839,080
Cost of securities sold 27,802,775
- --------------------------------------------------------------------------------
Net Realized Loss (10,963,695)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period --
End of period 13,057,452
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 13,057,452
- --------------------------------------------------------------------------------
Net Gain on Investments 2,093,757
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $7,384,332
================================================================================
(a) For the period from June 30, 1995 (commencement of operations) to December
31, 1995.
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Period Ended December 31, 1995(a)
OPERATIONS:
Net investment income $ 5,290,575
Net realized loss (10,963,695)
Increase in net unrealized appreciation 13,057,452
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 7,384,332
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (5,230,852)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (5,230,852)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 6):
Net proceeds from sale of shares 521,385,582
Net asset value of shares issued
for reinvestment of dividends 5,090,062
Cost of shares reacquired (15,572,581)
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 510,903,063
- --------------------------------------------------------------------------------
Increase in Net Assets 513,056,543
NET ASSETS:
Beginning of period --
- --------------------------------------------------------------------------------
End of period* $513,056,543
================================================================================
* Includes undistributed net investment income of: $59,723
================================================================================
(a) For the period from June 30, 1995 (commencement of operations) to
December 31, 1995.
See Notes to Financial Statements.
14
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Managed Growth Fund ("Portfolio"), a separate investment
fund of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland corporation,
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund consists of the
Portfolio and four other separate investment portfolios: Smith Barney Government
Securities Fund, Smith Barney Special Equities Fund, Smith Barney Investment
Grade Bond Fund and Smith Barney Growth Opportunity Fund. The financial
statements and financial highlights for the other portfolios are presented in
separate annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) securities transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets; securities traded in the over-the-counter market and listed securities
for which no sales price were reported are valued at bid price, or in the
absence of a recent bid price, at the bid equivalent obtained from one or more
of the major market makers; (c) short-term securities that have a maturity of
more than 60 days are valued at prices based on market quotations for securities
of similar type, yield and maturity; (d) short-term investments and securities
maturing within 60 days are valued at cost plus accreted discount, or minus
amortized premium, as applicable; (e) dividend income is recorded on ex-dividend
date and interest income is recorded on the accrual basis; (f) gains or losses
on the sale of securities are calculated using the specific identification
method; (g) direct expenses are charged to each portfolio and each class;
management fees and general portfolio expenses are allocated on the basis of
relative net assets; (h) the Portfolio intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
(i) the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At December 31, 1995, reclassifications were made to the
Portfolio's capital accounts to reflect permanent book/tax differences and
income and gains available for distributions under income tax regulations. Net
investment income, net realized gains and net assets
15
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
were not affect by this change; and (j) estimates and assumptions are required
to be made regarding assets, liabilities and changes in net assets resulting
from operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ from these amounts.
2. Management Agreement and Other Transactions
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment manager to the Fund. The
Portfolio pays SBMFM a management fee calculated at an annual rate of 0.85% of
the average daily net assets. This fee is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
period ended December 31, 1995, SB received brokerage commissions of $140,970
and sales charges of approximately $5.4 million on sales of the Portfolio's
Class A shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase and declines thereafter by 1.00% per year until no CDSC is incurred.
Class C shares have a 1.00% CDSC, which applies if redemption occurs within the
first year of purchase. For the period ended December 31, 1995, CDSCs paid to SB
were:
Class B Class C
========================================================
CDSCs $174,000 $10,000
========================================================
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to Class A, B and C shares calculated at the annual rate of 0.25% of the
average daily net assets for each respective class. The Portfolio also pays a
distribution fee with respect to Class B and C shares calculated at the annual
rate of 0.75% of the average daily net assets of each class, respectively. For
the period ended December 31, 1995, total Distribution Plan fees incurred were:
Class A Class B Class C
========================================================
Distribution Plan Fees $189,955 $1,407,495 $188,678
========================================================
All officers and one Director of the Fund are employees of SB.
16
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
3. Investments
During the period ended December 31, 1995, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
========================================================
Purchases $421,689,073
- --------------------------------------------------------
Sales 16,839,080
========================================================
At December 31, 1995, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
========================================================
Gross unrealized appreciation $31,289,997
Gross unrealized depreciation (18,232,545)
- --------------------------------------------------------
Net unrealized appreciation $13,057,452
========================================================
4. Capital Loss Carryforward
At December 31, 1995, the Portfolio had, for Federal tax purposes,
approximately $10,877,000 of unused capital loss carryforwards available to
offset future capital gains through December 31, 2003. To the extent that these
carryforward losses are used to offset capital gains, it is probable that the
gains so offset will not be distributed.
5. Repurchase Agreements
The Portfolio purchases (and its custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day), at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
6. Capital Shares
At December 31, 1995, the Fund had ten billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
17
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At December 31, 1995, total paid-in capital amounted to the following for
each class:
Class A Class B Class C Class Z
===========================================================================
Total Paid-in Capital $159,900,512 $298,858,374 $42,327,076 $9,817,101
===========================================================================
Transactions in shares of each class were as follows:
Period Ended
December 31, 1995
-----------------------------
Shares Amount
=============================================================================
Class A*
Shares sold 13,774,175 $164,959,840
Shares issued on reinvestment 162,519 1,955,093
Shares redeemed (591,022) (7,014,421)
- -----------------------------------------------------------------------------
Net Increase 13,345,672 $159,900,512
=============================================================================
Class B*
Shares sold 25,291,425 $302,851,281
Shares issued on reinvestment 219,534 2,640,980
Shares redeemed (562,757) (6,633,887)
- -----------------------------------------------------------------------------
Net Increase 24,948,202 $298,858,374
=============================================================================
Class C*
Shares sold 3,667,471 $ 43,872,257
Shares issued on reinvestment 31,113 374,292
Shares redeemed (162,481) (1,919,473)
- -----------------------------------------------------------------------------
Net Increase 3,536,103 $ 42,327,076
=============================================================================
Class Z**
Shares sold 824,984 $ 9,702,204
Shares issued on reinvestment 9,950 119,697
Shares redeemed (407) (4,800)
- -----------------------------------------------------------------------------
Net Increase 834,527 $ 9,817,101
=============================================================================
* Transactions are for the period from June 30, 1995 (inception date) to
December 31, 1995.
** Transactions are for the period from October 2, 1995 (inception date) to
December 31, 1995.
18
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
Class A(1) Class B(1) Class C(1) Class Z(2)
======================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $12.00 $12.00 $12.00 $11.83
- --------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.16 0.11 0.11 0.04
Net realized and unrealized gain 0.02 0.02 0.03 0.32
- --------------------------------------------------------------------------------------
Total Income From Operations 0.18 0.13 0.14 0.36
- --------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.15) (0.11) (0.11) (0.16)
- --------------------------------------------------------------------------------------
Total Distributions (0.15) (0.11) (0.11) (0.16)
- --------------------------------------------------------------------------------------
Net Asset Value, End of Period $12.03 $12.02 $12.03 $12.03
- --------------------------------------------------------------------------------------
Total Return++ 1.53% 1.16% 1.16% 3.06%
- --------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $160,487 $300,000 $42,530 $10,040
- --------------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 1.19% 1.94% 1.91% 0.90%
Net investment income 2.74 1.99 2.02 2.30
- --------------------------------------------------------------------------------------
Portfolio Turnover Rate 6% 6% 6% 6%
======================================================================================
Average commissions paid on
equity security transactions $0.06 $0.06 $0.06 $0.06
======================================================================================
</TABLE>
(1) For the period from June 30, 1995 (inception date) to December 31, 1995.
(2) For the period from October 2, 1995 (inception date) to December 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
19
<PAGE>
Smith Barney Managed Growth Fund
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Smith Barney Investment Funds Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Barney Managed Growth Fund
of Smith Barney Investment Funds Inc. as of December 31, 1995, the related
statements of operations, changes in net assets and financial highlights for the
period from June 30, 1995 (commencement of operations) to December 31, 1995.
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 audit.
We conducted our audit 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, 1995, by correspondence with the custodian. As to securities
purchased but not received, we performed other appropriate auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Smith Barney Managed Growth Fund of Smith Barney Investment Funds Inc. as of
December 31, 1995, the results of its operations, changes in its net assets and
its financial highlights for the period from June 30, 1995 to December 31, 1995,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 16, 1996
20
<PAGE>
Smith Barney
Managed Growth
Fund
DIRECTORS
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Allan R. Johnson
Frank G. Hubbard
Heath B. McLendon, Chairman
Ken Miller
John F. White
OFFICERS
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Doug Johnson
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
- ------------
A Member of TravelersGroup [LOGO]
INVESTMENT ADVISER
Smith Barney Mutual Funds
Management Inc.
DISTRIBUTOR
Smith Barney Inc.
CUSTODIAN
PNC Bank
SHAREHOLDER
SERVICING AGENT
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Managed Growth Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by a current Prospectus for
the Fund, which contains information concerning the Fund's investment policies
and expenses as well as other pertinent information.
SMITH BARNEY
MANAGED GROWTH
FUND
388 Greenwich Street
New York, New York 10013
FD01070 2/96
<PAGE>
ANNUAL REPORT
1995
1995
1995
1995
1995
[GRAPHIC APPEARS HERE]
Smith Barney
Growth
Opportunity
Fund
- -----------------------------
December 31, 1995
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney Growth Opportunity Fund
DEAR SHAREHOLDER:
We would like to extend a warm welcome to you as a shareholder in Smith Barney
Growth Opportunity Fund. We believe an important part of serving your investment
needs is keeping you informed about the Fund. We are therefore pleased to
provide the first annual report and audited financial statements for the period
ended December 31, 1995. In this report, we outline our investment philosophy
and current portfolio strategy. A more detailed summary of performance and
current holdings can be found in the appropriate sections that follow in the
annual report.
FUND'S INVESTMENT APPROACH
Smith Barney Growth Opportunity Fund employs a varied and eclectic investment
approach that combines the philosophy of a Warren Buffett (who currently owns
roughly 30 stocks of outstanding companies) and a Peter Lynch (who owned 1,500
stocks and believed the universe of investment opportunities is more expansive).
As of December 31, 1995, the Fund owned roughly 150 stocks spread across a
number of companies and industries and the size of its investment universe lies
somewhere in between Buffett's and Lynch's. Both of these renowned investors
said, "never time the market." Instead, Buffet and Lynch advise you look for
good companies at good prices and own them for the long term.
Smith Barney Growth Opportunity Fund does not make investment decisions based on
market timing or predictions about the market. The Fund takes an opportunistic
approach utilizing the strengths of different traditional disciplines such as
value, growth, large capitalization stock and small capitalization stock
investing. The Fund's investment management team are long-term investors who
emphasize strong, hands-on research. They visit hundreds of companies each year
and meet regularly with their managements to understand a company's business and
industry, identify outstanding managements and target promising long-term
investment opportunities. Because of our eclectic investment approach, Smith
Barney Growth Opportunity Fund defies easy categorization.
Although we never predict the market, we still monitor market conditions closely
to look for warning signs that may lead us to make changes in the portfolio. For
example, if interest rates are going down, we invest in financial company stocks
because the cost of money is their most important variable. If the economy is
doing well and interest rates are rising, we would invest in
1
<PAGE>
cyclical companies whose fortunes are tied to the economy. Conversely, when
interest rates are going down, we would generally not invest in cyclical
companies.
Another distinguishing feature of the Fund's investment approach is that it
looks for long-term investment opportunities based on themes versus how much is
invested in a particular sector such as technology or consumer. Smith Barney
Growth Opportunity Fund invests in many companies where managements own a
significant amount of stock. In addition, the Fund looks for companies that may
be beneficiaries of a significant change in governmental regulations.
A LOOK BACK AT 1995
We were extremely bullish in 1995 for a number of reasons. This was the third-
year of the Presidential four-year term cycle and that has historically been the
best-performing year for the stock market. However, the most important reason
why we were bullish in 1995 was declining interest rates. The Federal Reserve
started to cut interest rates in February 1995 and that was a very strong buy
signal for us. The year 1995 ended on a positive note as the Federal Reserve
again lowered short-term rates at their last meeting held in December 1995.
Because of slower economic growth and fairly benign inflation, 1995 was one of
the best years ever for both the equity and fixed income markets. The strong
performance of the stock market had no effect on the Fund's eclectic investment
strategy.
MARKET OUTLOOK
In our view, the current budget disagreement in Washington, D.C. is not really a
relevant factor for the stock market. As long as the economy does not enter a
significant recession, we remain bullish on the market. In some ways, our view
is not as conventional as many other investment managers.
Yet, we think the most important factor influencing the economy is interest
rates. As long as interest rates remain at their current levels, the economy
should grow slowly. However, because of the Presidential election later this
year, we believe the economy will improve and interest rates may rise
moderately.
PORTFOLIO UPDATE
Smith Barney Growth Opportunity Fund owns three cable companies because we
believe the telecommunications bill, which is favorable to their interests, will
eventually pass. In our view, what is driving these cable stocks is not the
condition of the market or economy, but proposed changes in governmental
regulation.
2
<PAGE>
Over the coming year, we will look more closely at cyclical companies because we
believe we have seen the last of declining interest rates. During the period
covered by this report, the Fund's largest areas of investment were:
1) Media industry
2) Restructuring corporations (i.e., cyclical or industrial companies where
there is the likelihood of a major corporate event taking place such as the
sales of a division)
3) Medical industry
4) Small-capitalization growth stocks
5) Financial services organizations
At this time, we would like to thank you for your investment in Smith Barney
Growth Opportunity Fund and appreciate your continued support.
Sincerely,
/s/ Heath B. McLendon /s/ Harvey Eisen
Heath B. McLendon Harvey Eisen
Chairman and Senior Vice President
Chief Executive Officer Investments
January 15, 1996
3
<PAGE>
Smith Barney Growth Opportunity Fund
<TABLE>
<CAPTION>
Historical Performance -- Class A Shares
- ----------------------------------------
Net Asset Value
--------------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns/(1)/
<S> <C> <C> <C> <C> <C>
Inception* - 12/31/95 $13.36 $14.31 $0.02 $0.93 14.61%+
<CAPTION>
Historical Performance -- Class B Shares
- ----------------------------------------
Net Asset Value
--------------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns/(1)/
<S> <C> <C> <C> <C> <C>
Inception* - 12/31/95 $13.36 $14.27 $0.00 $0.93 14.15%+
<CAPTION>
Historical Performance -- Class C Shares
- ----------------------------------------
Net Asset Value
--------------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns/(1)/
<S> <C> <C> <C> <C> <C>
Inception* - 12/31/95 $14.05 $14.29 $0.00 $0.93 8.69%+
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
<CAPTION>
Average Annual Total Return++
- ----------------------------------------
Without Sales Charge /(1)/
------------------------------------
Class A Class B Class C
<S> <C> <C> <C>
Six Months Ended 12/31/95 14.61% 14.15% N/A
Year Ended 12/31/95 30.92 29.90 N/A
Inception* through 12/31/95 18.33 17.84 8.69%
With Sales Charge /(2)/
------------------------------------
Class A Class B Class C
<S> <C> <C> <C>
Six Months Ended 12/31/95 8.91% 9.15% N/A
Year Ended 12/31/95 24.36 24.90 N/A
Inception* through 12/31/95 14.75 15.67 7.69%
</TABLE>
4
<PAGE>
Smith Barney Growth Opportunity Fund
Cumulative Total Return++
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge /(1)/
--------------------------
<S> <C>
Class A (May 3, 1994 through 12/31/95) 32.36%
Class B (May 3, 1994 through 12/31/95) 31.44
Class C (Inception* through 12/31/95) 8.69
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charge with respect to Class A shares or the applicable contingent
deferred sales charges ("CDSC") with respect to Class B and C shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A shares reflect the deduction
of the maximum initial sales charge of 5.00%; and Class B shares reflect
the deduction of a 5.00% CDSC, which applies if shares are redeemed less
than one year from initial purchase and declines thereafter by 1.00% per
year until no CDSC is incurred. Class C shares reflect the deduction of a
1.00% CDSC, which applies if shares are redeemed within the first year of
purchase.
* Inception date for Class A and B shares is July 3, 1995. Inception date for
Class C shares is August 8, 1995.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ Performance calculations include the historical return information related
to the Common Sense II Aggressive Opportunity Fund of the Common Sense
Trust for the period from May 3, 1994 through June 30, 1995.
5
<PAGE>
Smith Barney Growth Opportunity Fund
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares of
the Smith Barney Growth Opportunity Fund
vs. Russell 2000 Index+
- --------------------------------------------------------------------------------
May 1994 -- December 1995
[CHART APPEARS HERE]
+Hypothetical illustration of $10,000 invested in Class A shares on May 3, 1994
(inception of Common Sense II Aggressive Opportunity Fund of the Common Sense
Trust ("Common Sense")), assuming deduction of the maximum 5.00% sales charge
at the time of investment and reinvestment of dividends and capital gains, if
any, at net asset value through December 31, 1995. (Performance calculations
include the historical return information related to Common Sense for the
period from May 3, 1994 through June 30, 1995). The Russell 2000 Index is
comprised of 2,000 of the largest capitalized U.S. domiciled companies whose
common stock is traded on either the New York, American or NASDAQ stock
exchanges. The index is unmanaged and it is not subject to the same management
and trading expenses of a mutual fund. The performance of the Fund's other
classes may be greater or less than the Class A shares' performance indicated
on this chart, depending on whether greater or lesser sales charges and fees
were incurred by shareholders investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
value may be more or less than the original cost. No adjustment has been made
for shareholder tax liability on dividends or capital gains.
6
<PAGE>
Smith Barney Growth Opportunity Fund
Portfolio Highlights (unaudited) December 31, 1995
- --------------------------------------------------------------------------------
Portfolio Breakdown
[CHART APPEARS HERE]
Financial Services 14.2%
Broadcast Radio & Television 6.0%
Pharmaceuticals 5.7%
Telecommunications 5.6%
Medical 4.3%
Electrical Equipment 4.1%
Technology 4.5%
Electronics 3.5%
Machinery 3.3%
Commercial Service 3.2%
Repurchase Agreement 11.9%
Other Common Stocks, Preferred Convertible Stock and
Convertible Bonds 33.7%
Top Ten Common Stock Holdings
Percentage of
Total Investments
-----------------
Thermo Electron Corp. 3.3%
Ideon Group Inc. 2.8
Minnesota Mining & Manufacturing Co. 2.4
General Electric Co. 2.1
Data Broadcasting Corp. 1.8
American Stores Co. 1.7
Honeywell Inc. 1.7
Allergan Inc. 1.6
Foremost Corporation of American Co. 1.5
American International Group Inc. 1.5
7
<PAGE>
Smith Barney Growth Opportunity Fund
Schedule of Investments December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
===================================================================
<C> <S> <C>
COMMON STOCKS - 86.9%
Advertising -- 0.9%
31,000 Advo Inc. $ 806,000
----------
Aerospace Defense -- 1.3%
7,000 Alliant Techsystems Inc.* 354,375
7,500 General Motors Corp., Class H Shares 368,438
60,000 Power Control Technologies Inc.* 487,500
----------
1,210,313
----------
Auto & Trucks -- 0.5%
18,000 Ford Motor Co. 522,000
----------
Auto Parts Replacement -- 0.3%
15,000 Federal Mogul Corp. 294,375
----------
Beverages -- 0.1%
2,500 Glacier Water Services Inc.* 46,563
----------
Biotechnology -- 0.3%
25,500 Cell Genesys Inc.* 255,000
7,500 Neurex Corp.* 68,438
----------
323,438
----------
Broadcast Radio and Television -- 6.0%
23,500 Cablevision Systems Corp.* 1,274,875
126,000 Home Shopping Network Inc.* 1,134,000
46,000 Jacor Communications Inc.* 805,000
25,000 New World Communications Group Inc.* 437,500
60,000 Tele-Communications Inc. 1,192,500
15,000 Tele-Communications Liberty Media, 403,125
Class A Shares*
25,000 U.S. West Media Group Inc.* 475,000
---------
5,722,000
---------
Chemicals -- 1.6%
16,000 Olin Corp. 1,188,000
16,500 Scotts Co.* 327,938
---------
1,515,938
---------
Commercial Services -- 3.2%
260,000 Ideon Group Inc. 2,632,500
25,000 Sotheby's Holdings Inc. 356,250
5,000 Vallen Corp.* 98,125
---------
3,086,875
---------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Smith Barney Growth Opportunity Fund
Schedule of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
===================================================================
<C> <S> <C>
Computers -- 2.9%
12,500 Apple Computer Inc. $ 398,437
9,500 Auspex Systems Inc.* 173,375
15,000 Crosscomm Corp.* 170,625
22,500 Key Tronic Corp.* 188,438
12,000 Microkey Communications 26,394
Systems Inc.*
70,000 Multi-Corp Inc.* 301,875
5,200 Phoenix Technologies Ltd., Co.* 81,900
25,000 Pyxis Corp.* 365,625
10,000 Stac Inc.* 143,750
10,000 Standard Microsystems Co.* 165,000
31,290 Storage Technology Corp.* 747,048
----------
2,762,467
----------
Computer Software -- 0.3%
5,000 Banyan Systems Inc.* 51,250
7,500 Centennial Technologies Inc.* 141,562
6,000 Interleaf Inc.* 60,750
----------
253,562
----------
Cosmetics -- 0.4%
17,500 Herbalife International Inc. 150,938
35,000 Playtex Products Inc.* 262,500
----------
413,438
----------
Distribution/Wholesale -- 0.1%
18,000 Handleman Co. 103,500
----------
Electrical Equipment -- 4.1%
25,000 American Superconductor Corp.* 362,500
8,500 Anixter International Inc.* 158,312
32,500 Honeywell Inc. 1,580,312
6,000 Premier Industrial Corp. 147,000
12,500 Raychem Corp. 710,938
55,000 Westinghouse Electric Corp. 907,500
----------
3,866,562
----------
Electronics -- 3.5%
150,000 Ampex Corp.* 600,000
35,000 Chyron Corp.* 96,250
4,000 Franklin Electric Publishers Inc.* 118,000
27,500 General Electric Co. 1,980,000
50,400 Kollmorgen Corp. 554,400
----------
3,348,650
----------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
Smith Barney Growth Opportunity Fund
Schedule of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
====================================================================
<C> <S> <C>
Energy -- 1.7%
48,500 Global Marine Inc.* $ 424,375
18,500 Lufkin Industries Inc. 418,563
13,000 Triton Energy Corp. 745,875
-----------
1,588,813
-----------
Entertainment -- 2.9%
71,500 American Classic Voyager Co. 777,562
47,500 Cinar Films Inc.* 718,436
12,500 Discovery Zone Inc.* 39,062
31,000 Gaylord Entertainment Co. 860,250
12,500 Hollywood Park Inc.* 125,781
25,000 National Gaming Corp.* 296,875
-----------
2,817,966
-----------
Financial Services -- 14.2%
8,000 Alexander & Alexander Services Inc. 152,000
15,000 American International Group Inc. 1,387,500
20,000 Banca Quadrum, S.A.* 102,500
20,000 Capital One Financial Corp. 477,500
37,200 Capsure Holdings Corp.* 655,650
137,500 Data Broadcasting Corp. 1,701,562
9,000 Dauphin Deposit Corp. 258,750
25,000 First Security Corp. 962,500
27,500 Foremost Corporation of America Co. 1,395,624
5,000 General Reinsurance Corp. 775,000
32,500 Long Island Bancorp Inc. 857,188
12,500 Oppenheimer Capital, L.P. 348,438
5,000 Paul Revere Corp. 103,750
18,500 Roosevelt Financial Group Inc. 358,438
22,500 Salomon Inc. 798,750
15,000 Student Loan Marketing Association 988,125
22,500 TIG Holdings Inc. 641,250
22,500 Union Planters Corp. 717,188
20,000 United Asset Management Corp. 767,500
-----------
13,449,213
-----------
Food and Beverage -- 2.3%
20,000 Dole Food Co. 700,000
2,500 General Mills Inc. 144,375
30,000 Quality Food Centers Inc. 660,000
20,000 Seagram Company, Ltd. 692,500
-----------
2,196,875
-----------
See Notes to Financial Statements.
</TABLE>
10
<PAGE>
Smith Barney Growth Opportunity Fund
Schedule of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
====================================================================
<C> <S> <C>
Furniture -- 0.5%
23,500 Heilig Meyers Co. $ 431,813
----------
Hotels -- 0.3%
5,000 Hilton Hotels Corp. 307,500
----------
Insurance -- 0.1%
15,000 Reliance Group Holdings Inc. 129,375
----------
Leisure Time -- 1.1%
77,500 Bell Sports Corp.* 620,000
15,000 Harley Davidson Inc. 431,250
----------
1,051,250
----------
Machinery -- 3.3%
60,000 Thermo Electron Corp. 3,120,000
----------
Manufactured Consumer and Industrial Products -- 0.1%
5,000 Leggett & Platt Inc. 121,250
----------
Media -- 0.5%
32,500 Media Fund Inc. 483,438
----------
Medical -- 4.3%
69,500 Amsco International Inc.* 1,033,812
34,000 Beverly Enterprises Inc.* 361,250
28,500 Comram Healthcare Corp.* 124,687
5,000 Dentsply International Inc. 200,000
45,000 North American Biologicals Inc.* 483,750
87,500 Quidel Corp.* 623,438
23,698 Ramsay Managed Care Inc.* 47,396
10,000 Thermo Cardiosystems Inc.* 772,500
12,500 Vivus Inc.* 390,625
----------
4,037,458
----------
Mining -- 0.3%
325,000 Campbell Resources Inc.* 325,000
----------
Oil/Gas -- 1.5%
12,500 Amerada Hess Corp. 662,500
10,500 Box Energy Corp.* 90,563
25,000 Parker Drilling Co.* 153,125
52,800 Plains Resources Inc.* 475,200
1,381,388
----------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
Smith Barney Growth Opportunity Fund
Schedule of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
====================================================================
Oil Energy Services -- 0.1%
<S> <C> <C>
7,000 Pool Energy Services Co.* $ 66,500
----------
Pharmaceuticals -- 5.7%
315 Allergan Ligand Retinoid Therapeutics Inc.* 5,591
47,000 Allergan Inc. 1,527,500
8,500 Biochem Pharma, Inc.* 341,063
45,000 FoxMeyer Health Corp.* 1,203,750
50,000 Imclone Systems Inc.* 381,250
36,500 Ivax Corp. 1,040,250
35,000 Perrigo Co.* 415,624
10,000 Teva Pharmaceutical Industries Ltd. 463,750
5,378,778
----------
Publishing -- 0.9%
50,000 Big Flower Press Holdings Inc.* 775,000
4,000 Western Publishing Group Inc.* 31,500
806,500
----------
Raw and Intermediate Materials -- 1.0%
34,000 Addington Resources Inc.* 497,250
36,500 Giant Group Ltd.* 333,063
15,000 Repap Enterprises Inc.* 66,563
896,876
----------
Real Estate -- 0.1%
6,666 Castle & Cooke Inc.* 111,667
----------
Real Estate Investment Trust -- 2.5%
50,000 Manufactured Home Communities Inc. 875,000
25,000 Prime Residential Inc. 453,125
22,000 Real Estate Investment Trust of California 437,250
20,000 Starwood Lodging Trust 595,000
2,360,375
----------
Restaurants -- 0.9%
198,700 Sizzler International Inc. 844,475
----------
Retail -- 2.6%
40,200 Arbor Drugs Inc. 844,200
22,100 Intertan Inc.* 160,225
35,000 Lillian Vernon Corp. 468,124
7,500 Neiman Marcus Group Inc. 176,250
----------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
Smith Barney Growth Opportunity Fund
Schedule of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
====================================================================
<C> <S> <C>
Retail -- 2.6% (continued)
48,800 Right Start Inc.* $ 240,950
56,500 Shopko Stores Inc. 2,525,374
----------
Retail Grocery -- 1.7%
60,000 American Stores Co. 1,605,000
----------
Technology -- 4.5%
15,000 Eastman Kodak Co. 1,005,000
35,000 Minnesota Mining & Manufacturing Co. 2,318,750
34,500 Pall Corp. 927,188
4,250,938
----------
Telecommunications -- 5.6%
71,000 Antec Corp.* 1,278,000
4,000 Cellular Communications International Inc.* 171,000
34,000 Comment Cellular Inc.* 981,750
49,000 Generak DataCom Industries Inc.* 839,125
18,500 MCI Communications Corp. 483,313
6,500 Newbridge Networks Corp.* 268,938
15,000 Performance Systems International Inc.* 343,125
14,000 Symmetricom Inc.* 192,500
9,000 Tandycrafts Inc.* 70,875
22,500 U.S. Inc.* 503,438
40,000 VSI Enterprises Inc.* 152,500
5,284,564
----------
Telecommunications Equipment -- 0.0%
4,100 Memotec Communications Inc.* 35,697
----------
Textiles -- 0.3%
14,000 Westpoint Stevens Inc.* 280,875
----------
Tobacco -- 0.3%
15,000 Mafco Consolidated Group Inc.* 270,000
----------
Transportation -- 0.6%
12,500 Canadian Pacific Ltd. 226,562
35,000 Worldcorp Inc.* 350,000
576,562
----------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
Smith Barney Growth Opportunity Fund
Schedule of Investments (continued) December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
====================================================================
<C> <S> <C>
Utilities -- 1.5%
12,500 Sprint Corp. $ 498,438
25,000 US West Communications Group Inc. 893,750
1,392,188
-----------
TOTAL COMMON STOCKS
(Cost -- $70,877,927) 82,403,389
===========
CONVERTIBLE PREFERRED STOCK -- 0.1%
Entertainment -- 0.1%
7,500 Hollywood Park Inc., Convertible 7.00%
(Cost -- $76,875) 78,750
-----------
WARRANT -- 0.0%
Publishing -- 0.0%
6,000 Viacom Inc., Expires 7/7/97
(Cost -- $26,190) 17,250
-----------
<CAPTION>
FACE
AMOUNT SECURITY VALUE
====================================================================
<C> <S> <C>
CONVERTIBLE BOND -- 1.1%
Transportation -- 1.1%
$1,000,000 Worldcorp Inc., 7.00% due 5/15/04
(Cost -- $790,357) 1,010,000
-----------
TOTAL COMMON STOCKS, CONVERTIBLE
PREFERRED STOCK, WARRANT
AND COVERTIBLE BOND
(Cost -- $71,771,349) 83,509,389
===========
REPURCHASE AGREEMENT -- 11.9%
11,365,000 Citibank, 5.796% due 1/2/96; Proceeds at
maturity -- $11,372,319; (Fully collater-
alized by U.S. Treasury Notes, 5.50% due
11/15/98; Market value -- $11,592,866)
(Cost -- $11,365,000) 11,365,000
-----------
TOTAL INVESTMENTS -- 100%
(Cost -- $83,136,349)++ $94,874,389
===========
</TABLE>
* Non-income producing security.
++ Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
14
<PAGE>
Smith Barney Growrth Opportunity Fund
Statement of Assets and Liabilities December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at value (Cost -- $71,771,349) $83,509,389
Repurchase agreement (Cost -- $11,365,000) 11,365,000
Receivable for Fund shares sold 47,336
Receivable for securities sold 417,236
Dividends and interest receivable 94,894
Other assets 1,004
-----------
Total Assets 95,434,859
-----------
LIABILITIES:
Payable for securities purchased 4,153,411
Due to bank 416,404
Distribution fees payable 200,085
Management fees payable 76,134
Payable for Fund shares purchased 26,022
Accrued expenses and other liabilities 96,396
-----------
Total Liabilities 4,968,452
-----------
Total Net Assets $90,466,407
===========
NET ASSETS:
Par value of capital shares $ 6,329
Capital paid in excess of par value 78,943,280
Overdistributed net investment income (564)
Overdistribution of net realized gains (220,678)
Net unrealized appreciation of investments 11,738,040
-----------
Total Net Assets $90,466,407
===========
Shares Outstanding:
Class A 4,032,164
-----------
Class B 2,290,346
-----------
Class C 6,160
-----------
Net Asset Value:
Class A (and redemption price) $14.31
-----------
Class B * $14.27
-----------
Class C ** $14.29
-----------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $15.06
-----------
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed less than one year from initial purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
15
<PAGE>
Smith Barney Growth Opportunity Fund
Statement of Operations For the Period Ended December 31, 1995(a)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INVESTMENT INCOME:
<S> <C>
Interest $ 275,508
Dividends 578,032
Less: Foreign withholding tax (1,900)
-----------
Total Investment Income 851,640
-----------
EXPENSES:
Management fees (Note 2) 390,902
Distribution fees (Note 2) 200,085
Shareholder and system servicing fees 55,921
Shareholder communications 45,755
Registration fees 30,503
Directors' fees 25,083
Audit and legal 15,250
Custody 5,418
Other 2,034
-----------
Total Expenses 770,951
-----------
Net Investment Income 80,689
-----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 37,197,640
Cost of securities sold 32,152,324
-----------
Net Realized Gain 5,045,316
Increase in Net Unrealized Appreciation (Note 6) 5,383,267
-----------
Net Gain on Investments 10,428,583
-----------
Increase in Net Assets From Operations $10,509,272
-----------
</TABLE>
(a )For the period from July 3, 1995 (commencement of operations) to
December 31, 1995.
See Notes to Financial Statements.
16
<PAGE>
Smith Barney Growth Opportunity Fund
Statement of Change in Net Assets
- --------------------------------------------------------------------------------
For the Period Ended December 31,1995(a)
<TABLE>
<CAPTION>
OPERATIONS:
<S> <C>
Net investment income $ 80,689
Net realized gain 5,045,316
Increase in net unrealized appreciation 5,383,267
-----------
Increase in Net Assets From Operations 10,509,272
-----------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (81,128)
Net realized gains (5,272,265)
-----------
Decrease in Net Assets From
Distributions to Shareholders (5,353,393)
-----------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 13,173,276
Net asset value of shares issued in connection
with the transfer of net assets of the Common
Sense II Aggressive Opportunity Fund 68,038,812
(Note 6)
Net asset value of shares issued for 5,353,317
reinvestment of dividends
Cost of shares reacquired (1,254,877)
-----------
Increase in Net Assets From
Fund Share Transactions 85,310,528
-----------
Increase in Net Assets 90,466,407
NET ASSETS:
Beginning of period-- --
-----------
End of period* $90,466,407
===========
* Includes overdistributed net $ (564)
investment income of: -----------
</TABLE>
(a) For the period from July 3, 1995 (commencement of operations) to
December 31, 1995.
See Notes to Financial Statements.
17
<PAGE>
Smith Barney Growth Opportunity Fund
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Growth Opportunity Fund ("Portfolio"), a separate
investment fund of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company. The Fund consists of
the Portfolio and four other separate investment portfolios: Smith Barney
Investment Grade Bond Fund, Smith Barney Special Equities Fund, Smith Barney
Managed Growth Fund and Smith Barney Government Securities Fund. The financial
statements and financial highlights for the other portfolios are presented in
separate annual reports.
The significant accounting policies consistently followed by the Portfolio
are: (a) securities transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets; securities traded in the over-the-counter market and listed securities
for which no sales price were reported are valued at bid price, or in the
absence of a recent bid price, at the bid equivalent obtained from one or more
of the major market makers; (c) short-term securities that have a maturity of
more than 60 days are valued at prices based on market quotations for securities
of similar type, yield and maturity; (d) short-term investments and securities
maturing within 60 days are valued at cost plus accreted discount, or minus
amortized premium, which approximates market value; (e) dividend income is
recorded on ex-dividend date and interest income is recorded on the accrual
basis; (f) gains or losses on the sale of securities are calculated using the
specific identification method; (g) the accounting records are maintained in
U.S. dollars. All assets and liabilities denominated in foreign currencies are
translated into U.S. dollars on the date of valuation. Purchases and sales of
securities and income and expenses are translated at the rate of exchange quoted
on the respective date that such transactions are recorded. Differences between
income and expense amounts recorded and collected or paid are adjusted when
reported by the custodian bank; (h) direct expenses are charged to each class;
management fees and general portfolio expenses are allocated on the basis of
relative net assets; (i) the Portfolio intends to comply with the applicable
provisions of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal
18
<PAGE>
Smith Barney Growth Opportunity Fund
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
income and excise taxes; (j) the character of income and gains to be distributed
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At December 31, 1995,
reclassifications are made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. Accordingly, a portion of accumulated net investment
income amounting to $6,146 has been reclassified to paid-in capital. Net
investment income, net realized gains and net assets were not affected by this
change; and (k) estimates and assumptions are required to be made regarding
assets, liabilities and changes in net assets resulting from operations when
financial statements are prepared. Changes in the economic environment,
financial markets and any other parameters used in determining these estimates
could cause actual results to differ from these amounts.
2. Management Agreement and Other Transactions
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment manager of the Fund. The
Portfolio pays SBMFM a management fee calculated at an annual rate of 1.00% of
the average daily net assets. This fee is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
period ended December 31, 1995, SB received brokerage commissions of $650 and
sales charges of approximately $18,000 on sales of the Portfolio's Class A
shares.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs less than one year from initial
purchase and declines thereafter by 1.00% per year until no CDSC is incurred.
Class C shares have a 1.00% CDSC, which applies if redemption occurs within the
first year of purchase. For the period ended December 31, 1995, there were no
CDSCs paid to SB.
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to Class A, B and C shares calculated at the annual rate of 0.25% of the
average daily net assets for each respective class. The Portfolio also pays a
service fee with respect to Class B and C shares calculated at the annual rate
of 0.75% of the average daily net assets of each class,
19
<PAGE>
Smith Barney Growth Opportunity Fund
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
respectively. For the period ended December 31, 1995, total Distribution Plan
fees incurred by the Portfolio were:
<TABLE>
<CAPTION>
Class A Class B Class C
------- -------- -------
<S> <C> <C> <C>
Distribution Plan Fees $63,606 $136,385 $94
</TABLE>
All officers and one Director of the Fund are employees of SB.
3. Investments
During the period ended December 31, 1995, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<S> <C>
Purchases $49,588,720
Sales 37,197,640
</TABLE>
At December 31, 1995, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were approximately
as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross unrealized appreciation $14,292,630
Gross unrealized depreciation (2,554,590)
-----------
Net unrealized appreciation $11,738,040
===========
</TABLE>
4. Repurchase Agreements
The Portfolio purchases (and its custodian takes possession of) U.S.
Government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day), at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. Capital Shares
At December 31, 1995, the Fund had ten billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolio has the ability
to issue multiple classes of shares. Each share of a class represents an
identical interest and has the same rights, except that each class bears certain
direct expenses, including those specifically related to the distribution of its
shares.
20
<PAGE>
Smith Barney Growth Opportunity Fund
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At December 31, 1995, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Total Paid-in Capital $49,980,325 $28,883,094 $86,190
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Period Ended
December 31, 1995
-----------------
Shares Amount
------ ------
<S> <C> <C>
Class A*
Shares sold 461,030 $ 6,505,850
Net asset value of shares issued in connection
with the transfer of net assets of the Common
Sense II Aggressive Opportunity Fund (Note 6) 3,386,185 45,262,249
Shares issued on reinvestment 255,366 3,469,508
Shares redeemed (70,417) (992,400)
--------- -----------
Net Increase 4,032,164 $54,245,207
========= ===========
Class B*
Shares sold 465,703 $ 6,582,175
Net asset value of shares issued in connection
with the transfer of net assets of the Common
Sense II Aggressive Opportunity Fund (Note 6) 1,704,119 22,776,563
Shares issued on reinvestment 139,162 1,882,868
Shares redeemed (18,638) (262,477)
--------- -----------
Net Increase 2,290,346 $30,979,129
========= ===========
Class C**
Shares sold 6,090 $ 85,251
Shares issued on reinvestment 70 941
Shares redeemed -- --
--------- -----------
Net Increase 6,160 $ 86,192
========= ===========
</TABLE>
* Transactions are for the period from July 3, 1995 (inception date) to
December 31, 1995.
** Transactions are for the period from August 8, 1995 (inception date) to
December 31, 1995.
21
<PAGE>
Smith Barney Growth Opportunity Fund
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
6. Transfer of Net Assets
On June 30, 1995, the Portfolio acquired the net assets and certain
liabilities of the Common Sense II Aggressive Opportunity Fund of the Common
Sense Trust ("Common Sense") pursuant to a plan of reorganization approved by
Common Sense shareholders on June 23, 1995. Total shares issue by the Portfolio
and the total net assets of Common Sense and the Portfolio on the date of
transfer were:
<TABLE>
<CAPTION>
Total
Shares Assets of Total Net
Issued by Acquired Assets of
Acquired Fund the Portfolio Fund the Portfolio
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Common Sense 5,090,304 $68,038,812 --
</TABLE>
The total net assets of Common Sense before acquisition included unrealized
appreciation of $6,354,773. The transaction was structured for tax purposes to
qualify as a tax-free reorganization under the Internal Revenue Code, as
amended.
22
<PAGE>
Smith Barney Growth Opportunity Fund
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
Class A(1) Class B(1) Class C(2)
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $13.36 $13.36 $14.05
Income From Operations:
Net investment income (loss) 0.03 (0.02) 0.01
Net realized and unrealized 1.87 1.86 1.16
gain
Total Income From Operations 1.90 1.84 1.17
Less Distributions From:
Net investment income (0.02) -- --
Net realized gains (0.93) (0.93) (0.93)
Total Distributions (0.95) (0.93) (0.93)
Net Asset Value, End of Period $14.31 $14.27 $14.29
Total Return++ 14.61% 14.15w% 8.69%
Net Assets, End of Period (000s) $57,693 $32,685 $88
Ratios to Average Net Assets+:
Expenses 1.72% 2.46% 2.29%
Net investment income (loss) 0.46 (0.27) 0.13
Portfolio Turnover Rate 51% 51% 51%
Average commissions paid on
equity security transactions
$0.06 $0.06 $0.06
</TABLE>
(1) For the period from July 3, 1995 (inception date) to December 31, 1995.
(2) For the period from August 8, 1995 (inception date) to December 31,
1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
Additional Tax Information (unaudited)
- --------------------------------------------------------------------------------
The amount of long-term capital gains paid by the Portfolio to its
shareholders for the fiscal year ended December 31, 1995 was $196,206.
23
<PAGE>
Smith Barney Growth Opportunity Fund
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of the
Smith Barney Investment Funds Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Barney Growth Opportunity
Fund of the Smith Barney Investment Funds Inc. as of December 31, 1995, the
related statements of operations, changes in net assets and financial highlights
for the period from July 3, 1995 (commencement of operations) to December 31,
1995. 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 audit.
We conducted our audit 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 from 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, 1995, by correspondence with the custodian. As to securities
purchased and sold but not received or delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above presents fairly,
in all material respects, the financial position of the Smith Barney Growth
Opportunity Fund of the Smith Barney Investment Funds Inc. as of December 31,
1995, and the results of its operations, changes in its net assets and financial
highlights for the period from July 3, 1995 to December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 16, 1996
24
<PAGE>
Smith Barney
Growth Opportunity
Fund
Directors
Paul R. Ades
Herberg Barg
Alger B. Chapman
Dwight B. Crane
Frank J. Hubbard
Allan R. Johnson
Heath B. McLendon, Chairman
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President and Treasurer
Havey Eisen
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SmithBarney
-----------
A Member of TravelersGroup [LOGO]
Investment Adviser
Smith Barney Mutual Funds
Management Inc.
Distributor
Smith Barney Inc.
Custodian
PNC Bank
Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is submitted for the general information of the shareholders of
Smith Barney Growth Opportunity Fund. It is not authorized for distribution to
prospective investors unless accompanied or preceded by a current Prospectus for
the Fund, which contains information containing the Fund's investment policies
and expenses as well as other pertinent information.
Smith Barney
Growth Opportunity
Fund
388 Greenwich Street
New York, NY 10013
FD01071 2/96
