ANNUAL REPORT
================================================================================
1996
1996
1996 [Stock Photography]
1996
1994
Smith Barney
Investment
Grade Bond
Fund
-------------------------------------
December 31, 1996
[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 you with the annual report for the Smith Barney
Investment Grade Bond Fund for the year ended December 31, 1996. In this report,
we have summarized the period's prevailing economic and market conditions. In
addition, a more detailed summary of the Fund's performance and current holdings
can be found in the appropriate sections that follow in the annual report.
Fund Performance Update
For the year ended December 31, 1996, the Smith Barney Investment Grade Bond
Fund generated a total return of -0.47% on Class A shares, underperforming its
Lipper Peer Group Average of 2.49%. (Lipper Analytical Services, Inc. is a major
fund tracking organization.) Because of our optimistic view both near term and
long term, we have remained fully invested primarily in long maturity corporate
bonds during 1996.
However, this aggressive investment strategy negatively impacted the Fund's
performance as long-term interest rates rose from 5.95% in 1995 to 6.75% in 1996
and market volatility increased. In addition, this environment of rising
interest rates with possibly higher inflation heightened investor concerns over
the prospects of many of the Fund's holdings, particularly in two of our key
industries -- airlines and aerospace & defense -- and that also hurt the Fund's
performance. While the long-term maturity structure maintained in the Smith
Barney Investment Bond Grade Fund may be more sensitive to interest rate
fluctuations than more conservatively managed funds, we believe this strategy
offers investors greater total return potential over the long term.
For the five-year period ended December 31, 1996, the Fund had an average annual
total return for Class B shares of 9.11% exceeding the Lehman Aggregate Bond
Index (an unmanaged index composed of Treasury issues, government issues, and
corporate bonds) annual total return of 7.04% for the same period. In addition
to providing shareholders with competitive total returns over the long term, the
Fund continues to make monthly distributions of approximately $0.0615 per Class
B share.
Market Update
In summarizing 1996 for many fixed-income investors, the famous novel entitled A
Tale of Two Cities comes to mind. Perhaps a better title to describe recent
market conditions would be A Tale of Two Economies. As we entered
1
<PAGE>
1996, the consensus forecast was for a continuation of the very modest economic
growth seen in 1995. During the first half of the year, U.S. economic growth, as
measured by the Gross Domestic Product ("GDP"), showed surprising strength.
Moreover, the jobless rate, another key economic indicator, rose slightly in
January and then began to drop steadily. These economic reports suggested to
many bond investors that the economy was expanding at a greater rate than
previously expected. In this environment, 30 year U.S. Treasury Bond yields (a
bellwether of long-term yields) rose rather quickly. For example, the 30 year
Treasury Bond yield ended 1995 at 5.95% and by the spring of 1996 the yield
exceeded 7%. One reason given by some market observers was that the long-awaited
and much heralded inflationary spiral was just around the corner. In fact, many
investors believed that a rate hike from the Federal Reserve was imminent.
However, during the second half of 1996, a different picture of the U.S. economy
emerged. Previous fears of inflation proved to be unfounded as economic
indicators demonstrated that growth slowed dramatically in the third quarter of
1996. The 30 year U.S. Treasury Bond yield fell into a 6.25% - 6.50% range. The
monthly CPI (consumer price index) and the PPI (producer price index) reports
indicated no noticeable increases in inflation. As 1996 ended, the 30 year U.S.
Treasury Bond yield was 6.75%.
The corporate bond market during 1996 demonstrated better relative performance
compared with U.S. Government securities. Major rating agencies continued to
upgrade many issues because of moderate U.S. economic growth combined with
improvements in corporate profitability. Those upgrades helped reduce the spread
(i.e., incremental yield) of corporate bonds versus U.S. Government bonds.
Market Outlook
Looking ahead at 1997, we expect continued quarterly volatility in the rate of
economic growth. Moreover, what we have learned from this six-year U.S. economic
expansion is that labor costs should remain relatively flat because of corporate
restructuring, higher worker productivity and technological advances. This means
a U.S. economy with higher corporate profitability and relatively stable prices
for consumers. Lastly, we believe that the Federal Reserve, under Chairman Alan
Greenspan, will continue to follow a conservative monetary policy which is
independent of political pressures.
On balance, our outlook for the next six months is positive. We believe the U.S.
economy will continue along its present path of moderate growth with low
inflation. While there may be periods of rising short-term and long-term
interest rates, we expect long-term interest rates to decline which should prove
to be beneficial for the markets.
2
<PAGE>
Fund Strategy Update
We continue to focus on the following companies: AMR, Delta, UAL (airlines),
Time Warner, Disney (entertainment and media), and Boeing and Lockheed Martin
(aerospace & defense). In particular, we favor the airline industry because cost
reductions have returned most airlines to profitability. In our view, the
entertainment and media industries should benefit from ongoing technological
breakthroughs and their formidable ability to compete in the vast global markets
of Europe and Asia. The aerospace and defense industries are still consolidating
as defense expenditures continue to decline. However, surviving companies in
these industries are now bigger, better managed, and possess more resources. In
addition, during the reporting period, we increased our financial services
holdings by adding NationsBank and American General Insurance and we reduced our
weighting in the retail sector with our sale of Woolworth bonds.
In closing, thank you for your investment in the Smith Barney Investment Grade
Bond Fund. We look forward to continuing to help you achieve your investment
goals.
Sincerely,
/s/ Heath B. McLendon /s/ George E. Mueller, Jr.
Heath B. McLendon George E. Mueller, Jr.
Chairman and Vice President and
Chief Executive Officer Investment Officer
February 3, 1997
3
<PAGE>
- --------------------------------------------------------------------------------
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)
================================================================================
12/31/96 $13.25 $12.27 $0.76 $0.12 $0.00 (0.47)%
- --------------------------------------------------------------------------------
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 $3.54 $0.73 $0.04
================================================================================
- --------------------------------------------------------------------------------
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)
================================================================================
12/31/96 $13.25 $12.29 $0.68 $0.12 $0.00 (0.89)%
- --------------------------------------------------------------------------------
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)
================================================================================
Total $8.58 $1.62 $0.06
================================================================================
- --------------------------------------------------------------------------------
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)
================================================================================
12/31/96 $13.26 $12.30 $0.69 $0.12 $0.00 (0.83)%
- --------------------------------------------------------------------------------
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 $3.01 $0.73 $0.03
================================================================================
4
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
================================================================================
Inception*
-12/31/96 $13.03 $12.28 $0.72 $0.12 $0.00 1.01%+
================================================================================
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
-----------------------------------------------
Class A Class B Class C Class Y
================================================================================
Year Ended 12/31/96 (0.47)% (0.89)% (0.83)% N/A
- --------------------------------------------------------------------------------
Five Years Ended 12/31/96 N/A 9.11 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/96 N/A 8.83 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 12/31/96 10.25 11.39 7.83 1.01%+
================================================================================
With Sales Charge(2)
-----------------------------------------------
Class A Class B Class C Class Y
================================================================================
Year Ended 12/31/96 (4.92)% (5.07)% (1.76)% N/A
- --------------------------------------------------------------------------------
Five Years Ended 12/31/96 N/A 9.11 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 12/31/96 N/A 8.83 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 12/31/96 9.02 11.39 7.83 1.01%+
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 12/31/96) 49.96%
- --------------------------------------------------------------------------------
Class B (12/31/86 through 12/31/96) 117.11
- --------------------------------------------------------------------------------
Class C (Inception* through 12/31/96) 33.62
- --------------------------------------------------------------------------------
Class Y (Inception* through 12/31/96) 1.01+
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A 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 within one
year from initial purchase. This CDSCdeclines 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, C and Y shares are November 6, 1992,
January 4, 1982, February 26, 1993 and February 7, 1996, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
5
<PAGE>
- --------------------------------------------------------------------------------
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 1986 -- December 1996
[The following table was represented as a line graph in the printed material.]
Smith Barney Lehman Brothers
Investment Grade Long-Term Corporate Lipper Corporate
Bond Bond Index Debt A-Rated Average
---------------- ------------------- --------------------
12/86 10544 10000 10000
12/87 9051 10625 10147
12/88 9633 11522 11212
12/89 11133 13290 12927
12/90 11464 14217 13764
12/91 14044 15734 16652
12/92 15218 18384 18207
12/93 17966 21348 20692
12/94 16272 20534 19500
12/95 21906 24428 24946
12/96 21711 28491 25069
+ Hypothetical illustration of $10,000 invested in Class B shares on December
31, 1986, assuming reinvestment of dividends and capital gains, if any, at
net asset value through December 31, 1996. The Lehman Brothers Long-Term
Corporate Bond Index is comprised of all publicly issued, fixed rate,
non-convertible and dollar-denominated investment-grade corporate debt from
a diverse range of industries with an average maturity of approximately 23
years. The index is unmanaged and is not subject to the same management and
trading expenses as a mutual fund. The Lipper Corporate Debt A-Rated
Average is composed of the Fund's peer group of 115 mutual funds as of
December 31, 1996. 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.
6
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) December 31, 1996
- --------------------------------------------------------------------------------
Portfolio Breakdown
[The following table was represented as a pie graph in the printed material.]
Aerospace/Defense 7.4%
Airlines 9.6%
Automotive 8.2%
Foods 6.5%
Banking 6.5%
Media Groups 10.2%
Yankee Bonds 6.1%
U.S. Government Obligations and Agencies 6.4%
Entertainment 5.7%
Beverages/(Alcoholic) 5.7%
Other Corporate Bonds and Notes 27.7%
Top Ten Bond Holdings by Issuer
Percentage of
Total Investments
================================================================================
U.S. Treasury Strip 5.4%
Time Warner Inc. 4.8
NationsBank Corp. 4.7
General Motors Corp. 4.3
American General Corp. 4.1
IBM Corp. 4.1
AMR Corp. 4.0
Ford Motor Co. 3.9
News America Holdings Inc. 3.9
Delta Air Lines, Inc. 3.7
================================================================================
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=====================================================================================================
CORPORATE BONDS AND NOTES -- 87.5%
=====================================================================================================
<C> <C> <S> <C>
Aerospace/Defense -- 7.4%
$18,500,000 AA Boeing Co., Debentures, 6.875% due 10/15/43 $17,390,000
2,000,000 A* Lockheed Martin, Debentures, 7.750% due 5/1/26 2,087,500
17,500,000 BBB Loral Co., Debentures, 7.000% due 9/15/23 16,581,250
- -----------------------------------------------------------------------------------------------------
36,058,750
- -----------------------------------------------------------------------------------------------------
Airlines -- 9.6%
AMR Corp., Debentures:
12,500,000 Baa* 9.000% due 9/15/16 14,015,625
4,500,000 Baa* 9.880% due 6/15/20 5,484,375
Delta Air Lines, Inc., Debentures:
10,735,000 Baa* 9.000% due 5/15/16 11,915,850
5,000,000 Baa* 9.750% due 5/15/21 5,943,750
7,650,000 Baa* United Airlines, Inc., Debentures, 9.750% due 8/15/21 9,036,563
- -----------------------------------------------------------------------------------------------------
46,396,163
- -----------------------------------------------------------------------------------------------------
Automotive -- 8.2%
19,400,000 A+ Ford Motor Co., Debentures, 7.400% due 11/1/46 19,084,750
21,000,000 A- General Motors Corp., Notes, 7.400% due 9/1/25 20,606,250
- -----------------------------------------------------------------------------------------------------
39,691,000
- -----------------------------------------------------------------------------------------------------
Banking -- 6.5%
8,500,000 A+ Banc One Corp., Debentures, 7.625% due 10/15/26 8,606,250
23,500,000 A- NationsBank Corp., Debentures, 7.250% due 10/15/25 22,706,875
- -----------------------------------------------------------------------------------------------------
31,313,125
- -----------------------------------------------------------------------------------------------------
Beverages-Soft Drinks -- 4.3%
Coca Cola Enterprises Inc., Debentures:
12,000,000 AA- 6.750% due 9/15/23 11,220,000
10,000,000 AA- 6.950% due 11/15/26 9,562,500
- -----------------------------------------------------------------------------------------------------
20,782,500
- -----------------------------------------------------------------------------------------------------
Beverages-Alcoholic -- 5.7%
11,000,000 AAA Anheuser Busch Co., Debentures, 7.000% due 12/1/25 10,450,000
18,300,000 A Seagrams Co. Ltd., Debentures, 6.875% due 9/1/23 16,996,125
- -----------------------------------------------------------------------------------------------------
27,446,125
- -----------------------------------------------------------------------------------------------------
Chemicals -- 0.3%
1,500,000 AAA Lyondell Petrochemicals Co., Debentures,
7.550% due 2/15/26 1,460,625
- -----------------------------------------------------------------------------------------------------
Consumer Products -- 1.1%
6,000,000 BBB+ Fruit of the Loom, Inc., Debentures, 7.375% due 11/15/03 5,557,500
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=====================================================================================================
<C> <C> <S> <C>
Electronics/Computers -- 4.5%
$21,000,000 A IBM Corp., Debentures, 7.000% due 10/30/45 $ 19,766,250
2,000,000 A Johnson Controls Inc., Debentures, 6.950% due 12/1/45 1,885,000
- -----------------------------------------------------------------------------------------------------
21,651,250
- -----------------------------------------------------------------------------------------------------
Entertainment -- 5.7%
12,000,000 AA- Paramount Communications, Inc., Sr. Debentures,
7.500% due 7/15/23 10,680,000
17,000,000 A The Walt Disney Corp., Sr. Debentures,
7.550% due 7/15/2093 17,000,000
- -----------------------------------------------------------------------------------------------------
27,680,000
- -----------------------------------------------------------------------------------------------------
Foods -- 6.5%
16,750,000 BBB+ Borden Inc., Notes, 7.875% due 2/15/23 14,698,125
16,000,000 A- Ralston Purina Co., Debentures, 8.125% due 2/1/23 16,860,000
- -----------------------------------------------------------------------------------------------------
31,558,125
- -----------------------------------------------------------------------------------------------------
Healthcare -- 2.5%
12,295,000 A- Columbia/HCA Healthcare, Debentures,
7.500% due 11/15/2095 12,218,156
- -----------------------------------------------------------------------------------------------------
Insurance -- 4.1%
20,000,000 AAA American General Corp., Debentures, 7.500% due 7/15/25 20,050,000
- -----------------------------------------------------------------------------------------------------
Media Groups -- 10.2%
17,500,000 A CBS Inc., Notes, 7.125% due 11/1/23 14,634,375
10,500,000 BBB+ Harcourt General Cinema, Debentures, 8.875% due 6/1/22 11,668,125
Time Warner Inc. Debentures:
19,000,000 BBB- 9.150% due 2/1/23 20,638,750
2,500,000 BBB- 8.375% due 7/15/33 2,521,875
- -----------------------------------------------------------------------------------------------------
49,463,125
- -----------------------------------------------------------------------------------------------------
Metals & Mining -- 2.2%
10,000,000 BBB Asarco Inc., Debentures, 8.500% due 5/1/25 10,587,500
- -----------------------------------------------------------------------------------------------------
Oil-Exploration & Production -- 2.0%
9,500,000 BBB Apache Corp., Debentures, 7.625% due 11/1/2096 9,488,125
- -----------------------------------------------------------------------------------------------------
Paper & Forest Products -- 1.5%
Georgia-Pacific Corp., Debentures:
500,000 BBB- 9.625% due 3/15/22 550,000
7,000,000 BBB- 7.375% due 12/01/25 6,580,000
- -----------------------------------------------------------------------------------------------------
7,130,000
- -----------------------------------------------------------------------------------------------------
Publishing -- 4.3%
20,000,000 AAA News America Holdings Inc., Notes, 7.750% due 12/1/45 18,800,000
2,000,000 A+ Times Mirror Co., Debentures, 7.250% due 11/15/2096 1,955,000
- -----------------------------------------------------------------------------------------------------
20,755,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=====================================================================================================
<C> <C> <S> <C>
Super National Entity -- 0.9%
$42,860,000 Aaa* International Bank for Reconstruction and Development,
zero coupon due 7/15/29 $ 4,446,725
- -----------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $420,167,345) 423,733,794
=====================================================================================================
U.S. GOVERNMENT OBLIGATIONS AND AGENCIES -- 6.4%
170,000,000 Aaa* U.S. Treasury Strip, zero coupon due 2/15/25 26,001,500
Financing Corp., Strips, Series 19:
2,400,000 NR Zero coupon due 12/6/18 504,527
21,400,000 NR Zero coupon due 6/6/19 4,322,800
- -----------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
AND AGENCIES (Cost -- $30,122,903) 30,828,827
=====================================================================================================
YANKEE BONDS -- 6.1%
British Columbia, Province of Canada, Debentures:
2,000,000 AAA 6.500% due 1/15/26 1,860,000
3,000,000 AAA 7.250% due 9/1/36 3,060,000
Hydro-Quebec Debentures:
1,600,000 A+ Series HE, 8.625% due 6/15/29 1,800,000
15,000,000 A+ Series HH, 8.500% due 12/1/29 16,650,000
1,000,000 A Series HI, 9.375% due 4/15/30 1,213,750
5,000,000 BBB+ Newfoundland, Province of Canada, Debentures,
7.320% due 10/13/23 4,937,500
- -----------------------------------------------------------------------------------------------------
TOTAL YANKEE BONDS
(Cost -- $27,281,300) 29,521,250
=====================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $477,571,548**) $484,083,871
=====================================================================================================
</TABLE>
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 11 for definition of ratings.
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Ratings Service ("Standard &Poor's"),
except those identified by an asterisk (*) are rated by Moody's Investors
Service, Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Ratings from "AA" to "CCC" 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.
11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $477,571,548) $484,083,871
Receivable for Fund shares sold 655,069
Interest receivable 8,704,293
- --------------------------------------------------------------------------------
Total Assets 493,443,233
- --------------------------------------------------------------------------------
LIABILITIES:
Payable to bank 3,307,880
Investment advisory fees payable 193,205
Administration fees payable 85,829
Distribution fees payable 81,804
Payable for Fund shares purchased 413,623
Accrued expenses 129,822
- --------------------------------------------------------------------------------
Total Liabilities 4,212,163
- --------------------------------------------------------------------------------
Total Net Assets $489,231,070
================================================================================
NET ASSETS:
Par value of capital shares $ 39,837
Capital paid in excess of par value 471,251,242
Overdistributed net investment income (7,345)
Accumulated net realized gain on security transactions 11,435,013
Net unrealized appreciation of investments 6,512,323
- --------------------------------------------------------------------------------
Total Net Assets $489,231,070
================================================================================
Shares Outstanding:
Class A 16,782,817
-----------------------------------------------------------------------------
Class B 21,027,741
-----------------------------------------------------------------------------
Class C 546,770
-----------------------------------------------------------------------------
Class Y 1,479,476
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $12.27
-----------------------------------------------------------------------------
Class B* $12.29
-----------------------------------------------------------------------------
Class C** $12.30
-----------------------------------------------------------------------------
Class Y (and redemption price) $12.28
-----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $12.85
================================================================================
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if shares
are redeemed within 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>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 37,275,659
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 2,551,546
Investment advisory fees (Note 2) 2,198,162
Administration fees (Note 2) 976,938
Shareholder and system servicing fees 382,961
Registration fees 70,000
Shareholder communications 60,000
Directors' fees 36,978
Audit and legal 30,000
Custody 21,438
Other 33,806
- --------------------------------------------------------------------------------
Total Expenses 6,361,829
- --------------------------------------------------------------------------------
Net Investment Income 30,913,830
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 228,597,573
Cost of securities sold 210,738,525
- --------------------------------------------------------------------------------
Net Realized Gain 17,859,048
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 60,111,981
End of year 6,512,323
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (53,599,658)
- --------------------------------------------------------------------------------
Net Loss on Investments (35,740,610)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (4,826,780)
================================================================================
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
=============================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 30,913,830 $ 30,379,334
Net realized gain 17,859,048 5,326,832
Increase (decrease) in net unrealized appreciation (53,599,658) 101,641,373
- ---------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (4,826,780) 137,347,539
- ---------------------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (28,812,734) (32,487,427)
Net realized gains (4,763,509) (6,128,106)
- ---------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions To Shareholders (33,576,243) (38,615,533)
- ---------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 95,481,067 87,249,088
Net asset value of shares issued for
reinvestment of dividends 24,865,353 25,423,076
Cost of shares reacquired (111,387,406) (96,181,787)
- ---------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 8,959,014 16,490,377
- ---------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (29,444,009) 115,222,383
NET ASSETS:
Beginning of year 518,675,079 403,452,696
- ---------------------------------------------------------------------------------------------
End of year* $489,231,070 $518,675,079
=============================================================================================
* Includes overdistributed net investment income of: $(7,345) $(2,108,093)
=============================================================================================
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
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) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing price on such
markets; 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) 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) 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) dividends and distributions to shareholders are recorded on the
ex-dividend date; (h) direct expenses are charged to each class; management fees
and general portfolio expenses are allocated on the basis of relative net
assets; (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 income and excise taxes; 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.
15
<PAGE>
- --------------------------------------------------------------------------------
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 adviser to the Fund. The
Portfolio pays SBMFM an advisory fee calculated at an annual rate of 0.45% of
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.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. For the year ended December 31, 1996, SB received sales charges of
approximately $182,000 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 within one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
thereafter by 1.00% per year until no CDSC is incurred. Class C shares have a
1.00% CDSC, which applies if redemption occurs within the first year of
purchase. For the year ended December 31, 1996, CDSCs paid to SB were
approximately:
Class B Class C
================================================================================
CDSCs $422,000 $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, 1996, total Distribution Plan fees
incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $524,533 $1,986,537 $40,476
================================================================================
All officers and one Director of the Fund are employees of SB.
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
3. INVESTMENTS
During the year ended December 31, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $238,467,957
- --------------------------------------------------------------------------------
Sales 228,597,573
================================================================================
At December 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $ 16,533,773)*
Gross unrealized depreciation (10,021,450)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 6,512,323*
================================================================================
* Substantially the same for Federal income tax purposes.
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, 1996, 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, 1996, total paid-in capital amounted to the following for
each class:
Class A Class B Class C Class Y
================================================================================
Total Paid-in Capital $187,761,004 $259,158,699 $6,620,214 $17,751,162
================================================================================
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996* December 31, 1995
------------------------- -------------------------
Shares Amount Shares Amount
=========================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 2,058,458 $ 25,299,353 1,607,785 $ 19,821,590
Shares issued on reinvestment 991,797 12,112,796 1,002,331 12,111,574
Shares redeemed (3,352,017) (40,540,251) (2,523,526) (30,346,445)
- ---------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (301,762) $ (3,128,102) 86,590 $ 1,586,719
=========================================================================================================
Class B
Shares sold 3,938,648 $ 48,026,162 5,310,407 $ 63,978,854
Shares issued on reinvestment 1,016,702 12,428,663 1,087,231 13,196,188
Shares redeemed (5,704,337) (69,325,860) (5,346,794) (64,605,561)
- ---------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (748,987) $ (8,871,035) 1,050,844 $ 12,569,481
=========================================================================================================
Class C
Shares sold 362,134 $ 4,404,390 283,140 $ 3,448,644
Shares issued on reinvestment 26,633 323,894 9,409 115,314
Shares redeemed (126,244) (1,521,295) (101,992) (1,229,781)
- ---------------------------------------------------------------------------------------------------------
Net Increase 262,523 $ 3,206,989 190,557 $ 2,334,177
=========================================================================================================
Class Y
Shares sold 1,479,476 $ 17,751,162 -- --
- ---------------------------------------------------------------------------------------------------------
Net Increase 1,479,476 $ 17,751,162 -- --
=========================================================================================================
</TABLE>
* For Class Y shares, transactions are for the period from February 7, 1996
(inception date) to December 31, 1996.
18
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1996 1995(1) 1994(1) 1993(1) 1992(2)
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.25 $ 10.67 $ 13.01 $ 11.89 $ 11.67
- ----------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.80 0.83 0.74 0.88 0.14
Net realized and unrealized gain (loss) (0.90) 2.80 (1.88) 1.27 0.23
- ----------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.10) 3.63 (1.14) 2.15 0.37
- ----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.76) (0.89) (0.86) (0.88) (0.14)
Overdistribution of net
investment income -- -- -- (0.01) --
Net realized gains (0.12) (0.16) (0.31) (0.14) --
Capital -- -- (0.03) -- (0.01)
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.88) (1.05) (1.20) (1.03) (0.15)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.27 $ 13.25 $ 10.67 $ 13.01 $ 11.89
- ----------------------------------------------------------------------------------------------------------------------
Total Return (0.47)% 35.29% (8.95)% 18.45% 3.25%++
- ----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $206,002 $226,373 $181,334 $ 10,136 $ 933
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.04% 1.11% 1.11% 1.11% 1.03%+
Net investment income 6.63 7.02 7.35 6.67 7.53+
- ----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 48% 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.
19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class B Shares 1996 1995(1) 1994(1) 1993(1) 1992
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.25 $ 10.67 $ 13.01 $ 11.89 $ 11.80
- ---------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.74 0.77 0.82 0.80 0.83
Net realized and unrealized gain (loss) (0.90) 2.80 (2.02) 1.29 0.12
- ---------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.16) 3.57 (1.20) 2.09 0.95
- ---------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.68) (0.83) (0.80) (0.82) (0.83)
Overdistribution of net
investment income -- -- -- (0.01) --
Net realized gains (0.12) (0.16) (0.31) (0.14) --
Capital -- -- (0.03) -- (0.03)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions (0.80) (0.99) (1.14) (0.97) (0.86)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.29 $ 13.25 $ 10.67 $ 13.01 $ 11.89
- ---------------------------------------------------------------------------------------------------------------
Total Return (0.89)% 34.63% (9.41)% 18.06% 8.36%
- ---------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $258,331 $288,533 $221,120 $476,088 $431,783
- ---------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 1.54% 1.61% 1.57% 1.58% 1.57%
Net investment income 6.13 6.51 6.89 6.20 6.99
- ---------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 48% 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 year ended December 31, 1992, the expense ratio excludes interest
expense. The expense ratio including interest expense was 1.58%.
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares 1996 1995(1) 1994(1) 1993(1)(2)
========================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.26 $ 10.67 $ 13.01 $ 12.56
- --------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.75 0.78 0.75 0.63
Net realized and unrealized gain (loss) (0.90) 2.80 (1.95) 0.65
- --------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.15) 3.58 (1.20) 1.28
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.69) (0.83) (0.80) (0.68)
Overdistribution of net investment income -- -- -- (0.01)
Net realized gains (0.12) (0.16) (0.31) (0.14)
Capital -- -- (0.03) --
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.81) (0.99) (1.14) (0.83)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.30 $ 13.26 $ 10.67 $ 13.01
- --------------------------------------------------------------------------------------------------------
Total Return (0.83)% 34.74% (9.41)% 10.38%++
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 6,724 $ 3,769 $ 999 $ 208
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.42% 1.56% 1.57% 1.61%+
Net investment income 6.28 6.55 6.89 6.17+
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 48% 49% 18% 65%
========================================================================================================
</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 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.
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Class Y Shares 1996(1)
================================================================================
Net Asset Value, Beginning of Year $ 13.03
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.75
Net realized and unrealized loss (0.66)
- --------------------------------------------------------------------------------
Total Income From Operations 0.09
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.72)
Net realized gains (0.12)
- --------------------------------------------------------------------------------
Total Distributions (0.84)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.28
- --------------------------------------------------------------------------------
Total Return++ 1.01%
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $18,174
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.72%
Net investment income 7.34
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 48%
================================================================================
(1) For the period from February 7, 1996 (inception date) to December 31, 1996.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
22
<PAGE>
- --------------------------------------------------------------------------------
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, 1996, the related
statement of operations for the year then ended and the statements of changes in
net assets and financial highlights for each of the years in the two-year period
then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the years in the three-year period
ended December 31, 1994 were audited by other auditors whose report thereon,
dated February 10, 1995, expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Smith Barney Investment Grade Bond Fund of Smith Barney Investment Funds Inc. as
of December 31, 1996, the results of its operations for the year then ended and
the changes in its net assets and its financial highlights for each of the years
in the two-year period year then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 18, 1997
23
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
The Fund paid distributions of $3,172,505 from long-term capital gains.
83.82% of long-term capital gains are in excess of two years. A total of 2.46%
of the ordinary dividends paid by the Fund have been derived from federal
obligations and may be exempt from taxation at the state level.
24
<PAGE>
Smith Barney SMITH BARNEY
Investment ------------
Grade Bond A Member of TravelersGroup[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, N.A.
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 infor-
mation.
Smith Barney
Investment
Grade Bond
Fund
388 Greenwich Street
New York, New York 10013
FD0317 2/97
ANNUAL REPORT
1996
1996
1996
1996
1996
SMITH BARNEY
GOVERNMENT
SECURITIES
FUND
- -----------------
December 31, 1996
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
SMITH BARNEY GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide you with the annual report for the Smith Barney
Government Securities Fund (the "Fund") for the year ended December 31, 1996. In
this report, we summarize the period's prevailing economic and market conditions
and outline our portfolio strategy. A more detailed summary of performance can
be found in the appropriate sections that follow in the report.
Fund Performance Update
For the year ended December 31, 1996, the Fund's Class A shares had a total
return of 1.96%, which was above its Lipper Analytical Services, Inc. peer group
total return average of 1.72%. (Lipper is an independent fund tracking
organization.) Moreover, over the past twelve months, the Fund distributed
dividends totaling $0.59 per Class A share.
Market Update and Outlook
In our view, one of the most important events for the market in 1996 was the
unexpected strength of the U.S. economy during the first half of the year and
weaker economic growth during the second half. In addition to President
Clinton's re-election and Congress maintaining its Republican majority, other
significant market events in 1996 include the U.S. Treasury's plans to introduce
inflation-indexed securities, the Boskin Report that suggests inflation may be
roughly 1% lower than previously reported, and Russian President Boris Yeltsin
surviving both medically and politically.
Looking ahead to 1997, we believe there may be some possible (although not
necessarily probable) market challenges on the horizon such as:
-- Data that indicates moderate to weaker economic growth
-- Continued partisan ethics probes that negatively impact our political
leaders
-- U.S. dollar coming under short-term pressure because of a failure to put
in place a credible fiscal plan
-- Renewed tension in the Middle East -- possibly oil related
-- Political problems resurfacing in Russia
In our opinion, the yield on the 30 Year U.S. Treasury bond should remain in a
broad range of 6%-7%. However, if any of the expected 1997 events outlined above
take place, the yield could temporarily rise above the 7% level.
1
<PAGE>
Ultimately, we believe this would represent a buying opportunity because U.S.
economic fundamentals do not, in our view, warrant higher rates. The section
below shows how yields have changed during the reporting period.
Yields from U.S. Treasuries
12/31/95 12/31/96
-------- --------
2 Year U.S. Treasury Note 5.15% 5.87%
3 Year U.S. Treasury Note 5.21 6.01
5 Year U.S. Treasury Note 5.37 6.21
10 Year U.S. Treasury Bond 5.57 6.42
30 Year U.S. Treasury Bond 5.95 6.64
Portfolio's Investment Strategy
As interest rates rose during the first half of 1996, we slowly reduced the
Fund's weighting in mortgage-backed securities and increased our U.S. Treasury
holdings (specifically zero coupon Treasury strips and 10 Year Treasuries).
During September through November, these actions paid off as interest rates
declined. In early December, we sold the Fund's longer-maturity zero coupon
Treasury strips and some 10 Year Treasuries and purchased 5 Year Treasuries and
mortgage-backed securities on the belief that interest rates had temporarily
declined as much as they would.
In closing, thank you for investing in the Smith Barney Government Securities
Fund. We look forward to continuing to help you achieve your financial goals.
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 15, 1997
2
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------
Year Beginning End Income Capital Gain Return Total
Ended of Year of Year Dividends Distributions of Capital Returns(1)
==========================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/96 $ 9.77 $ 9.34 $0.59 $0.00 $0.01 1.96%
- ------------------------------------------------------------------------------------------
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 $2.57 $0.00 $0.10
==========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------
Year Beginning End Income Capital Gain Return Total
Ended of Year of Year Dividends Distributions of Capital Returns(1)
===========================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/96 $ 9.81 $ 9.38 $0.54 $0.00 $0.01 1.42%
- -------------------------------------------------------------------------------------------
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)
===========================================================================================
Total $6.05 $0.45 $0.36
===========================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
------------------
Year Beginning End Income Capital Gain Return Total
Ended of Year of Year Dividends Distributions of Capital Returns(1)
============================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/96 $ 9.81 $ 9.38 $0.55 $0.00 $0.01 1.47%
- --------------------------------------------------------------------------------------------
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 $2.22 $0.00 $0.08
============================================================================================
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
--------------------
Year Beginning End Income Capital Gain Return Total
Ended of Year of Year Dividends Distributions of Capital Returns(1)
================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Inception* -
12/31/96 $9.71 $9.34 $0.56 $0.00 $0.01 2.30%+
================================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND
CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge(1)
---------------------------------------------
Class A Class B Class C Class Y
===========================================================================================
<S> <C> <C> <C> <C>
Year Ended 12/31/96 1.96% 1.42% 1.47% N/A
- -------------------------------------------------------------------------------------------
Five Years Ended 12/31/96 N/A 5.43 N/A N/A
- -------------------------------------------------------------------------------------------
Ten Years Ended 12/31/96 N/A 6.50 N/A N/A
- -------------------------------------------------------------------------------------------
Inception* through 12/31/96 6.32 8.04 4.87 2.30%+
===========================================================================================
</TABLE>
<TABLE>
<CAPTION>
With Sales Charge(2)
----------------------------------------
Class A Class B Class C Class Y
======================================================================================
<S> <C> <C> <C> <C>
Year Ended 12/31/96 (2.62)% (2.89)% 0.52% N/A
- --------------------------------------------------------------------------------------
Five Years Ended 12/31/96 N/A 5.26 N/A N/A
- --------------------------------------------------------------------------------------
Ten Years Ended 12/31/96 N/A 6.50 N/A N/A
- --------------------------------------------------------------------------------------
Inception* through 12/31/96 5.15 8.04 4.87 2.30%+
======================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge(1)
=======================================================================
<S> <C>
Class A (Inception* through 12/31/96) 29.01%
- -----------------------------------------------------------------------
Class B (12/31/86 through 12/31/96) 87.69
- -----------------------------------------------------------------------
Class C (Inception* through 12/31/96) 20.41
- -----------------------------------------------------------------------
Class Y (Inception* through 12/31/96) 2.30+
=======================================================================
</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 charges 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 within one
year from initial purchase. This CDSC declines by 0.50% the first year
after purchase and thereafter by 1.00% per year until no CDSC is incurred.
Class 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 Y shares are November 6, 1992, March
20, 1984, February 4, 1993, and February 7, 1996, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
4
<PAGE>
- --------------------------------------------------------------------------------
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 1986 -- December 1996
[GRAPHIC]
Smith Barney Lehman Brother Lipper General
Government Government U.S. Government
Securities Fund Bond Index Peer Group Average
- --------------------------------------------------------------------------
12/86 $10,000 $10,000 $10,000
12/87 9,731 10,219 10,060
12/88 10,387 10,938 10,731
12/89 11,902 12,494 12,068
12/90 12,734 13,582 13,045
12/91 14,808 15,662 14,941
12/92 15,614 16,794 15,900
12/93 17,247 18,584 17,384
12/94 16,698 17,955 16,602
12/95 19,014 21,248 19,512
12/96 18,769 21,838 19,847
+ Hypothetical illustration of $10,000 invested in Class B shares on December
31, 1986, assuming reinvestment of dividends and capital gains, if any, at
net asset value through December 31, 1996. 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 181 mutual funds investing in U.S. government
securities as of December 31, 1996. 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.
5
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) December 31, 1996
- --------------------------------------------------------------------------------
Portfolio Breakdown
Mortgage-Backed Securities 17.6%
U.S. Treasury Obligations 57.1%
Call Option and Repurchase Agreement 25.3%
U.S. Treasury Obligations 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 issued 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.
6
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
==============================================================================================
<S> <C> <C>
U. S. TREASURY OBLIGATIONS -- 57.1%
$ 49,000,000 U.S. Treasury Notes, 5.875% due 11/30/01+ $ 48,310,080
332,000,000 U.S. Treasury Notes, 6.500% due 10/15/06+ +++ 333,865,840
85,130,000 U.S. Treasury Strips, zero coupon due 11/15/09 36,181,952
- ----------------------------------------------------------------------------------------------
TOTAL U. S. TREASURY OBLIGATIONS
(Cost -- $422,697,386) 418,357,872
==============================================================================================
MORTGAGE-BACKED SECURITIES -- 17.6%
829 FNMA 30 Year, 8.000% due 6/1/07 854
102,000,000 FNMA Principal Strips, zero coupon due 10/9/19 20,920,200
136,761 GNMA 30 Year, 11.000% due 10/15/10* 152,744
32,652 GNMA 30 Year, 10.000% due 3/15/16 35,806
62,700 GNMA 30 Year, 10.500% due 3/15/16 69,342
100,026,023 GNMA 30 Year, 9.000% due 12/15/17+++ 106,964,829
328,987 GNMA 30 Year, 9.500% due 5/15/20* 355,613
- ----------------------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost -- $125,307,418) 128,499,388
==============================================================================================
REPURCHASE AGREEMENT -- 25.3%
185,150,000 Morgan Stanley Group, Inc., 6.150% due 1/7/97;
Proceeds at maturity -- $185,371,409;
(Fully collateralized by the following:
FNMA Pool 296042, 6.085% due 12/1/33;
Market value -- $139,615,568;
FNMA Pool 315992, 6.234% due 5/1/25;
Market value -- $49,236,735;
Total Market value -- $188,852,303) (Cost -- $185,150,000) 185,150,000
<CAPTION>
==============================================================================================
SHARES SECURITY VALUE
==============================================================================================
<S> <C> <C>
CALL OPTION -- 0.0%
2,000 U.S. Treasury Long Bond Call @ 124, Expires 2/22/97
(Cost -- $332,187) 32,000
==============================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $733,486,991**) $732,039,260
==============================================================================================
</TABLE>
+ Security partially serves as collateral for reverse repurchase agreements.
+++ Security has been partially segregated by custodian to cover open
commitments.
* Date shown represents the last in range of maturity dates of mortgage
certificates owned.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $548,336,991) $546,889,260
Repurchase agreement (Cost -- $185,150,000) 185,150,000
Receivable for Fund shares sold 1,161,234
Interest receivable 5,648,051
- ----------------------------------------------------------------------------------------
Total Assets 738,848,545
- ----------------------------------------------------------------------------------------
LIABILITIES:
Reverse repurchase agreements (Note 6) 186,150,000
Payable for Fund shares purchased 467,068
Investment advisory fees payable 166,753
Payable to bank 125,194
Administration fees payable 98,838
Distribution fees payable 71,405
Interest payable 26,630
Accrued expenses 175,999
- ----------------------------------------------------------------------------------------
Total Liabilities 187,281,887
- ----------------------------------------------------------------------------------------
Total Net Assets $551,566,658
========================================================================================
NET ASSETS:
Par value of capital shares $ 59,006
Capital paid in excess of par value 621,905,888
Accumulated net realized loss from security transactions,
futures contracts and options (68,950,505)
Net unrealized depreciation of investments and options (1,447,731)
- ----------------------------------------------------------------------------------------
Total Net Assets $551,566,658
========================================================================================
Shares Outstanding:
Class A 41,615,632
--------------------------------------------------------------------------------------
Class B 12,991,397
--------------------------------------------------------------------------------------
Class C 153,878
--------------------------------------------------------------------------------------
Class Y 4,245,386
--------------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $9.34
--------------------------------------------------------------------------------------
Class B* $9.38
--------------------------------------------------------------------------------------
Class C** $9.38
--------------------------------------------------------------------------------------
Class Y (and redemption price) $9.34
--------------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $9.78
========================================================================================
</TABLE>
* 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.
8
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $ 44,682,561
Less: Interest expense (Note 6) (4,722,559)
- -----------------------------------------------------------------------------------
Total Investment Income 39,960,002
- -----------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 2,057,005
Investment advisory fees (Note 2) 1,979,639
Administration fees (Note 2) 1,131,222
Shareholder and system servicing fees 424,482
Shareholder communications 90,000
Registration fees 70,001
Director's fees 37,601
Audit and legal 37,034
Custody 30,501
Other 15,213
- -----------------------------------------------------------------------------------
Total Expenses 5,872,698
- -----------------------------------------------------------------------------------
Net Investment Income 34,087,304
- -----------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, FUTURES CONTRACTS AND
OPTIONS (NOTES 3, 7 AND 8):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 2,995,950
Futures contracts 56,578
Options purchased (983,646)
- -----------------------------------------------------------------------------------
Net Realized Gain 2,068,882
- -----------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation) of
Investments and Options:
Beginning of year 25,599,781
End of year (1,447,731)
- -----------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (27,047,512)
- -----------------------------------------------------------------------------------
Net Loss on Investments, Futures Contracts and Options (24,978,630)
- -----------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 9,108,674
===================================================================================
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
===========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 34,087,304 $ 42,959,653
Net realized gain 2,068,882 12,784,089
Increase (decrease) in net unrealized appreciation (27,047,512) 29,027,947
- --------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 9,108,674 84,771,689
- --------------------------------------------------------------------------------------------
DISTRIBUTION TO
SHAREHOLDERS FROM:
Net investment income (34,910,628) (43,905,023)
Capital (592,035) --
- --------------------------------------------------------------------------------------------
Decrease In Net Assets From
Distributions To Shareholders (35,502,663) (43,905,023)
- --------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares 69,365,690 25,672,666
Net asset value of shares issued for
reinvestment of dividends 22,924,466 29,237,388
Cost of shares reacquired (125,806,899) (140,055,055)
- --------------------------------------------------------------------------------------------
Decrease In Net Assets From Fund
Share Transactions (33,516,743) (85,145,001)
- --------------------------------------------------------------------------------------------
Decrease In Net Assets (59,910,732) (44,278,335)
NET ASSETS:
Beginning of year 611,477,390 655,755,725
- --------------------------------------------------------------------------------------------
End of year* $551,566,658 $611,477,390
============================================================================================
* Includes overdistributed net investment income of: -- $(945,370)
============================================================================================
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
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, Smith Barney Special Equities, Smith Barney Managed
Growth and Smith Barney Growth Opportunity Funds. 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) security 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)
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)
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)
dividends and distributions to shareholders are recorded on the ex-dividend
date; (h) 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; (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 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, 1996, reclassifications are made to the
Portfolio'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 realized losses and overdistributed
net investment income amounting to $146,694,392 and $1,768,694 have been
reclassified to paid-in capital respectively. Net investment income, net
realized gains and net assets
11
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
were not affected by this change; (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; and (l) certain prior year
numbers have been restated to reflect current year's presentation. Net
investment income, net realized gains, and net assets were not affected by this
change.
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.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. For the year ended December 31, 1996, SB received sales charges of
approximately $65,000 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, 1996, CDSCs paid to SB for Class B
shares were approximately $305,000.
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,
12
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
respectively. For the year ended December 31, 1996, total Distribution Plan fees
incurred were:
Class A Class B Class C
===============================================================================
Distribution Plan Fees $1,026,748 $1,021,716 $8,541
===============================================================================
All officers and one Director of the Fund are employees of SB.
3. Investments
During the year ended December 31, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
===============================================================================
Purchases $2,375,634,209
- -------------------------------------------------------------------------------
Sales 2,392,742,077
- -------------------------------------------------------------------------------
At December 31, 1996, aggregate gross unrealized appreciation and
depreciation of investments were as follows:
===============================================================================
Gross unrealized appreciation $ 6,184,367 *
Gross unrealized depreciation (7,632,098)*
- -------------------------------------------------------------------------------
Net unrealized depreciation $(1,447,731)*
===============================================================================
* Substantially the same for Federal income tax purposes.
4. Capital Loss Carryforward
At December 31, 1996, the Portfolio had, for Federal tax purposes,
approximately $69,251,000 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 gains so offset will not
be distributed. The amount and expiration of the carryforwards are indicated
below. Expiration occurs on December 31 of the year indicated:
2002 2003
===============================================================================
Capital Loss Carryforward $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.
13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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. A reverse
repurchase agreement involves the risk that the market value of the securities
sold by the Portfolio may decline below the repurchase price of the securities.
The Portfolio will establish a segregated account with its custodian, in which
the Portfolio will maintain cash, U.S. government securities or other liquid
high grade debt obligations equal in value to its obligations with respect to
reverse repurchase agreements.
At December 31, 1996, the Portfolio had the following open reverse
repurchase agreements:
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================================
<S> <C> <C>
$ 48,632,500 Reverse Repurchase Agreement with Morgan Stanley
Group, Inc., dated 12/31/96 bearing 5.150% to be
repurchased at $48,681,200 on 1/7/97, collateralized
by U.S. Treasury Notes, 5.875% due 11/30/01 $ 48,632,500
137,517,500 Reverse Repurchase Agreement with Morgan Stanley
Group, Inc., dated 12/31/96 bearing 5.150% to be
repurchased at $137,655,209 on 1/7/97, collateralized
by U.S. Treasury Notes, 6.500% due 10/15/06 137,517,500
- ------------------------------------------------------------------------------------------------
TOTAL REVERSE REPURCHASE AGREEMENTS $186,150,000
================================================================================================
</TABLE>
During the year ended December 31, 1996, the maximum and average amount of
reverse repurchase agreements outstanding were as follows:
===============================================================================
Maximum amount outstanding $192,168,750
- -------------------------------------------------------------------------------
Average amount outstanding $109,574,862
===============================================================================
Interest rates on reverse repurchase agreements ranged from 1.375% to
5.400% during the year. Total market value of the collateral for the reverse
repurchase agreements is $183,063,160.
For the year ended December 31, 1996, interest expense on reverse
repurchase agreements totalled $4,722,559.
7. Futures Contracts
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
14
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Portfolio records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Portfolio's basis in the contract. The Portfolio enters into such contracts
to hedge a portion of its portfolio. The Portfolio bears the market risk that
arises from changes in the value of the financial instruments and securities
indices (futures contracts) and the credit risk should a counterparty fail to
perform under such contracts.
As of December 31, 1996, 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 and are included in the
schedule of investments. When a purchased option expires, the Portfolio will
realize a loss in the amount of the premium paid. When the Portfolio enters into
a closing sales transaction, the Portfolio will realize a gain or loss depending
on whether the proceeds from 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.
As of December 31, 1996, the Portfolio held one purchase call option with a
total cost of $332,187.
When a Portfolio writes a covered call or put option, an amount equal to
the premium received by the Portfolio is recorded as a liability, the value of
which is marked-to-market daily. When a written option expires, the Portfolio
realizes a gain equal to the amount of the premium received. When the Portfolio
enters into a closing purchase transaction, the Portfolio realizes a gain (or
loss if the cost of the closing purchase transaction exceeds the premium
received when the option was sold) without regard to any unrealized gain or loss
on the underlying security, and the liability related to such option is
eliminated. When a written call option is exercised, the cost of the security
15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
sold will be decreased by the premium originally received. When a put option is
exercised, the amount of the premium originally received will reduce the cost of
the security which the Portfolio purchased upon exercise. When written index
options are exercised, settlement is made in cash. The risk associated with
purchasing options is limited to the premium originally paid. The Portfolio
enters into options for hedging purposes. The risk in writing a covered call
option is that the Portfolio gives up the opportunity to participate in any
increase in the price of the underlying security beyond the exercise price. The
risk in writing a put option is that the Portfolio is exposed to the risk of a
loss if the market price of the underlying security declines.
During the year ended December 31, 1996, the Portfolio did not write any
options.
9. Securities Traded on a When-Issued or
To-Be-Announced Basis
The Portfolio may trade securities on a "to-be-announced" ("TBA") basis. In
a TBA transaction, the Portfolio commits to purchasing or selling securities for
which specific information is not yet known at the time of the trade,
particularly the face amount and maturity date. Securities purchased on a TBA
basis are not settled until they are delivered to the Portfolio, normally 15 to
45 days later. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other portfolio
securities.
At December 31, 1996, the Portfolio held no TBA securities.
10. Capital Shares
At December 31, 1996, 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, 1996, total paid-in capital amounted to the following for
each class:
<TABLE>
<CAPTION>
Class A Class B Class C Class Y
=====================================================================================
<S> <C> <C> <C> <C>
Total Paid-in Capital $381,159,668 $200,171,472 $1,458,340 $39,175,414
=====================================================================================
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996* December 31, 1995
----------------------------- ---------------------------
Shares Amount Shares Amount
=============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,535,869 $ 14,470,892 695,391 $ 6,717,062
Shares issued on
reinvestment 1,868,453 17,348,871 2,271,693 21,769,239
Shares redeemed (8,104,977) (75,644,753) (9,230,741) (87,994,409)
- ---------------------------------------------------------------------------------------------
Net Decrease (4,700,655) $(43,824,990) (6,263,657) $(59,508,108)
=============================================================================================
Class B
Shares sold 1,580,979 $ 14,793,615 1,925,940 $ 18,365,201
Shares issued on
reinvestment 590,814 5,515,212 774,634 7,419,294
Shares redeemed (5,296,153) (49,706,247) (5,409,406) (51,757,610)
- ---------------------------------------------------------------------------------------------
Net Decrease (3,124,360) $(29,397,420) (2,708,832) $(25,973,115)
=============================================================================================
Class C
Shares sold 90,317 $ 850,795 62,023 $ 590,403
Shares issued on
reinvestment 6,474 60,383 5,077 48,855
Shares redeemed (48,604) (455,899) (31,879) (303,036)
- ---------------------------------------------------------------------------------------------
Net Increase 48,187 $ 455,279 35,221 $ 336,222
=============================================================================================
Class Y
Shares sold 4,245,386 $ 39,250,388 -- --
Shares issued on
reinvestment -- -- -- --
Shares redeemed -- -- -- --
- ---------------------------------------------------------------------------------------------
Net Increase 4,245,386 $ 39,250,388 -- --
=============================================================================================
</TABLE>
* For Class Y Shares, transactions are for the period from February 7, 1996
(inception date) to December 31, 1996.
17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1996 1995(1) 1994 1993(1) 1992(2)
==============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $9.77 $9.17 $10.01 $9.69 $9.56
- ----------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (3) 0.61 0.67 0.52 0.81 0.10
Net realized and
unrealized gain (loss) (0.44) 0.62 (0.80) 0.23 0.13
- ----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.17 1.29 (0.28) 1.04 0.23
- ----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.59) (0.69) (0.49) (0.72) (0.08)
Capital (0.01) -- (0.07) -- (0.02)
- ----------------------------------------------------------------------------------------------
Total Distributions (0.60) (0.69) (0.56) (0.72) (0.10)
- ----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.34 $9.77 $9.17 $10.01 $9.69
- ----------------------------------------------------------------------------------------------
Total Return 1.96% 14.50% (2.76)% 10.87% 2.41%+++
- ----------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $388,563 $453,378 $482,404 $7,067 $275
- ----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (3)(4) 0.93% 0.94% 1.00% 0.92% 0.68%+
Net investment income 6.16 6.70 6.18 7.76 6.24+
- ----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 420% 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 would have
been 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>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class B Shares 1996 1995(1) 1994 1993(1) 1992
==================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $9.81 $9.17 $10.01 $9.68 $9.81
- --------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (2) 0.56 0.59 0.46 0.73 0.53
Net realized and
unrealized gain (loss) (0.44) 0.65 (0.78) 0.27 (0.02)
- --------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.12 1.24 (0.32) 1.00 0.51
- --------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.54) (0.60) (0.45) (0.67) (0.53)
Capital (0.01) -- (0.07) -- (0.11)
- --------------------------------------------------------------------------------------------------
Total Distributions (0.55) (0.60) (0.52) (0.67) (0.64)
- --------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.38 $9.81 $9.17 $10.01 $9.68
- --------------------------------------------------------------------------------------------------
Total Return 1.42% 13.87% (3.25)% 10.45% 5.45%
- --------------------------------------------------------------------------------------------------
Net Assets,
End of Year (000s) $121,894 $158,459 $172,705 $851,350 $1,046,921
- --------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2)(3) 1.45% 1.45% 1.48% 1.40% 1.45%
Net investment income 5.64 6.19 5.69 7.28 5.47
- --------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 420% 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) 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 would have been 1.74%, 1.55% and
1.71%, respectively.
19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares 1996 1995(1) 1994 1993(1)(2)
=========================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $9.81 $9.17 $10.01 $9.90
- -----------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (3) 0.57 0.60 0.49 0.68
Net realized and unrealized gain (loss) (0.44) 0.65 (0.81) 0.04
- -----------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.13 1.25 (0.32) 0.72
- -----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.55) (0.61) (0.45) (0.61)
Capital (0.01) -- (0.07) --
- -----------------------------------------------------------------------------------------
Total Distributions (0.56) (0.61) (0.52) (0.61)
- -----------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.38 $9.81 $9.17 $10.01
- -----------------------------------------------------------------------------------------
Total Return 1.47% 13.93% (3.25)% 7.36%+++
- -----------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $1,443 $1,039 $646 $213
- -----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (3)(4) 1.38% 1.37% 1.47% 1.40%+
Net investment income 5.71 6.27 5.71 7.28+
- -----------------------------------------------------------------------------------------
Portfolio Turnover Rate 420% 294% 276% 540%
=========================================================================================
</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 February 4, 1993 (inception date) to December 31, 1993.
(3) The Investment adviser waived a portion of its fees for the period 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% (annualized).
(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 would have been 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>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Class Y Shares 1996(1)
=======================================================================
Net Asset Value, Beginning of Year $9.71
- -----------------------------------------------------------------------
Income From Operations:
Net investment income 0.57
Net realized and unrealized loss (0.37)
- -----------------------------------------------------------------------
Total Income From Operations 0.20
- -----------------------------------------------------------------------
Less Distributions From:
Net investment income (0.56)
Capital (0.01)
- -----------------------------------------------------------------------
Total Distributions (0.57)
- -----------------------------------------------------------------------
Net Asset Value, End of Year $9.34
- -----------------------------------------------------------------------
Total Return+++ 2.30%
- -----------------------------------------------------------------------
Net Assets, End of Year (000s) $39,667
- -----------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.44%
Net investment income 6.49
- -----------------------------------------------------------------------
Portfolio Turnover Rate 420%
=======================================================================
(1) For the period from February 7, 1996 (inception date) to December 31, 1996.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
21
<PAGE>
- --------------------------------------------------------------------------------
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, 1996, and the
related statement of operations for the year then ended and the statement of
changes in net assets and financial highlights for each of the years in the two-
year period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the years in the three-year period
ended December 31, 1994, were audited by other auditors whose report thereon,
dated February 10, 1995, expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Smith Barney Government Securities Fund of Smith Barney Investment Funds Inc. as
of December 31, 1996, the results of its operations for the year then ended and
the changes in its net assets and financial highlights for each of the years in
the two-year period then ended, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 11, 1997
22
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
A total of 47.03% of the ordinary income dividends paid by the Portfolio
have been derived from federal obligations and may be exempt from taxation at
the state level.
23
<PAGE>
[This page intentionally left blank]
<PAGE>
SMITH BARNEY
GOVERNMENT
SECURITIES
FUND
DIRECTORS
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank J. 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
James E. Conroy
Vice President and
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, N.A.
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 Government Securities Fund. It is not authorized for distribution
to prospective investors unless accompanied or preceded by an effective
Prospectus for the Fund, which contains information concerning the Fund's
investment policies and expenses as well as other pertinent information.
SMITH BARNEY
GOVERNMENT
SECURITIES
FUND
388 Greenwich Street
New York, New York 10013
FD0316 2/97
<PAGE>
ANNUAL REPORT
1996
1996
1996
1996
1996
[GRAPHIC]
SMITH BARNEY
GROWTH
OPPORTUNITY
FUND
- -----------------
December 31, 1996
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Growth Opportunity Fund
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide you with the annual report for the Smith Barney Growth
Opportunity Fund for the year ended December 31, 1996. 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 report.
Fund Performance Update
For the year ended December 31, 1996, the Smith Barney Growth Opportunity Fund
had a total return of 13.96% for its Class A shares and underperformed versus
the 16.50% total return for the Russell 2000 Index over the same period. The
Russell 2000 Index is an unmanaged index made up of 2,000 of the smallest
capitalized U.S.-based companies whose common stock trade on either the New
York, American or NASDAQ stock exchanges.
Fund's Investment Approach
The Smith Barney Growth Opportunity Fund employs a varied and eclectic
investment approach. As of December 31, 1996, the Fund owned 159 securities
spread across a number of companies and industries. We never "time the market."
Instead, we look for good companies at good prices and own them for the long
term.
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 is
made up of 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.
Market Update and Outlook
In 1995, the stock market, as measured by the Dow Jones Industrial Average
(DJIA) was up 33.45%. The sentiment coming into 1996 was that kind of market
performance could not be repeated. However, if you look back at history, any
time that the DJIA posted significant gains (which we define as 30% or better
returns), the following year has always been positive and the market as measured
by the DJIA gained 28.91% in 1996. At the beginning of 1996, we expected
positive market performance because the market has risen every Presidential
election year over the last 50 years. In fact, by all measures, 1996 was almost
a perfect year for the market because the economy was
1
<PAGE>
neither too hot nor too cold, inflation was subdued and the Federal Reserve
Board's monetary policy remained unchanged.
In 1996, the Growth Opportunity Fund performed well until late May and early
June. Then the over-the-counter market experienced a significant correction and
small capitalization stocks were hit exceptionally hard. Although we thought
this was an aberration and the climb in the Dow and the S&P 500 would eventually
spread to small cap stocks, that did not happen as blue chip stocks continued to
power the market. While the Fund has underperformed versus the major indices
this past year, we believe its performance has been competitive and shareholders
who are patient should ultimately be rewarded.
Looking ahead at 1997, we do not expect anything materially different for the
market because the economy is fine and inflation does not appear to be a
problem. Moreover, if history is any guide, a strong January usually means that
1997 will be another positive year for stocks. However, there are some potential
negatives on the horizon. One, blue chip stocks have obviously been driven to
historically high valuation levels and any correction could trigger a sharp
decline. Second, we believe current proposals to invest a portion of Social
Security in the stock market may be a sign of a possible market top because the
expectations of many investors about future returns, which we believe have
become unrealistic, are now conventional wisdom. Third, we are concerned about
what may happen to the market if the large inflows into stock mutual funds ever
slows down.
Portfolio Update
Although we do not 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
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 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 goods. The Smith
Barney Growth Opportunity Fund invests in many companies where management owns a
significant amount of stock, in companies with share purchase programs in place
and acquisition candidates in industries that have had takeovers. In addition,
the Fund looks for out-of-favor companies that are returning to favor as their
operating results are improving. In other words, stocks with excellent upside
potential that we believe can post outsized gains. All of these types of stocks
can be found in the Growth Opportunity Fund's top-twenty holdings.
2
<PAGE>
In closing, thank you for investing in the Smith Barney Growth Opportunity Fund.
We look forward to continuing to help you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Harvey Eisen
Heath B. McLendon Harvey Eisen
Chairman and Vice President and
Chief Executive Officer Investment Officer
January 22, 1997
3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/96 $14.31 $13.80 0.11 $2.26 13.96%
- --------------------------------------------------------------------------------
Inception* - 12/31/95 13.36 14.31 0.02 0.93 14.61+
================================================================================
Total $0.13 $3.19
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/96 $14.27 $13.74 $0.02 $2.26 13.12%
- --------------------------------------------------------------------------------
Inception* - 12/31/95 13.36 14.27 0.00 0.93 14.15+
================================================================================
Total $0.02 $3.19
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/96 $14.29 $13.78 $0.02 $2.26 13.24%
- --------------------------------------------------------------------------------
Inception* - 12/31/95 14.05 14.29 0.00 0.93 8.69+
================================================================================
Total $0.02 $3.19
================================================================================
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
-------------------------------
Class A+++ Class B+++ Class C
================================================================================
Year Ended 12/31/96 13.96% 13.12% 13.24%
- --------------------------------------------------------------------------------
Inception* through 12/31/96 16.65 16.03 15.98
================================================================================
With Sales Charge(2)
-------------------------------
Class A+++ Class B+++ Class C
================================================================================
Year Ended 12/31/96 8.28% 8.12% 12.24%
- --------------------------------------------------------------------------------
Inception* through 12/31/96 14.44 15.14 15.98
================================================================================
4
<PAGE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (May 3, 1994 through 12/31/96)+++ 50.83%
- --------------------------------------------------------------------------------
Class B (May 3, 1994 through 12/31/96)+++ 48.68
- --------------------------------------------------------------------------------
Class C (Inception* through 12/31/96) 23.07
================================================================================
(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 charges 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 within
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, which was the predecessor fund, for the period from May 3, 1994
through June 30, 1995.
5
<PAGE>
- --------------------------------------------------------------------------------
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 1996
[GRAPHIC]
Smith Barney Growth Opportunity Fund Russell 2000 Index
------------------------------------ ------------------
5/3/94 $ 9448 $ 10000
6/94 9536 9552
12/94 9552 10027
6/95 10911 11474
12/95 12506 12880
6/96 13467 14215
12/96 14251 15005
+ 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") which was the predecessor Fund), 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 June 30, 1996.
(Performance calculations include the historical return information related to
Common Sense for the period from May 3, 1994 through December 31, 1996). 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 as 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>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) December 31, 1996
- --------------------------------------------------------------------------------
Portfolio Breakdown
[PIE CHART]
Transportation 3.0%
Financial Services 10.2%
Repurchase Agreement 4.5%
Broadcast - Radio & Television 3.3%
Retail 3.0%
Telecommunications 4.8%
Pharmaceuticals 5.7%
Commercial Services 3.9%
Tobacco 3.5%
Entertainment 7.6%
Real Estate 3.2%
Manufacturing 4.8%
Property & Casualty Insurance 3.3%
Other Common Stocks, Convertible
Preferred Stocks and Convertible Bond 39.2%
Top Ten Common Stock Holdings
Percentage of
Company Total Investments
================================================================================
Allergan Inc. 2.8%
Cinar Films Inc. 2.7
Handleman Co. 2.7
American Classic Voyages Co. 2.1
Comsat Corp. 2.0
CUC International Inc. 2.0
Jacor Communications Inc. 1.9
Leggett & Platt Inc. 1.8
Foremost Corporation of America Co. 1.7
Falcon Building Products Inc. 1.5
================================================================================
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
===============================================================================
COMMON STOCKS -- 92.3%
===============================================================================
Advertising -- 1.1%
51,500 Advo Inc. $ 721,000
27,000 True North Communications Inc. 590,625
- -------------------------------------------------------------------------------
1,311,625
- -------------------------------------------------------------------------------
Aerospace/Defense -- 0.6%
7,000 Alliant Techsystems Inc.+ 385,000
22,500 Diagnostic Retrieval Systems 281,250
- -------------------------------------------------------------------------------
666,250
- -------------------------------------------------------------------------------
Automotive -- 0.9%
10,000 Copart Inc.+ 131,250
20,000 Harley Davidson Inc. 940,000
- -------------------------------------------------------------------------------
1,071,250
- -------------------------------------------------------------------------------
Beverages -- 0.2%
8,500 Glacier Water Services Inc.+ 194,438
- -------------------------------------------------------------------------------
Biotechnology -- 2.0%
73,000 Cell Genesys Inc.+ 666,125
37,000 Matritech Inc.+ 314,500
20,000 Neurex Corp.+ 340,000
7,400 Regeneron Pharmaceutical Inc.+ 119,325
95,000 Targeted Genetics Corp.+ 427,500
25,000 Thermedics Inc.+ 453,125
- -------------------------------------------------------------------------------
2,320,575
- -------------------------------------------------------------------------------
Broadcast - Radio & TV -- 3.3%
31,000 Cablevision Systems Corp.+ 949,375
80,000 Jacor Communications Inc.+ 2,190,000
25,000 Tele-Communications Liberty Media, Class A Shares + 714,063
- -------------------------------------------------------------------------------
3,853,438
- -------------------------------------------------------------------------------
Brokerage -- 1.0%
35,000 A.G. Edwards Inc. 1,176,875
- -------------------------------------------------------------------------------
Building Materials -- 0.7%
91,800 Giant Group Ltd. 768,825
53,000 Metalclad Corp.+ 96,063
- -------------------------------------------------------------------------------
864,888
- -------------------------------------------------------------------------------
Chemicals -- 0.7%
20,000 Monsanto Co. 777,500
- -------------------------------------------------------------------------------
Closed-End Funds -- 0.5%
32,500 New Age Media Funds Inc. 406,250
33,000 Central Fund Canada, Class A Shares 146,438
- -------------------------------------------------------------------------------
552,688
- -------------------------------------------------------------------------------
Commercial Services -- 3.9%
96,316 CUC International Inc. 2,287,505
1,000 Donnelley Enterprise Solutions Inc.+ 24,500
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
===============================================================================
Commercial Services -- 3.9% (continued)
5,000 GRC International Inc.+ $ 40,625
8,000 Intelliquest Information Group Inc.+ 182,000
88,000 Sotheby's Holdings Inc. 1,639,000
19,000 Vallen Corp.+ 315,875
- -------------------------------------------------------------------------------
4,489,505
- -------------------------------------------------------------------------------
Communications - Equipment & Software -- 0.8%
65,000 California Microwave Inc.+ 966,875
- -------------------------------------------------------------------------------
Computer Software -- 2.6%
28,000 Banyan Systems Inc.+ 126,000
90,000 Broadway & Seymour Inc.+ 945,000
40,000 Cellular Technical Services Co.+ 800,000
125,000 Interleaf Inc.+ 234,375
15,000 MDL Informational Systems Inc.+ 279,375
90,000 Multi-Corp. Inc.+ 405,000
40,000 Stac Inc.+ 265,000
- -------------------------------------------------------------------------------
3,054,750
- -------------------------------------------------------------------------------
Computers -- 0.5%
40,000 Auspex Systems Inc.+ 465,000
7,500 Standard Microsystems Co.+ 71,250
- -------------------------------------------------------------------------------
536,250
- -------------------------------------------------------------------------------
Construction -- 1.5%
120,000 Falcon Building Products Inc.+ 1,770,000
- -------------------------------------------------------------------------------
Consumer Services -- 0.2%
20,000 Metromedia International Group Inc.+ 197,500
- -------------------------------------------------------------------------------
Distribution/Wholesale -- 2.7%
363,700 Handleman Co. 3,091,450
- -------------------------------------------------------------------------------
Diversified Manufacturing-- 0.1%
6,000 Shelter Components Corp. 73,500
- -------------------------------------------------------------------------------
Drug & Health Care -- 0.5%
5,000 Emisphere Technologies Inc.+ 93,125
10,000 Johnson & Johnson 497,500
- -------------------------------------------------------------------------------
590,625
- -------------------------------------------------------------------------------
Education -- 0.2%
25,000 Childtime Learning Centers+ 234,375
- -------------------------------------------------------------------------------
Electrical Equipment -- 1.9%
72,000 American Superconductor Corp. + 765,000
35,000 Anixter International Inc. + 564,375
13,800 Fluke Corp. 615,825
10,000 Park Electrochemical Corp. 227,500
- -------------------------------------------------------------------------------
2,172,700
- -------------------------------------------------------------------------------
Electronics -- 2.4%
35,000 ADT Ltd. 800,625
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
===============================================================================
Electronics -- 2.4% (continued)
11,400 Ampex Corp., Class A Shares+ $ 106,875
10,000 EDO Corp. 71,250
36,000 Franklin Electric Publishers Inc. + 436,500
65,400 Kollmorgen Corp. 719,400
15,000 Tech-Sym Corp.+ 446,250
5,000 Wyle Electronics 197,500
- -------------------------------------------------------------------------------
2,778,400
- -------------------------------------------------------------------------------
Electronics-Defense -- 0.8%
50,000 Loral Space & Communications+ 918,750
- -------------------------------------------------------------------------------
Engineering -- 0.2%
20,000 Emcor Group Inc.+ 260,000
- -------------------------------------------------------------------------------
Entertainment -- 6.6%
184,000 American Classic Voyages Co. 2,415,000
70,000 Aztar Corp.+ 490,000
120,000 Cinar Films Inc. + 3,120,000
37,750 Gaylord Entertainment Co. 863,531
5,800 Go Video Inc. 6,888
12,500 Hollywood Park Inc. + 187,500
30,000 Steinway Musical Instruments+ 521,250
- -------------------------------------------------------------------------------
7,604,169
- -------------------------------------------------------------------------------
Environmental Control -- 0.6%
56,800 Calgon Carbon Corp. 695,800
- -------------------------------------------------------------------------------
Financial Services -- 10.2%
78,200 Capsure Holdings Corp. 889,525
197,000 Data Broadcasting Corp. + 1,379,000
9,000 Dauphin Deposit Corp. 297,000
30,000 Equitable Companies Inc. 738,750
10,000 First Bank Systems Inc. 682,500
32,500 Foremost Corporation of America Co. 1,950,000
7,500 Glendale Federal Bank FSB 174,375
299,500 Hoenig Group Inc. 1,609,806
15,000 Mercantile Bancorp Inc. 770,625
22,500 Oppenheimer Capital, L.P. 787,500
18,500 Roosevelt Financial Group Inc. 388,500
15,000 Salomon Inc. 706,875
55,000 Stifel Financial Corp. 481,250
35,000 United Asset Management Corp. 931,875
- -------------------------------------------------------------------------------
11,787,581
- -------------------------------------------------------------------------------
Food and Beverage -- 1.8%
29,500 EPL Technologies Inc.+ 178,844
29,100 Quality Food Centers Inc. 982,125
20,000 Savannah Foods & Industries Inc. 270,000
60,000 Triarc Co.+ 690,000
- -------------------------------------------------------------------------------
2,120,969
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
===============================================================================
Healthcare -- 0.8%
20,000 Mallinckrodt Inc. $ 882,500
- -------------------------------------------------------------------------------
Holding Companies-Diversified-- 0.8%
215,000 Worldcorp Inc.+ 940,625
- -------------------------------------------------------------------------------
Hospital Related -- 0.9%
110,000 Transitional Hospitals Corp.+ 1,058,750
- -------------------------------------------------------------------------------
Hotel/Gaming -- 0.2%
5,000 Jackpot Enterprises Inc. 48,750
22,500 U.S. Franchise Systems Inc.+ 227,813
- -------------------------------------------------------------------------------
276,563
- -------------------------------------------------------------------------------
Household Furnishings/Products -- 0.7%
78,000 Crown Crafts Inc. 780,000
- -------------------------------------------------------------------------------
Leisure Time -- 0.5%
100,000 Bell Sports Corp.+ 600,000
- -------------------------------------------------------------------------------
Lodging -- 0.6%
50,000 Chartwell Leisure Inc.+ 687,500
- -------------------------------------------------------------------------------
Machinery -- 0.3%
15,000 Goulds Pumps Inc. 344,063
- -------------------------------------------------------------------------------
Manufacturing -- 4.8%
20,000 Central Sprinkler Corp.+ 525,000
60,000 Leggett & Platt Inc. 2,077,500
60,365 Mark IV Industries Inc. 1,365,758
40,000 Outboard Marine Corp. 660,000
34,500 Pall Corp. 879,750
- -------------------------------------------------------------------------------
5,508,008
- -------------------------------------------------------------------------------
Medical -- 1.6%
20,000 Beckman Instruments Inc. 767,500
34,000 Beverly Enterprises Inc. + 433,500
12,500 Cephalon Inc.+ 256,250
9,000 Datascope Corp.+ 180,000
5,000 Dentsply International Inc. 237,500
- -------------------------------------------------------------------------------
1,874,750
- -------------------------------------------------------------------------------
Mining -- 0.8%
475,000 Campbell Resources Inc. + 445,313
15,000 Golden Star Resources, Ltd.+ 195,000
34,000 Uranium Resources Inc.+ 267,750
- -------------------------------------------------------------------------------
908,063
- -------------------------------------------------------------------------------
Office Equipment & Supplies -- 0.5%
30,000 Day Runner Inc.+ 585,000
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
===============================================================================
Oil/Gas -- 1.2%
10,500 Box Energy Corp. + $ 95,813
5,000 Lone Star Technologies+ 85,000
39,200 Lufkin Industries Inc. 980,000
15,000 McDermott International Inc. 249,375
- -------------------------------------------------------------------------------
1,410,188
- -------------------------------------------------------------------------------
Pharmaceuticals -- 4.6%
91,000 Allergan Inc. 3,241,875
250,000 FoxMeyer Health Corp.+ 406,250
80,000 Imclone Systems Inc.+ 780,000
35,000 Perrigo Co.+ 319,375
12,500 Teva Pharmaceutical Industries Ltd. ADR 628,125
- -------------------------------------------------------------------------------
5,375,625
- -------------------------------------------------------------------------------
Property & Casualty Insurance -- 3.3%
15,000 Chubb Corp. 806,250
40,000 Tig Holdings Inc. 1,355,000
20,000 Transatlantic Holdings Inc. 1,610,000
- -------------------------------------------------------------------------------
3,771,250
- -------------------------------------------------------------------------------
Publishing -- 1.5%
70,000 Big Flower Press Holdings Inc.+ 1,312,500
40,000 Golden Books Family Entertainment+ 445,000
- -------------------------------------------------------------------------------
1,757,500
- -------------------------------------------------------------------------------
Real Estate -- 3.2%
20,500 Ambassador Apartments Inc. 484,313
10,000 California Real Estate I+ 27,500
25,000 Cresent Real Estate Equities Inc. 1,318,750
15,000 Excel Realty Trust Inc. 380,625
65,000 Manufactured Home Communities Inc. 1,511,250
- -------------------------------------------------------------------------------
3,722,438
- -------------------------------------------------------------------------------
Retail -- 3.0%
10,800 Arbor Drugs Inc. 187,650
10,000 Cannondale Corp.+ 225,000
5,000 Egghead Inc.+ 26,250
35,000 Giant Foods Inc. 1,207,500
30,000 Heilig Meyers Co. 487,500
22,100 Intertan Inc.+ 107,738
67,500 Levitz Furniture Inc.+ 210,938
35,000 Lillian Vernon Corp. 428,750
102,622 Right Start Inc.+ 654,215
- -------------------------------------------------------------------------------
3,535,541
- -------------------------------------------------------------------------------
Schools -- 0.4%
65,700 Whitman Education Group Inc.+ 443,475
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Technology -- 1.3%
10,000 Coltec Industries+ $ 188,750
7,500 Ramtron International Co.+ 45,000
27,500 Storage Technology Inc.+ 1,309,688
- --------------------------------------------------------------------------------
1,543,438
- --------------------------------------------------------------------------------
Telecommunications -- 4.8%
96,000 Antec Corp.+ 864,000
55,000 ARC International Corp.+ 206,250
29,000 Commnet Cellular Inc.+ 808,375
95,000 Comsat Corp. 2,339,375
10,000 Diana Corp. 275,000
25,000 General DataComm Industries Inc.+ 262,500
22,000 Intelidata Technologies Corp.+ 159,500
80,000 Paxson Communications Co.+ 630,000
- --------------------------------------------------------------------------------
5,545,000
- --------------------------------------------------------------------------------
Textiles -- 0.9%
33,500 Westpoint Stevens Inc.+ 1,000,813
- --------------------------------------------------------------------------------
Tobacco -- 3.5%
42,500 Loews Corp. 4,005,625
- --------------------------------------------------------------------------------
Transportation -- 3.0%
40,000 Dynamex Inc.+ 395,000
425,000 Greyhound Lines Inc.+ 1,646,875
50,000 Kirby Corp.+ 987,500
10,000 Xtra Corp. 433,750
- --------------------------------------------------------------------------------
3,463,125
- --------------------------------------------------------------------------------
Utilities -- 0.6%
15,000 Enron Corp. 646,875
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $100,834,338) 106,799,441
================================================================================
CONVERTIBLE PREFERRED STOCKS -- 2.6%
================================================================================
Entertainment -- 1.0%
7,500 Hollywood Park Inc., Convertible 7.00% 99,375
40,000 General Datacom Industries, Convertible 9.00%+++ 1,065,000
- --------------------------------------------------------------------------------
1,164,375
- --------------------------------------------------------------------------------
Pharmaceuticals -- 1.1%
145,078 Foxmeyer Health Corp., Series A, Convertible $4.20 1,287,567
- --------------------------------------------------------------------------------
Publishing-- 0.5%
10,000 Golden Books, Convertible 8.75%+++ 582,500
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost -- $3,737,640) 3,034,442
================================================================================
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
===============================================================================
CONVERTIBLE BOND -- 0.6%
===============================================================================
Holding Companies-Diversified -- 0.6%
$1,000,000 Worldcorp Inc., 7.00% due 5/15/04
(Cost -- $806,776) $ 701,250
===============================================================================
REPURCHASE AGREEMENT -- 4.5%
5,157,000 Chase Manhattan Bank, 6.540% due 1/2/97; Proceeds
at maturity -- $5,158,874; (Fully collateralized
by U.S. Treasury Notes, 5.875% due 10/31/98; Market
value -- $5,263,556)
(Cost -- $5,157,000) 5,157,000
===============================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $110,535,754*) $115,692,133
===============================================================================
+ Non-income producing security.
+++ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be sold in transactions that are exempt from
registration, normally to qualified institutional buyers.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $110,535,754) $ 115,692,133
Cash 966
Receivable for securities sold 965,668
Dividends and interest receivable 91,119
Receivable for Fund shares sold 58,197
- --------------------------------------------------------------------------------
Total Assets 116,808,083
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 827,576
Payable for Fund shares purchased 279,404
Management fees payable 104,644
Accrued expenses 94,762
- --------------------------------------------------------------------------------
Total Liabilities 1,306,386
- --------------------------------------------------------------------------------
Total Net Assets $ 115,501,697
================================================================================
NET ASSETS:
Par value of capital shares $ 8,384
Capital paid in excess of par value 107,207,626
Overdistributed net investment income (915,530)
Accumulated net realized gain from security transactions 4,044,838
Net unrealized appreciation of investments 5,156,379
- --------------------------------------------------------------------------------
Total Net Assets $ 115,501,697
================================================================================
Shares Outstanding:
Class A 5,231,112
------------------------------------------------------------------------------
Class B 3,140,115
------------------------------------------------------------------------------
Class C 12,619
------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $13.80
------------------------------------------------------------------------------
Class B * $13.74
------------------------------------------------------------------------------
Class C ** $13.78
------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $14.53
================================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within 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>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 1,400,699
Interest 534,480
- --------------------------------------------------------------------------------
Total Investment Income 1,935,179
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 1,040,355
Distribution fees (Note 2) 552,538
Shareholder and system servicing fees 216,311
Registration fees 124,096
Shareholder communications 92,013
Audit and legal fees 62,959
Custody 40,400
Directors' fees 10,222
Other 6,574
- --------------------------------------------------------------------------------
Total Expenses 2,145,468
- --------------------------------------------------------------------------------
Net Investment Loss (210,289)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 175,824,529
Cost of securities sold 155,673,609
- --------------------------------------------------------------------------------
Net Realized Gain 20,150,920
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 11,738,040
End of year 5,156,379
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (6,581,661)
- --------------------------------------------------------------------------------
Net Gain on Investments 13,569,259
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 13,358,970
================================================================================
See Notes to Financial Statements.
16
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
1996 1995(a)
================================================================================
OPERATIONS:
Net investment income (loss) $ (210,289) $ 80,689
Net realized gain 20,150,920 5,045,316
Increase (decrease) in net unrealized appreciation (6,581,661) 5,383,267
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 13,358,970 10,509,272
- --------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS:
From net investment income -- (81,128)
In excess of net investment income (641,248) --
From net realized gains (15,974,305) (5,272,265)
- --------------------------------------------------------------------------------
Decrease In Net Assets From
Distributions to Shareholders (16,615,553) (5,353,393)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sales of shares 22,596,576 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 (Note 8) -- 68,038,812
Net asset value of shares issued
for reinvestment of dividends 16,598,514 5,353,317
Cost of shares reacquired (10,903,217) (1,254,877)
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 28,291,873 85,310,528
- --------------------------------------------------------------------------------
Increase in Net Assets 25,035,290 90,466,407
NET ASSETS:
Beginning of year 90,466,407 --
- --------------------------------------------------------------------------------
End of year* $115,501,697 $90,466,407
================================================================================
*Includes overdistributed net investment income of: $(915,530) $(564)
================================================================================
(a) For the period from July 3, 1995 (commencement of operations) to December
31, 1995.
See Notes to Financial Statements.
17
<PAGE>
- --------------------------------------------------------------------------------
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) security 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) 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) 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) dividends and distributions to
shareholders are recorded on the ex-dividend date; (g) gains or losses on the
sale of securities are calculated using the specific identification method; (h)
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; (i) direct expenses are charged to each class; management fees
and general portfolio expenses are allocated on the basis of relative net
assets; (j) the Portfolio intends to comply with the applicable provisions of
the Internal Revenue Code of 1986, as amended, pertaining to regulated
investment companies and to make distributions of taxable income sufficient to
relieve it from substantially all Federal income and excise taxes; (k) the
character of income and gains distributed are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. At December 31, 1996, reclassifications were made to the Fund's
capital accounts to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Accordingly, a portion
of
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
accumulated net investment loss amounting to $29,108 and a portion of
accumulated realized gain amounting to $3,636 was reclassified to paid-in
capital. Additionally, accumulated net investment income amounting to $92,537
was reclassified to accumulated net realized gains. Net investment income, net
realized gains and net assets were not affected by this change; and (l)
estimates and assumptions are required to be made regarding assets, liabilities
and changes in net assets resulting from operations when financial statements
are prepared. Changes in the economic environment, financial markets and any
other parameters used in determining these estimates could cause actual results
to differ.
2. MANAGEMENT AGREEMENT AND OTHER TRANSACTIONS
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
year ended December 31, 1996, SB received brokerage commissions of $21,680 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 within one year from initial
purchase. This CDSC declines by 0.50% the first year after purchase and
thereafter by 1.00% per year until no CSDC 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, 1996, CDSCs paid to SB were
approximately:
Class B Class C
================================================================================
CDSCs $3,000 $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 0.75% of the average daily net assets of each class, respectively. For
the year ended December 31, 1996, total Distribution Plan fees incurred by the
Portfolio were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $162,606 $387,723 $2,209
================================================================================
All officers and one Director of the Fund are employees of SB.
19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
3. INVESTMENTS
During the year ended December 31, 1996, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $190,212,787
- --------------------------------------------------------------------------------
Sales 175,824,529
================================================================================
At December 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $14,722,276*
Gross unrealized depreciation (9,565,897)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 5,156,379*
================================================================================
* Substantially the same for Federal income tax purposes.
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. 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 Fund enters into closing sales transaction, the Portfolio will realize
a gain or loss depending on whether the sales proceeds from 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 Fund purchases upon exercise will be increased by
the premium originally paid.
As of December 31, 1996, the Portfolio had no purchased call or put
options.
When a Portfolio writes a call or put option, an amount equal to the
premium received by the Portfolio is recorded as a liability, the value of which
is marked-to-market daily. When a written option expires, the Portfolio realizes
a gain equal
20
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
to the amount of the premium received. When the Portfolio enters into a closing
purchase transaction, the Portfolio realizes a gain (or loss if the cost of the
closing purchase transaction exceeds the premium received when the option was
written) without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is eliminated. When a written
call option is exercised the cost of the security sold will be increased by the
premium originally received. When a written put option is exercised, the amount
of the premium received will reduce the cost of the security which the Portfolio
purchased upon exercise. When written index option is exercised, settlement is
made in cash. The risk associated with purchasing options for hedging purposes.
The risk in writing a call option is that the Portfolio gives up the opportunity
to participate in any increase in the price of the underlying security beyond
the exercise price. The risk in writing a put option is that the Fund is exposed
to the risk of loss if the market price of the underlying security declines.
As of December 31, 1996, the Portfolio had no written call or put options.
6. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Portfolio records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Portfolio's basis in the contract. The Portfolio enters into such contracts
to hedge a portion of its portfolio. The Portfolio bears the market risk that
arises from changes in the value of the financial instruments and securities
indices (futures contracts) and the credit risk should a counterparty fail to
perform under such contracts.
As of December 31, 1996, the Portfolio had no open futures contracts.
7. CAPITAL SHARES
At December 31, 1996, 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.
21
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At December 31, 1996, total paid-in capital amounted to the following for
each class:
Class A Class B Class C
==============================================================================
Total Paid-in Capital $66,375,450 $40,662,542 $178,018
==============================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995*
------------------- -------------------
Shares Amount Shares Amount
====================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 919,099 $13,273,879 461,030 $ 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 8) -- -- 3,386,185 45,262,249
Shares issued on
reinvestment 789,890 10,459,184 255,366 3,469,508
Shares redeemed (510,041) (7,322,036) (70,417) (992,400)
- ------------------------------------------------------------------------------------
Net Increase 1,198,948 $16,411,027 4,032,164 $ 54,245,207
====================================================================================
Class B
Shares sold 626,244 $ 9,084,836 465,703 $ 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 8) -- -- 1,704,119 22,776,563
Shares issued on
reinvestment 463,511 6,114,715 139,162 1,882,868
Shares redeemed (239,986) (3,410,585) (18,638) (262,477)
- ------------------------------------------------------------------------------------
Net Increase 849,769 $11,788,966 2,290,346 $ 30,979,129
====================================================================================
Class C
Shares sold 16,080 $ 237,861 6,090 $ 85,251
Shares issued on
reinvestment 1,860 24,615 70 941
Shares redeemed (11,481) (170,596) -- --
- ------------------------------------------------------------------------------------
Net Increase 6,459 $ 91,880 6,160 $ 86,192
====================================================================================
</TABLE>
* For Class A shares and Class B shares, transactions are for the period from
July 3, 1995 (inception date) to December 31, 1995 and Class C shares
transactions are for the period from August 8, 1995 (inception date) to
December 31, 1995.
22
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
8. TRANSFER OF NET ASSETS
On June 30, 1995, the Portfolio acquired the 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:
Total Net
Shares Assets of Total Net
Issued by Acquired Assets of
Acquired Fund the Portfolio Fund the Portfolio
================================================================================
Common Sense 5,090,304 $68,038,812 $0
================================================================================
The total net assets of Common Sense before acquisition included unrealized
appreciation of $6,354,773. Total net assets of the Portfolio after the merger
were $68,038,812. The transaction was structured for tax purposes to qualify as
a tax-free reorganization under the Internal Revenue Code, as amended.
23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Class A Shares Class B Shares
--------------- ----------------
1996 1995(1) 1996 1995(1)
===============================================================================
Net Asset Value, Beginning of Year $14.31 $13.36 $14.27 $13.36
- -------------------------------------------------------------------------------
Income From Operations:
Net investment income (loss) 0.01 0.03 (0.09) (0.02)
Net realized and unrealized gain 1.85 1.87 1.84 1.86
- -------------------------------------------------------------------------------
Total Income From Operations 1.86 1.90 1.75 1.84
- -------------------------------------------------------------------------------
Less Distributions:
From net investment income -- (0.02) -- --
In excess of net investment income (0.11) -- (0.02) --
From net realized gains (2.26) (0.93) (2.26) (0.93)
- -------------------------------------------------------------------------------
Total Distributions (2.37) (0.95) (2.28) (0.93)
- -------------------------------------------------------------------------------
Net Asset Value, End of Year $13.80 $14.31 $13.74 $14.27
- -------------------------------------------------------------------------------
Total Return 13.96% 14.61%+++ 13.12% 14.15%+++
- -------------------------------------------------------------------------------
Net Assets, End of Year (000s) $72,180 $57,693 $43,148 $32,685
- -------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.78% 1.72%+ 2.53% 2.46%+
Net investment income (loss) 0.13 0.46+ (0.63) (0.27)+
- -------------------------------------------------------------------------------
Portfolio Turnover Rate 183% 51% 183% 51%
- -------------------------------------------------------------------------------
Average commissions per share
paid on equity security transactions $0.06 $0.06 $0.06 $0.06
===============================================================================
(1) For the period from July 3, 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.
24
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
Class C Shares 1996 1995(1)
================================================================================
Net Asset Value, Beginning of Year $14.29 $14.05
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income (loss) (0.08) 0.01
Net realized and unrealized gain 1.85 1.16
- --------------------------------------------------------------------------------
Total Income From Operations 1.77 1.17
- --------------------------------------------------------------------------------
Less Distributions:
In excess of net investment income (0.02) --
From net realized gains (2.26) (0.93)
- --------------------------------------------------------------------------------
Total Distributions (2.28) (0.93)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $13.78 $14.29
- --------------------------------------------------------------------------------
Total Return 13.24% 8.69%+++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 174 $88
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.40% 2.29%+
Net investment income (0.48) 0.13+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 183% 51%
- --------------------------------------------------------------------------------
Average commissions per share paid on
equity security transactions $0.06 $0.06
================================================================================
(1) 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.
25
<PAGE>
- --------------------------------------------------------------------------------
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 Growth Opportunity
Fund of Smith Barney Investment Funds Inc. as of December 31, 1996, the related
statement of operations for the year then ended and the statements of changes in
net assets and financial highlights for the year then ended and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. As to securities
purchased or 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Smith Barney Growth Opportunity Fund of Smith Barney Investment Funds Inc. as of
December 31, 1996, the results of its operations for the year then ended and the
changes in its net assets and financial highlights for the year then ended and
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 5, 1997
26
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
The Fund paid distributions of $5,866,670 from long-term capital gains. A
total of 21.01% of the ordinary income dividends paid by the Fund qualified for
the dividends received deduction available to corporate taxpayers.
27
<PAGE>
[This page intentionally left blank]
<PAGE>
SMITH BARNEY
GROWTH OPPORTUNITY
FUND
DIRECTORS
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank J. 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
Harvey Eisen
Vice President and
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.
DISTRIBUTORS
Smith Barney Inc.
PFS Distributors, Inc.
CUSTODIAN
PNC Bank, N.A.
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 Governments Fund Inc. It is not authorized for distribution
to prospective investors unless accompanied or preceded by an effective
Prospectus for the Fund, which contains information concerning the Fund's
investment policies and expenses as well as other pertinent information.
SMITH BARNEY
GROWTH OPPORTUNITY
FUND
388 Greenwich Street
New York, New York 10013
FD01071 2/97
[PHOTO]
SMITH BARNEY
[PHOTO] SPECIAL
EQUITIES FUND
-------------
ANNUAL REPORT
-------------
December 31, 1996
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
================================================================================
The Smith Barney Special Equities Fund seeks to provide long-term capital
appreciation by investing in equity securities which are believed to have
superior appreciation potential. They may be securities of companies in their
development stage, or may be older companies which appear to be entering a new
stage of more rapid growth.
NASDAQ
SYMBOLS
- ----------------------------------------------
Class A HSEAX
Class B HSPEX
Class C HSECX
SMITH BARNEY SPECIAL EQUITIES FUND'S
AVERAGE ANNUAL TOTAL RETURNS*
- --------------------------------------------------------------------------------
Since
Inception Date One-Year Five-Year Ten-Year Inception
- --------------------------------------------------------------------------------
Class A 11/6/92 (5.81)% N/A N/A 19.83%
- --------------------------------------------------------------------------------
Class B 12/13/82 (6.44)% 15.42% 10.26% 10.55%
- --------------------------------------------------------------------------------
Class C 10/18/93 (6.44)% N/A N/A 8.11%
- --------------------------------------------------------------------------------
* Assumes reinvestment of all dividends and capital gain distributions, if any,
at net asset value and does not reflect the deduction of the applicable sales
charges with respect to Class A shares or the applicable contingent deferred
sales charges with respect to Class B and C shares, which would reduce the
performance quoted.
"At Smith Barney Mutual Funds, your investment needs come first. Our goal is
to deliver consistent and competitive returns over time using a wide range of
investment strategies."
[PHOTO]
JESSICA M. BIBLIOWICZ
President,
Smith Barney Special Equities Fund
- --------------------------------------------------------------------------------
WHAT'S INSIDE
- --------------------------------------------------------------------------------
Shareholder Letter........................................................... 1
An Interview with Portfolio Manager
George V. Novello............................................................ 3
Historical Performance....................................................... 5
Smith Barney Special Equities Fund
at a Glance.................................................................. 7
Schedule of Investments...................................................... 8
Statement of Assets and Liabilities......................................... 11
Statement of Operations..................................................... 12
Statements of Changes in Net Assets......................................... 13
Notes to Financial Statements............................................... 14
Financial Highlights........................................................ 18
Tax Information............................................................. 20
Independent Auditors' Report................................................ 21
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO] [PHOTO]
HEATH B. GEORGE V.
MCLENDON NOVELLO
Chairman and Vice President and
Chief Executive Officer Investment Officer
Fellow Shareholder:
We are pleased to provide you with the annual report for the Smith Barney
Special Equities Fund for the year ended December 31, 1996. In this report, we
discuss stock market conditions and outline our investment strategy in 1996. A
more detailed summary of performance and current holdings can be found in the
appropriate sections that follow. In addition, an interview with George Novello,
the Fund's Portfolio Manager, appears after this letter.
Fund Performance
After a strong 1995 performance reflecting the benefits of a vibrant small-cap
market, the Fund was greatly affected by underperformance in the small-cap
sector. The Fund's total return for the year ended December 31, 1996 was - 5.81%
for Class A shares.
Although the NASDAQ Composite Index ("Index") rose 22.71% during 1996, the gains
were posted by a relatively small group of stocks. For example, by subtracting
the top 25 stocks in terms of market weight, the Index rose only 8%.
Furthermore, taking out the top 100 names would show an overall decline in the
Index. Suffice it to say that 1996 stock market performance was indeed a
concentrated affair.
Market Overview
Following a period of relative strength through May of 1996,
small-capitalization stocks began to significantly underperform their large-cap
counterparts, reflecting slower domestic economic growth and subsequent profit
taking. Typically, in periods of decelerating economic growth investors look to
larger, more liquid issues perceived to offer greater earnings visibility. Put
another way, the current outperformance of the broader market (i.e., the
Standard &Poor's 500 Index) is being driven primarily by the top 50
largest-capitalized stocks, masking the underperformance of
smaller-capitalization issues in the Index. The slowing U.S. economy led to a
bond market rally, driving down yields and creating a fertile ground for
equities. This lower interest rate environment is to the advantage of overall
equity valuations and small-caps in particular.
In the third quarter the Fund pulled back, reflecting general weakness in the
small-cap and initial public offering markets. Large-cap issues led the advance,
substantially outperforming small-caps on a relative basis. We expect this trend
to reverse, as we look for a moderate corporate profit reacceleration in 1997,
resulting in stronger relative expected returns for emerging growth stocks
vis-a-vis large-caps. Fourth quarter market performance, led by a strong
interest in technology stocks, continued to strengthen as PC demand firmed and
semiconductor chip pricing and order rates troughed. To that end, most major
stock market averages finished the year on a choppy note, reflecting typical
earnings preannouncement jitters.
Fund's Investment Strategy
We remain focused on high-quality emerging growth stocks and continue to believe
that the small-cap universe, despite its inherent volatility, offers the
greatest potential return to long-term investors over a full market cycle. We do
not focus on short-term price fluctuations as long as we believe a company's
fundamentals and growth are sustainable. We think that small companies in
particular will deliver greater earnings growth and potential return over the
long term, given the expected earnings slowdown of large-capitalization
companies, the strengthening of the U.S. dollar and slightly higher interest
rates in the second half of 1997.
- --------------------------------------------------------------------------------
Smith Barney Special Equities fund 1
<PAGE>
At the end of the year, the Fund's top-five holdings were:
. Boston Chicken, Inc., operator and franchisor of a chain of retail food
service restaurants specializing in fresh, convenient meals featuring home-style
entrees, vegetables, salads and other side dishes.
. Starbucks Corp., the largest specialty coffee retailer and wholesaler. The
company has plans to roll out a bottled version of its frappucino in a joint
venture with Pepsi.
. PeopleSoft Inc., a leading supplier of client/server business software that
focuses on the human resources management sector. The company has expanded its
product reach into other segments, including accounting and financial planning.
. Planet Hollywood, the premier theme restaurant-merchandise store operator in
the country, whose success is linked to sponsor stars such as Arnold
Schwarzenegger, Sylvester Stallone, Bruce Willis, Demi Moore and Jean-Claude Van
Damme, to name a few.
. Cymer, Inc., a leading provider of laser light sources used in semiconductor
manufacturing that was one of the best-performing IPOs (Initial Public
Offerings) of 1996. The company has a 90% share of the deep-ultraviolet stepper
market, which is forecast to grow by 50% over the next five years.
Outlook
Our investment philosophy has not changed -- we look for high-quality growth
stocks with powerful earnings momentum -- believing that these types of stocks
offer superior growth potential and above-average return potential over the long
term.
As discussed earlier, we believe the current U.S. economic environment will
favor small-cap issues in 1997. Inflation remains subdued and real GDP growth is
moderate. Therefore, we do not foresee an interest rate hike by the Fed any time
soon. To that end, we believe the relative outperformance of the small cap
sector will be facilitated by a strengthening U.S. dollar, which tends to erode
profits of large-cap companies that derive significant earnings from overseas
markets.
At this time, we would like to thank you once again for your investment in Smith
Barney Special Equities Fund. We look forward to continuing to help you achieve
your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ George V. Novello
Heath B. McLendon George V. Novello
Chairman and Vice President and
Chief Executive Officer Investment Officer
January 17, 1997
- --------------------------------------------------------------------------------
Top Ten Holdings* December 31, 1996
- --------------------------------------------------------------------------------
1. Boston Chicken, Inc. 4.9%
- --------------------------------------------------------------------------------
2. Starbucks Corp. 4.3
- --------------------------------------------------------------------------------
3. PeopleSoft Inc. 4.0
- --------------------------------------------------------------------------------
4. Planet Hollywood International Inc. 3.4
- --------------------------------------------------------------------------------
5. Cymer, Inc. 3.2
- --------------------------------------------------------------------------------
6. Callaway Golf Co. 3.0
- --------------------------------------------------------------------------------
7. PETsMART, Inc. 3.0
- --------------------------------------------------------------------------------
8. Einstein/Noah Bagel Corp. 2.9
- --------------------------------------------------------------------------------
9. Aspect Telecommunications Corp. 2.6
- --------------------------------------------------------------------------------
10. Gucci Group NV 2.6
- --------------------------------------------------------------------------------
*As a percentage of total investments.
- --------------------------------------------------------------------------------
2 1996 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
An Interview with Portfolio Manager George V. Novello
- --------------------------------------------------------------------------------
A Focus on Growth
In a recent conversation with George Novello, Portfolio Manager of the Smith
Barney Special Equities Fund, he shared some of his ideas on growth investing.
With over 30 years of investment experience, Mr. Novello is currently
responsible for more than $600 million in equity assets for Smith Barney.
George, how would you describe the Smith Barney Special Equities Fund?
George: We view it as a mutual fund that invests in small capitalization
emerging growth stocks. Our stock selection process is focused on growth; not
momentum, not value, not dividend yield -- but growth.
Could you give us an example of the kind of company you generally invest in?
George: Consider Starbucks Coffee, the Fund's number two holding as of December
31, 1996. First, we have a big position in Starbucks, because the company makes
a terrific product that is consumed by millions of people all over the world
every day -- kind of like hamburgers. Second, we think Starbucks' management is
first rate. So we bought Starbucks when it went public and we have held it ever
since. It is a bigger and better company today than it was when we first bought
it, but even now we do not think it has really reached its full potential.
Many of the other companies in the Special Equities Fund are associated with
highly recognizable products: the kind you see in supermarkets or shopping malls
or drugstores. Why do you tend to favor companies like these?
George: I began my Wall Street career as an analyst in the consumer sector. If
you take a historical perspective, a great many of the fastest-growing companies
have been consumer oriented in one way or another. Whether it is food or
retailing or personal care or leisure or a number of other sectors, we like
companies that make products people use no matter what is going on in the
business cycle.
So you are drawn to consumer stocks because they are not as vulnerable to market
cycles as some of the industrial companies?
George: Partly. But what also attracts us to these types of companies is good
ability to see products, to hold them, to use them and to develop an
understanding of why many consumers would rather pay three dollars for a cup of
Starbucks coffee than a dollar for a cup of coffee at the local diner.
By that measure, should you avoid technology stocks? After all, it is pretty
difficult for most people to understand what a microprocessor or a modem does.
================================================================================
"We seldom buy stocks unless we have met with management. We sit down and look
them in the eye and have an exhaustive dialogue. And that hands-on approach
seems to work for us over time."
================================================================================
George: That is true. But even though the Special Equities Fund is about 28%
invested in the technology sector, you have to look more closely at the
companies we actually own. Unlike a lot of other small-capitalization funds, we
emphasize software. Hardware companies tend to make easily reproduced products;
someone comes up with an innovation and three months later a dozen companies
have either matched it or bettered it. In our view, software is far more
proprietary and, again, aimed at fulfilling consumer needs in many cases.
How much of your investment approach is based on intuition and how much stems
from security analysis?
George: We believe that the ability to select stocks is more art than science.
In other words, common sense plays a significant role. We definitely avail
ourselves of all the excellent quantitative and security analysis
- --------------------------------------------------------------------------------
Smith Barney Special Equities fund 3
<PAGE>
provided by Smith Barney and the rest of Wall Street. But this analytical
process primarily serves as a kind of screening and verification mechanism. When
all is said and done, we pick stocks based on our experience and a certain
degree of intuition.
Over time, the Special Equities Fund has performed very well under your
guidance, but 1996 was a tough year for the Fund. Could you put last year's
performance in perspective for us?
George: Shareholders should understand that the stock market did not reward the
kind of companies we like. In 1996, investors loved big, well-established
companies. In fact, the performance of the S&P 500 and even the Russell 2000 was
influenced substantially by the 25 biggest companies in these indexes.
So does that mean the companies the Special Equities Fund invests in had a bad
year?
George: Not at all. You have to make a distinction between stock performance and
earnings performance. Most of the companies in the Fund have average
capitalizations between $100 million and $800 million. And even though most
companies in this market capitalization range did not enjoy good stock price
performance last year, they did remarkably well from a business perspective. In
fact, of all the companies held by Special Equities Fund, only two reported
negative earnings in 1996.
George, is this a good time to invest in small-capitalization stocks?
George: We think so. If you look at traditional valuations like price-earnings
ratios, small-capitalization stocks look very attractive compared to their
large-capitalization brethren. But more importantly, we believe the earnings
potential of smaller companies is truly outstanding. A study by First Call, a
market data service, puts average earnings growth estimates for the Russell 2000
near 35% in 1997 -- compared with only 15% for the S&P 500. That is a pretty
compelling story.
What would you be doing if you were not managing the Special Equities Fund?
George: Actually, I have always wanted to write a mystery novel. I have even
jotted down a few ideas from time to time.
And the sleuth, in this case, would be a portfolio manager?
George: What else? In the same way that a detective combs through the evidence
looking for a pattern, I like to sift through investment stories and find
something that others may have overlooked.
How should investors view the Special Equities Fund?
George: Because of our outstanding year in 1995 and all the attention we
received in the media, I think many people got the impression that Special
Equities was a "hot" fund -- one that moves in and out of stocks based on
momentum or market dynamics. But in fact, much of our performance in 1995 was
generated by the stocks we had held two years or more.
Investors should understand that the Fund is a long-term vehicle aimed at
building wealth. A shareholder in the Fund should have the patience -- and the
risk tolerance -- to invest for a three- to five-year market cycle. Because of
the kinds of stocks we hold, the Fund is prone to greater short-term volatility
than the average equity mutual fund. But over time, we believe the Fund is a
great way to tap into the potential of small-capitalization emerging growth
stocks.
- --------------------------------------------------------------------------------
4 1996 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
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)
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/96 $30.44 $28.11 $0.00 $0.28 $0.36 (5.81)%
- -------------------------------------------------------------------------------------------------------------------------
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 $1.37 $0.36
=========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/96 $29.76 $27.28 $0.00 $0.28 $0.36 (6.44)%
- --------------------------------------------------------------------------------------------------------------------
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)
====================================================================================================================
Total $1.11 $2.04 $0.65
====================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/96 $29.77 $27.28 $0.00 $0.28 $0.36 (6.44)%
- ---------------------------------------------------------------------------------------------------------------------------
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 $1.37 $0.36
===========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Inception*- 12/31/96 $28.99 $28.21 $0.00 $0.28 $0.36 (0.75)%+
=========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Special Equities fund 5
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Z Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/96 $30.46 $28.26 $0.00 $0.28 $0.36 (5.37)%
- -------------------------------------------------------------------------------------------------------------------------
Inception*- 12/31/95 26.49 30.46 0.00 0.76 0.00 17.95+
=========================================================================================================================
Total $0.00 $1.04 $0.36
=========================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge(1)
-----------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/96 (5.81)% (6.44)% (6.44)% N/A (5.37)%
- ---------------------------------------------------------------------------------------------------------------
Five Years Ended 12/31/96 N/A 15.42 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Ten Years Ended 12/31/96 N/A 10.26 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Inception* through 12/31/96 19.83 10.55 8.11 (0.75)%+ 9.19
===============================================================================================================
<CAPTION>
With Sales Charge(2)
-----------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
===============================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/96 (10.51)% (11.03)% (7.38)% N/A (5.37)%
- ---------------------------------------------------------------------------------------------------------------
Five Years Ended 12/31/96 N/A 15.31 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Ten Years Ended 12/31/96 N/A 10.26 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
Inception* through 12/31/96 18.36 10.55 8.11 (0.75)%+ 9.19
===============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 12/31/96) 111.55%
- --------------------------------------------------------------------------------
Class B (12/31/86 through 12/31/96) 165.64
- --------------------------------------------------------------------------------
Class C (Inception* through 12/31/96) 28.40
- --------------------------------------------------------------------------------
Class Y (Inception* through 12/31/96) (0.75)+
- --------------------------------------------------------------------------------
Class Z (Inception* through 12/31/96) 11.61
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the applicable
sales charges with respect to Class A 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 within 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 dates for Class A, B, C, Y and Z shares are November 6, 1992,
December 13, 1982, October 18, 1993, January 31, 1996 and October 2, 1995,
respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
6 1996 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund at a Glance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of the
Smith Barney Special Equities Fund vs. the Standard & Poor's 500 Index
- --------------------------------------------------------------------------------
December 1986 - December 1996
[Line Graph Appears Here]
Smith Barney Standard &
Special Equities Poor's
Year Fund 500 Index
---- ---- ---------
1986 10,000 10,000
1987 8,909 10,525
1988 10,032 12,269
1989 11,899 16,150
1990 8,959 15,648
1991 12,969 20,406
1992 14,148 21,960
1993 18,666 24,167
1994 17,495 24,485
1995 28,394 33,675
1996 26,564 41,403
Hypothetical illustration of $10,000 invested in Class B shares on December 31,
1986, assuming reinvestment of dividends and capital gains, if any, at net asset
value through December 31, 1996. 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 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 shareholders tax liability on dividends or capital gains.
Industry Diversification of Common Stocks
- --------------------------------------------------------------------------------
[Diverse Bar Chart Appears Here]
Broadcasting 4.2
Business Services 6.3
Communications 6
Computer Services 5.8
Healthcare 4.6
Pharmaceuticals/Medical Products 4.5
Restaurant 16.9
Retail 11.7
Semiconductor & Electronics 11.4
Software 12.9
Other 15.7
Investment Breakdown
- --------------------------------------------------------------------------------
[Pie Chart Appears Here]
7.4% Repurchase Agreement
92.6% Common Stocks
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 92.6%
Auto Parts & Equipment -- 0.7%
225,000 Dura Automotive Systems, Inc.+ $ 5,062,500
- --------------------------------------------------------------------------------
Broadcasting -- 3.8%
400,000 Evergreen Media Corp., Class A Shares+ 10,000,000
125,000 Metro Networks, Inc.+ 3,156,250
400,000 Univision Communications Inc.+ 14,800,000
- --------------------------------------------------------------------------------
27,956,250
- --------------------------------------------------------------------------------
Business Services -- 5.8%
240,000 Abacus Direct Corp.+ 4,500,000
141,000 Applied Analytical Industries, Inc.+ 2,696,625
300,000 COREStaff, Inc.+ 7,106,250
500,000 Employee Solutions, Inc.+ 10,250,000
690,000 Whittman-Hart, Inc.+ 17,681,250
- --------------------------------------------------------------------------------
42,234,125
- --------------------------------------------------------------------------------
Communications -- 5.5%
300,000 Ascend Communications, Inc.+ 18,637,500
300,000 Aspect Telecommunications Corp.+ 19,050,000
75,000 Shiva Corp.+ 2,615,625
- --------------------------------------------------------------------------------
40,303,125
- --------------------------------------------------------------------------------
Computer Services -- 5.4%
200,000 Computer Horizons Corp.+ 7,700,000
550,000 Ingram Micro, Inc., Class A Shares+ 12,650,000
500,000 Sykes Enterprises, Inc.+ 18,750,000
- --------------------------------------------------------------------------------
39,100,000
- --------------------------------------------------------------------------------
Entertainment and Leisure -- 5.6%
750,000 Callaway Golf Co. 21,562,500
450,000 Panavision Inc.+ 9,337,500
300,000 Penske Motorsports, Inc.+ 7,575,000
100,000 Steiner Leisure Ltd.+ 2,012,500
- --------------------------------------------------------------------------------
40,487,500
- --------------------------------------------------------------------------------
Financial Services -- 1.1%
300,000 Delta Financial Corp.+ 5,400,000
105,000 The Money Store Inc. 2,900,625
- --------------------------------------------------------------------------------
8,300,625
- --------------------------------------------------------------------------------
Healthcare -- 4.3%
46,000 CRA Managed Care, Inc.+ 2,070,000
150,000 Henry Schein, Inc.+ 5,156,250
200,000 OccuSystems, Inc.+ 5,400,000
500,000 PhyCor, Inc.+ 14,187,500
300,000 Physicians Sales & Service, Inc.+ 4,312,500
- --------------------------------------------------------------------------------
31,126,250
- --------------------------------------------------------------------------------
Manufacturing -- 0.9%
300,000 Oakley, Inc.+ 3,262,500
182,500 Zag Industries Ltd.+ 3,011,250
- --------------------------------------------------------------------------------
6,273,750
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1996 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Office Products -- 2.1%
100,000 Corporate Express, Inc.+ $ 2,943,750
100,000 OfficeMax, Inc.+ 1,062,500
425,000 Viking Office Products, Inc.+ 11,342,188
- --------------------------------------------------------------------------------
15,348,438
- --------------------------------------------------------------------------------
Oil and Gas -- 0.8%
240,000 Saba Petroleum Co.+ 6,060,000
- --------------------------------------------------------------------------------
Personal Care -- 2.1%
500,000 Nu Skin Asia Pacific Inc.+ 15,437,500
- --------------------------------------------------------------------------------
Pharmaceuticals/Medical Products -- 4.2%
100,000 Autoimmune, Inc.+ 1,537,500
400,000 Liposome Co., Inc.+ 7,650,000
150,000 Medicis Pharmaceuticals Corp., Class A Shares+ 6,600,000
300,000 Safeskin Corp.+ 14,625,000
- --------------------------------------------------------------------------------
30,412,500
- --------------------------------------------------------------------------------
Restaurant -- 15.6%
1,000,000 Boston Chicken, Inc.+ 35,875,000
700,000 Einstein/Noah Bagel Corp.+ 20,825,000
60,000 Manhattan Bagel Co., Inc.+ 435,000
1,250,000 Planet Hollywood International Inc., Class A Shares+ 24,687,500
1,100,000 Starbucks Corp.+ 31,487,500
- --------------------------------------------------------------------------------
113,310,000
- --------------------------------------------------------------------------------
Retail -- 10.9%
650,000 Abercrombie & Fitch Co., Class A Shares+ 10,725,000
5,000 Delia's Inc.+ 99,375
600,000 Eagle Hardware & Garden, Inc.+ 12,450,000
300,000 Gucci Group NV 19,162,500
150,000 Mazel Stores, Inc.+ 3,375,000
250,000 Party City Corp.+ 4,250,000
1,000,000 PETsMART, Inc.+ 21,875,000
425,000 Sunglass Hut International, Inc.+ 3,081,250
150,000 United Auto Group, Inc.+ 3,862,500
- --------------------------------------------------------------------------------
78,880,625
- --------------------------------------------------------------------------------
Semiconductor and Electronics -- 10.6%
400,000 ANADIGICS, Inc.+ 15,700,000
480,000 Cymer, Inc.+ 23,100,000
450,000 ESS Technology, Inc.+ 12,656,250
375,000 Triquint Semiconductor, Inc.+ 9,890,625
662,600 3DLabs Inc., Ltd.+ 15,239,800
- --------------------------------------------------------------------------------
76,586,675
- --------------------------------------------------------------------------------
Software -- 12.0%
250,000 Baan Co., N.V.+ 8,687,500
100,000 Check Point Software Technologies Ltd.+ 2,175,000
160,000 Document Sciences Corp.+ 1,580,000
67,500 Infinity Financial Technology, Inc.+ 1,164,375
75,000 Information Management Resources, Inc.+ 1,584,375
60,000 Memco Software Ltd.+ 1,057,500
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Software -- 12.0% (continued)
400,000 Pegasystems Inc.+ $ 12,050,000
600,000 PeopleSoft Inc.+ 28,762,500
625,000 Puma Technology, Inc.+ 10,781,250
200,000 SeaChange International, Inc.+ 5,100,000
300,000 SELECT Software Tools ADR+ 5,475,000
40,000 Versatility Inc.+ 600,000
100,000 VIASOFT, Inc.+ 4,725,000
225,000 Viisage Technology, Inc.+ 3,262,500
- --------------------------------------------------------------------------------
87,005,000
- --------------------------------------------------------------------------------
Steel -- 0.3%
100,000 Steel Dynamics, Inc.+ 1,912,500
- --------------------------------------------------------------------------------
Technology -- 0.9%
110,000 Checkpoint Systems, Inc.+ 2,722,500
400,000 SRS Labs, Inc.+ 3,450,000
- --------------------------------------------------------------------------------
6,172,500
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $572,204,340) 671,969,863
================================================================================
WARRANTS -- 0.0%
696 Jan Bell Marketing Inc., Expire 12/16/98
(Cost -- $0) 10
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT -- 7.4%
$53,609,000 Chase Manhattan Bank, 6.550% due 1/2/97;
Proceeds at maturity -- $53,628,508; (Fully
collateralized by U.S. Treasury Notes,
5.875% due 10/31/98; Market value -- $54,708,669)
(Cost -- $53,609,000) 53,609,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $625,813,340*) $725,578,873
================================================================================
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1996 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $625,813,340) $725,578,873
Cash 382
Receivable for securities sold 10,215,718
Receivable for Fund shares sold 3,376,191
Dividends and interest receivable 10,050
- --------------------------------------------------------------------------------
Total Assets 739,181,214
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased 4,913,870
Payable for securities purchased 769,798
Investment advisory fees payable 348,692
Distribution fees payable 139,170
Administration fees payable 125,990
Accrued expenses and other liabilities 196,766
- --------------------------------------------------------------------------------
Total Liabilities 6,494,286
- --------------------------------------------------------------------------------
Total Net Assets $732,686,928
================================================================================
NET ASSETS:
Par value of capital shares $26,472
Capital paid in excess of par value 643,092,797
Accumulated net investment loss (6,962)
Accumulated net realized loss from security transactions (10,190,912)
Net unrealized appreciation of investments 99,765,533
- --------------------------------------------------------------------------------
Total Net Assets $732,686,928
===============================================================================
Shares Outstanding:
Class A 8,445,529
--------------------------------------------------------------------------
Class B 13,277,959
--------------------------------------------------------------------------
Class C 970,644
--------------------------------------------------------------------------
Class Y 3,329,629
--------------------------------------------------------------------------
Class Z 448,429
--------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $28.11
- -------------------------------------------------------------------------------
Class B* $27.28
--------------------------------------------------------------------------
Class C** $27.28
--------------------------------------------------------------------------
Class Y (and redemption price) $28.21
--------------------------------------------------------------------------
Class Z (and redemption price) $28.26
--------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $29.59
================================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within 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.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $2,929,959
Dividends 196,775
- --------------------------------------------------------------------------------
Total Investment Income 3,126,734
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 3,536,580
Investment advisory fees (Note 2) 3,094,925
Administration fees (Note 2) 1,125,428
Shareholder and system servicing fees 601,246
Shareholder communications 83,973
Registration fees 66,889
Audit and legal 31,084
Custody 25,067
Directors' fees 20,053
Other 21,969
- --------------------------------------------------------------------------------
Total Expenses 8,607,214
- --------------------------------------------------------------------------------
Net Investment loss (5,480,480)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS (NOTE 3):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 603,543,906
Cost of securities sold 613,255,996
- --------------------------------------------------------------------------------
Net Realized Loss (9,712,090)
Decrease in Net Unrealized Appreciation (51,828,623)
- --------------------------------------------------------------------------------
Net Loss on Investments (61,540,713)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $(67,021,193)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1996 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS:
Net investment loss $(5,480,480) $(3,195,629)
Net realized gain (loss) (9,712,090) 21,960,199
Increase (decrease) in net unrealized appreciation (51,828,623) 98,030,043
- ----------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (67,021,193) 116,794,613
- ----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains (5,788,148) (7,592,812)
Capital (7,183,275) --
- ----------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (12,971,423) (7,592,812)
- ----------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 668,556,473 237,931,179
Net asset value of shares issued in connection
with the transfer of net assets of the
Smith Barney Telecommunications Growth Fund (Note 6) 169,172,249 --
Net asset value of shares issued for reinvestment of dividends 11,155,330 7,348,955
Cost of shares reacquired (381,382,713) (205,804,360)
Increase in Net Assets From Fund Share Transactions 467,501,339 39,475,774
- ----------------------------------------------------------------------------------------------------
Increase in Net Assets 387,508,723 148,677,575
- ----------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of year 345,178,205 196,500,630
- ----------------------------------------------------------------------------------------------------
End of year* $732,686,928 $345,178,205
====================================================================================================
* Includes accumulated net investment loss of: $(6,962) --
====================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 13
<PAGE>
- --------------------------------------------------------------------------------
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) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing price on such markets;
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) securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, which
approximates market value; (d) dividend income is recorded on ex-dividend date
and interest income is recorded on the accrual basis; (e) dividends and
distributions to shareholders are recorded on the ex-dividend date; (f) gains or
losses on the sale of securities are calculated by 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, 1996,
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. Accordingly, a portion of accumulated net
investment loss amounting to $5,473,518 was 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.
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 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 any annual rate of 0.20% 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 year
ended December 31, 1996, SB received brokerage commissions of $47,100 and sales
charges of approximately $1.8 million on sales of the Portfolio's Class A
shares.
- --------------------------------------------------------------------------------
14 1996 Annual Report to Shareholders
<PAGE>
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B
shares, which applies if redemption occurs within 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. In addition, Class A shares have a 1.00% CDSC, which applies
if redemption occurs within the first year of purchase. This CDSC only applies
to those purchases of Class A shares, which, when combined with current holdings
of Class A shares, equal or exceed $500,000 in the aggregate. These purchases do
not incur an initial sales charge. For the year ended December 31, 1996, CDSCs
paid to SB were approximately:
Class A Class B Class C
================================================================================
CDSCs $26,000 $658,000 $22,000
================================================================================
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 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 year ended December 31, 1996, total Distribution Plan fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $525,204 $2,787,000 $224,376
================================================================================
All officers and one Director of the Fund are employees of SB.
3. Investments
During the year ended December 31, 1996, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $1,005,031,769
- --------------------------------------------------------------------------------
Sales 603,543,906
================================================================================
At December 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $140,776,107 *
- --------------------------------------------------------------------------------
Gross unrealized depreciation (41,010,574)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 99,765,533 *
================================================================================
* Substantially the same for Federal income tax purposes.
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, 1996, 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, 1996, total paid-in capital amounted to the following for each
class:
Amount
================================================================================
Class A $175,544,851
- --------------------------------------------------------------------------------
Class B 323,697,409
- --------------------------------------------------------------------------------
Class C 27,856,605
- --------------------------------------------------------------------------------
Class Y 102,658,497
- --------------------------------------------------------------------------------
Class Z 13,361,907
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996* December 31, 1995**
--------------------------- --------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A
Shares sold 10,652,763 $327,836,971 6,906,656 $158,758,785
Net asset value of shares issued in
connection with the transfer of
Smith Barney Telecommunications
Growth Fund's net assets (Note 6) 1,866,112 58,089,434 -- --
Shares issued on reinvestment 134,238 4,169,426 116,734 3,420,305
Shares redeemed (9,442,083) (289,227,515) (7,078,890) (159,234,258)
- --------------------------------------------------------------------------------------------------
Net Increase (Decrease) 3,211,030 $100,868,316 (55,500) $2,944,832
==================================================================================================
Class B
Shares sold 6,525,207 $201,058,070 2,715,135 $66,677,618
Net asset value of shares issued in
connection with the transfer of
Smith Barney Telecommunications
Growth Fund's net assets (Note 6) 3,645,892 110,318,124 -- --
Shares issued on reinvestment 202,395 6,108,286 128,647 3,689,606
Shares redeemed (2,843,971) (83,581,409) (2,085,066) (45,134,660)
- --------------------------------------------------------------------------------------------------
Net Increase 7,529,523 $233,903,071 758,716 $25,232,564
==================================================================================================
Class C
Shares sold 888,975 $27,449,605 296,498 $7,602,541
Net asset value of shares issued in
connection with the transfer of
Smith Barney Telecommunications
Growth Fund's net assets (Note 6) 25,273 764,691 -- --
Shares issued on reinvestment 20,018 604,141 5,282 151,484
Shares redeemed (280,031) (8,245,131) (66,546) (1,429,942)
- --------------------------------------------------------------------------------------------------
Net Increase 654,235 $20,573,306 235,234 $6,324,083
==================================================================================================
Class Y
Shares sold 3,329,725 $103,595,400 -- --
Shares issued on reinvestment -- -- -- --
Shares redeemed (96) (3,030) -- --
- --------------------------------------------------------------------------------------------------
Net Increase 3,329,629 $103,592,370 -- --
==================================================================================================
Class Z
Shares sold 274,522 $8,616,427 173,310 $4,892,235
Shares issued on reinvestment 8,768 273,477 2,986 87,560
Shares redeemed (10,978) (325,628) (179) (5,500)
- --------------------------------------------------------------------------------------------------
Net Increase 272,312 $8,564,276 176,117 $4,974,295
==================================================================================================
</TABLE>
* For Class Y shares, transactions are for the period from January 31, 1996
(inception date) to December 31, 1996.
** For Class Z shares, transactions are for the period from October 2, 1995
(inception date) to December 31, 1995.
- --------------------------------------------------------------------------------
16 1996 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
6. Transfer of Net Assets
On October 18, 1996, the Portfolio acquired the assets and certain liabilities
of the Smith Barney Telecommunications Trust--Smith Barney Telecommunications
Growth Fund ("SBTG"), pursuant to a plan of reorganization approved by SBTG
shareholders on October 17, 1996. Total shares issued by the Portfolio and the
total net assets of SBTG and the Portfolio on the date of the transfer were as
follows:
Shares Total Net Total Net
Acquired Issued by Assets of Assets of
Fund the Portfolio SBTG the Portfolio
================================================================================
SBTG 5,537,278 $169,172,249 $631,093,322
================================================================================
The total net assets of SBTG before acquisition included unrealized appreciation
of $21,668,848. The net assets of the Portfolio immediately after the transfer
were $800,265,571. The transaction was structured for tax purposes to qualify as
a tax-free reorganization under the Internal Revenue Code of 1986, as amended.
7. Capital Loss Carryforward
At December 31, 1996, the Portfolio had, for Federal income tax purposes,
approximately $7,971,000 of capital loss carryforwards available to offset
future realized gains expiring December 31, 2004. To the extent that these
carryforward losses can be used to offset net realized capital gains, such
gains, if any, will not be distributed.
8. Lending of Portfolio Securities
The Portfolio has an agreement with its custodian whereby the custodian may lend
securities owned by the Portfolio to brokers, dealers and other financial
organizations, and receives a lenders fee, which is shared 60% by the Portfolio
and 40% by the custodian. Fees earned by the Portfolio on securities lending are
recorded in interest income. Loans of securities by the Portfolio are
collateralized by cash, U.S. Government securities or high quality money market
instruments that are maintained at all times in an amount at least equal to the
current market value of the loaned securities, plus a margin which may vary
between 2% and 5% depending on the type of securities loaned. The custodian
establishes and maintains the collateral in a segregated account. The Portfolio
maintains exposure for the risk of any losses in the investment of amounts
received as collateral.
As of December 31, 1996, the Portfolio had no securities on loan.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares 1996(1) 1995 1994(1) 1993(1) 1992(2)
===========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $30.44 $19.10 $20.23 $15.47 $14.13
- -----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.19) (0.27) (0.13) (0.08) (0.01)
Net realized and unrealized gain (loss) (1.50) 12.37 (1.00) 5.17 1.35
- -----------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.69) 12.10 (1.13) 5.09 1.34
- -----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains (0.28) (0.76) -- (0.33) --
Capital (0.36) -- -- -- --
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.64) (0.76) -- (0.33) --
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $28.11 $30.44 $19.10 $20.23 $15.47
- -----------------------------------------------------------------------------------------------------------
Total Return (5.81)% 63.48% (5.59)% 32.90% 9.48%+++
- -----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $237,435 $159,316 $101,052 $50,121 $195
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.17% 1.43% 1.49% 1.67% 1.51%+
Net investment loss (0.61) (1.05) (0.94) (0.46) (0.97)+
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 118% 113% 123% 112% 211%
- -----------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (3) $0.06 $0.06 -- -- --
===========================================================================================================
<CAPTION>
Class B Shares 1996(1) 1995 1994(1) 1993(1) 1992(2)
===========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $29.76 $18.82 $20.08 $15.47 $14.18
- -----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.41) (0.37) (0.27) (0.20) (0.26)
Net realized and unrealized gain (loss) (1.43) 12.07 (0.99) 5.14 1.55
- -----------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.84) 11.70 (1.26) 4.94 1.29
- -----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains (0.28) (0.76) -- (0.33) --
Capital (0.36) -- -- -- --
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.64) (0.76) -- (0.33) --
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $27.28 $29.76 $18.82 $20.08 $15.47
- -----------------------------------------------------------------------------------------------------------
Total Return (6.44)% 62.30% (6.27)% 31.93% 9.10%
- -----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $362,163 $171,081 $93,920 $138,401 $78,130
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.91% 2.04% 2.21% 2.34% 2.32%
Net investment loss (1.36) (1.61) (1.66) (1.13) (1.77)
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 118% 113% 123% 112% 211%
- -----------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (3) $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 November 6, 1992 (inception date) to December 31, 1992.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
18 1996 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class C Shares 1996(1) 1995 1994(1) 1993(1)(2)
======================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $29.77 $18.82 $20.08 $22.62
- ------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.41) (0.42) (0.25) (0.16)
Net realized and unrealized gain (loss) (1.44) 12.13 (1.01) (2.05)
- ------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.85) 11.71 (1.26) (2.21)
- ------------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains (0.28) (0.76) -- (0.33)
Capital (0.36) -- -- --
- ------------------------------------------------------------------------------------------------------
Total Distributions (0.64) (0.76) -- (0.33)
- ------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $27.28 $29.77 $18.82 $20.08
- ------------------------------------------------------------------------------------------------------
Total Return (6.44)% 62.35% (6.27)% (9.77)%+++
- ------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $26,480 $9,417 $1,528 $185
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.90% 2.25% 2.15% 2.19%+
Net investment loss (1.34) (1.79) (1.60) (0.98)+
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 118% 113% 123% 112%
- ------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (3) $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) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
+++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Class Y
Shares Class Z Shares
---------- --------------------
1996(1)(2) 1996(1) 1995(3)
================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $28.99 $30.46 $26.49
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.08) (0.08) (0.06)
Net realized and unrealized gain (loss) (0.06) (1.48) 4.79
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.14) (1.56) 4.73
- --------------------------------------------------------------------------------
Less Distributions From:
Net realized gains (0.28) (0.28) (0.76)
Capital (0.36) (0.36) --
- --------------------------------------------------------------------------------
Total Distributions (0.64) (0.64) (0.76)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $28.21 $28.26 $30.46
- --------------------------------------------------------------------------------
Total Return (0.75)%++ (5.37)% 17.95%+++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $93,938 $12,671 $5,364
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.82%+ 0.80% 1.10%+
Net investment loss (0.29)+ (0.24) (0.86)+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 118% 118% 113%
- --------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $0.06 $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 January 31, 1996 (inception date) to December 31, 1996.
(3) 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.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
The Fund paid distributions of $481,711 from long-term capital gains which are
taxable as such.
- --------------------------------------------------------------------------------
20 1996 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
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 Special Equities Fund of Smith
Barney Investment Funds Inc. as of December 31, 1996, the related statement of
operations for the year then ended, and the statements of changes in net assets
and financial highlights for each of the years in the two-year period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for each of the years in the three-year period
ended December 31, 1994, were audited by other auditors whose report thereon,
dated February 10, 1995 expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Smith Barney Special Equities Fund of Smith Barney Investment Funds as of
December 31, 1996, the results of its operations for the year then ended, and
the changes in its net assets and financial highlights for each of the years in
the two-year period then ended, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 18, 1997
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 21
<PAGE>
SMITH BARNEY
SPECIAL EQUITIES FUND
Directors
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
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 V. Novello
Vice President and Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Manager
Smith Barney Mutual Funds Management Inc.
Distibutor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
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 an effective prospectus
for the Fund, which contains information concerning the Fund's investment
policies and expenses as well as other pertinent information.
SMITH BARNEY
- ----------------------------------
A Member of TraverlersGroup [LOGO]
SMITH BARNEY SPECIAL EQUITIES FUND
SMITH BARNEY MUTUAL FUNDS
388 Greenwich Street
New York, New York 10013
FD0313 2/97
<PAGE>
[PHOTO]
Smith Barney
Managed
Growth Fund
----------------------
ANNUAL REPORT
----------------------
December 31, 1996
[GRAPHIC]
[LOGO]Smith Barney Mutual Funds
Investing for your future.
Every day(sm).
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO] [PHOTO]
HEATH B. DOUGLAS
MCLENDON JOHNSON
Chairman and Vice President and
Chief Executive Officer Investment Officer
Fellow Shareholder:
We are pleased to provide you with the annual report for the Smith Barney
Managed Growth Fund for the year ended December 31, 1996. In this report we
summarize the period's prevailing market and economic conditions and outline the
investment strategy employed by the Fund during this time. A detailed summary of
the Fund's performance and current holdings can be found in the appropriate
sections that follow.
Performance and Market Update
The Smith Barney Managed Growth Fund gained 16.33% during the year ended
December 31, 1996, compared to the gain of 22.95% for the Standard & Poor's 500
Stock Index (S&P 500), an index that measures the performance of 500 widely held
common stocks. Throughout the first five months of 1996, small-cap stocks, which
comprise about 70% of the Fund's holdings, outperformed large-cap stocks.
However, a sharp sell-off in early July erased most of the gains posted by
small-cap stocks earlier in the year. Small-cap stocks rebounded between late
July and September, only to retreat once again during the fourth quarter.
However, the Russell 2000 Index, a measure of small-company stock performance,
still managed to register a 16.50% gain for the year. In our view, the
contrasting performance between large- and small-cap stocks can be attributed to
the classic "flight to safety" phenomenon that occurs as investors look to
larger, more liquid issues that they believe will offer greater earnings
stability.
Investment Strategy
The Smith Barney Managed Growth Fund seeks growth of capital by investing
primarily in the stocks of companies that are currently out of favor, price
depressed or undervalued. We employ a bottom-up approach, looking at individual
companies as opposed to macroeconomic or market conditions. The Fund purchases
companies that are trading at or near their 52-week lows because we believe
these companies offer great upside potential with limited downside risk. When
evaluating individual companies, we do not use technical analysis, but we do
utilize various methods that help us evaluate the downside risk of each stock.
The first thing we look at is the company's free cash flow, because we believe
companies that generate a lot of free cash will always have value in the market.
Other techniques we use include the relative price-earnings ratio, market
cap-to-sales ratio, price-to-book value, historical dividend yield and private
market value. Our stock selection process is not an exact science. Depending on
the company, the industry and other special circumstances, there are certain
valuation methods that may be more relevant than others.
Portfolio Update
Most investors anticipated that U.S. economic growth would slow down in 1996.
However, the U.S. economy actually expanded at a healthy pace during the first
half of the year. As a result, interest rates rose as investors grew concerned
over the possible reemergence of inflation. During this period of rising
interest rates, the Managed Growth Fund performed extremely well for three main
reasons. First, smaller companies tended to outperform larger companies during
this period. Second, we had a concentration of cyclical companies in the Fund
that we purchased in 1995, when they were very much out of favor. When the
economy did not slow down in 1996, the valuation on cyclical companies improved.
Several of our holdings appreciated enough to meet our price targets and were
sold. Third, we did not have a large exposure to the financial services sector,
which underperformed
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 1
<PAGE>
during the first half of the year. However, as interest rates began to decline
during the third quarter, financial stocks turned in a strong performance and
were among the top performers of 1996. Currently, the financial services sector
makes up 3.5% of the Fund's total equity assets. This sector has been the most
difficult one for us to find good, but still out of favor companies.
At the beginning of the year, we had a smaller weighting in the technology
sector. We took advantage of the inherent volatility in the share prices of
technology companies and added a number of new companies to the Fund at very
attractive prices. As of December 31, 1996, the Managed Growth Fund had 19.3% of
its total equity assets invested in the technology sector. In fact, technology
was the top performing sector for the equity market as a whole and for the Fund
in 1996. Health care is another sector that we have added to throughout the
year, particularly during the summer months. We believe the healthcare sector,
which now stands at 18.1% of the Fund's total equity assets, possesses long-term
growth potential as companies continue to look for cost-effective solutions to
healthcare costs.
The newest additions to the Fund this past fiscal year include LTV (steel),
Silicon Graphics (high-end workstations), Alexander & Alexander (insurance
broker), Great Lakes Chemical (chemicals), Giddings and Lewis (machine tools)
and Telephone and Data Systems (cellular telephones). The top-performing stock
for the Fund during the reporting period was Network Computing Devices. The
company recently signed a contract to produce network computers for IBM. Other
top performers for the Managed Growth Fund were Helene Curtis, which was bought
out by Unilever during the first quarter, and technology company Triquint
Semiconductors, which had an average gain of 115% for the Fund in 1996. We sold
our holdings in three companies whose earnings and fundamentals deteriorated
over the course of the year: Blair Corporation (a small direct retailer),
Pepsi-Cola Puerto Rico Bottling Company (Pepsi bottler) and Ekco Group
(housewares).
Market Outlook
Given the continued rise in the stock market, we found it difficult to find
large, blue chip companies that were out of favor during 1996. However, the
level of volatility that existed in the stock market this year helped the
Managed Growth Fund accumulate quality, small-cap companies at bargain prices.
We remain committed to our disciplined approach of buying quality companies that
are out of favor. While we do not try to forecast the future direction of the
stock market, we do believe that there will be new investment opportunities for
the Fund in 1997.
Thank you for investing in the Smith Barney Managed Growth Fund. We look forward
to continuing to help you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Douglas Johnson
Heath B. McLendon Douglas Johnson
Chairman and Vice President and
Chief Executive Officer Investment Officer
January 20, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Top Ten Holdings* December 31, 1996
- -----------------------------------------------------------------
<S> <C>
1. Federal Home Loan Mortgage Corp.,
5.70% due 1/2/97 5.8%
- -----------------------------------------------------------------
2. Forest Labs Inc. 3.2
- -----------------------------------------------------------------
3. Reader's Digest Association, Inc. 2.7
- -----------------------------------------------------------------
4. Dean Foods 2.6
- -----------------------------------------------------------------
5. Read-Rite Corp. 2.4
- -----------------------------------------------------------------
6. United Healthcare Corp. 2.4
- -----------------------------------------------------------------
7. UST, Inc. 2.2
- -----------------------------------------------------------------
8. Humana, Inc. 2.0
- -----------------------------------------------------------------
9. Pennzoil Co. 1.9
- -----------------------------------------------------------------
10. Wellpoint Health Networks, Inc. 1.8
- -----------------------------------------------------------------
</TABLE>
* As a percentage of total investments.
- --------------------------------------------------------------------------------
2 1996 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
An Interview with Portfolio Manager Douglas Johnson
- --------------------------------------------------------------------------------
Contrarian Investing
We recently had an opportunity to speak with Douglas Johnson, Portfolio Manager
of the Smith Barney Managed Growth Fund. Mr. Johnson is a CFA with more than 17
years of Wall Street experience. Before joining Smith Barney in January of 1995,
Mr. Johnson was with SAFECO Asset Management, where he successfully managed over
$650 million in equity assets. Mr. Johnson received both his B.S. in Electrical
Engineering and his M.B.A. degree from the University of Washington.
Doug, how would you characterize your management style?
Doug: We are what you call "contrarian" investors. We use a bottom-up approach,
meaning we look at individual companies rather than taking a top-down approach
that focuses on macroeconomic or market conditions. We seek quality companies
whose stocks are trading at or near their 52-week lows. The reason we target
currently out-of-favor or price-depressed companies is that we believe they can
offer great potential for price appreciation and also provide greater down side
protection. You never know when a market downturn will occur, and we have found
that quality companies that have already been beaten down in price tend to hold
up better in difficult markets.
Given the strong performance of the stock market in 1995 and 1996, have you
found it more difficult to find undervalued or out-of-favor stocks?
Doug: As far as finding opportunities, it has been difficult to find large, blue
chip companies that are out of favor. A lot of large-cap stocks bottomed out at
the end of 1994 and moved higher in 1995 and 1996 - the two-year return of the
S&P 500 at the end of 1996 was 69.2%. So, since the Smith Barney Managed Growth
Fund began, we have been able to find many more small-cap opportunities than
large-cap opportunities. In fact, we have quite a few companies that did very
well in 1996. During the course of the year, a total of 123 companies were in
the Fund at one time or another. 20 of those companies were up at least 50%
during 1996, and 50 of those 123 companies were up at least 20% for the year. We
have therefore been able to find opportunities in this rising market, but again,
most of them have been small- or mid-cap companies.
Doug, can you tell us more about how you select individual stocks for the Fund?
Doug: We begin the selection process with a review of companies that appear in
our database which indicates companies that are trading within 10 percent of
their 52-week low. We then try to evaluate the downside risk by looking at where
these companies have bottomed out in the past. We do this by using a number of
different quantification methods and ratios such as price to free cash flow
ratios, relative price-earnings ratios, market-cap to sales ratios,
price-to-book value, historical dividend yields and private market values.
Certain ratios may indicate that a stock has reached its lowest level, while
others will not. Therefore, the quantification process differs, depending on the
company and the industry. Although this is not an exact science, we know what
methods work and which tend not to work. Yet, just because we have quantified
the downside risk doesn't mean we are going to buy that stock immediately. Any
company that is trending down in a bull market causes concern. Therefore, we
like to see some sort of news on a company that clears the air, such as a bad
earnings report, a credit downgrade or litigation--anything that will make
people want to sell the stock. A lot of people look for a positive catalyst when
analyzing stocks. But we are just the opposite--we try to prey on the mistakes
of investors who get disenchanted or impatient, by finding good companies at
bargain prices and hopefully making money with them.
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 3
<PAGE>
Can you tell us how and why you became a contrarian investor?
Doug: Sure. When I first started with SAFECO in 1979, the person who ran the
department was a real savvy value investor who looked for companies with low
price- earnings ratios and high dividend yields. My background was in
technology. I have a bachelor's degree in engineering, I worked in the
electronics industry for two years and I've covered the industry as an analyst.
So, when I was with SAFECO, I learned the value side of investing and on my own
as an analyst I learned how to analyze growth potential, particularly in the
technology sector. What I have been able to do is meld the two disciplines
together to take a value approach to technology and other sectors that have
growth potential such as health care--and that is where I have gotten a lot of
the best ideas for my portfolios over the years.
How does your approach differ from the typical value approach?
Doug: Most value investors emphasize low price-earnings ratios, and that's not
really our focus. We focus on measuring the downside risk, by using a lot of
different methods--just pure earnings is not what is going to get us to buy a
company. The techniques I mentioned earlier should help us find companies that
are currently out of favor that are also in industries that have long-term
growth potential. We have found that most true value investors tend to migrate
toward lots of industries with low price-earnings ratios such as banking, autos,
aerospace, oil, chemicals, tobacco, insurance, electric utilities and telephone
utilities. While those areas may not have good long-term growth, they tend to
have low price-earnings ratios and higher dividend yields. Where we have had the
most success for shareholders has been in areas that we believe have excellent
long-term growth prospects such as technology and health care. Simply trying to
find companies with low price-earnings ratios and high dividend yields just
doesn't seem to work in those particular industries. To be contrarian and a
value type of investor in technology and health care you have to look at
different things. So while we have a value approach, we tend to gravitate toward
industries that have outstanding long-term growth prospects.
When does the Smith Barney Managed Growth Fund tend to outperform the broad
market averages?
Doug: When interest rates are trending up, the Fund tends to do a lot better
than the market averages. When rates are going down, we have tended to lag the
market averages--although the Fund has had a positive return in 1996. We did a
study where we took the months during 1996 that interest rates rose and the
months that interest rates went down. What we found was that the Fund
significantly outperformed the market during the months that interest rates
rose, and significantly underperformed during the months that rates went down.
In addition, out of the last 135 down days for the S&P 500, the Managed Growth
Fund has outperformed 81% of the time and was actually up 28% of the days the
market was down.
What is your outlook for 1997?
Doug: Our style is not to make market projections, but rather to do our homework
in such a way that we will recognize opportunities when they arise. The nature
of the market is such that even if 1997, or any year for that matter, is a bull
market, certain sectors and individual companies will see their prices beaten
down. Therefore, we will remain committed to our strategy of looking for good
companies at attractive prices regardless of overall market conditions.
- --------------------------------------------------------------------------------
4 1996 Annual Report to Shareholders
<PAGE>
================================================================================
Historical Performance -- Class A Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
--------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
12/31/96 $12.03 $13.42 $0.09 $0.46 16.33%
- --------------------------------------------------------------------------------------------------------------------------------
Inception*- 12/31/95 12.00 12.03 0.15 0.00 1.53+
================================================================================================================================
Total $0.24 $0.46
================================================================================================================================
</TABLE>
================================================================================
Historical Performance -- Class B Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
--------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
12/31/96 $12.02 $13.41 $0.00 $0.46 15.55%
- --------------------------------------------------------------------------------------------------------------------------------
Inception*- 12/31/95 12.00 12.02 0.11 0.00 1.16+
================================================================================================================================
Total $0.11 $0.46
================================================================================================================================
</TABLE>
================================================================================
Historical Performance -- Class C Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
--------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
12/31/96 $12.03 $13.41 $0.00 $0.46 15.45%
- --------------------------------------------------------------------------------------------------------------------------------
Inception*- 12/31/95 12.00 12.03 0.11 0.00 1.16+
================================================================================================================================
Total $0.11 $0.46
================================================================================================================================
</TABLE>
================================================================================
Historical Performance -- Class Y Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
--------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Inception*- 12/31/96 $12.21 $13.43 $0.13 $0.46 14.97%+
================================================================================================================================
</TABLE>
================================================================================
Historical Performance -- Class Z Shares
================================================================================
<TABLE>
<CAPTION>
Net Asset Value
--------------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
12/31/96 $12.03 $13.43 $0.13 $0.46 16.69%
- --------------------------------------------------------------------------------------------------------------------------------
Inception*- 12/31/95 11.83 12.03 0.16 0.00 3.06+
================================================================================================================================
Total $0.29 $0.46
================================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 5
<PAGE>
================================================================================
Average Annual Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
-----------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/96 16.33% 15.55% 15.45% N/A 16.69%
- --------------------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/96 11.66 10.83 10.83 14.97%+ 15.95
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
With Sales Charge(2)
-----------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Year Ended 12/31/96 10.54% 10.55% 14.45% N/A 16.69%
- --------------------------------------------------------------------------------------------------------------------------------
Inception* through 12/31/96 7.94 8.30 10.83 14.97%+ 15.95
================================================================================================================================
</TABLE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
=============================================================================================
<S> <C>
Class A (Inception* through 12/31/96) 18.12%
- ---------------------------------------------------------------------------------------------
Class B (Inception* through 12/31/96) 16.79
- ---------------------------------------------------------------------------------------------
Class C (Inception* through 12/31/96) 16.79
- ---------------------------------------------------------------------------------------------
Class Y (Inception* through 12/31/96) 14.97+
- ---------------------------------------------------------------------------------------------
Class Z (Inception* through 12/31/96) 20.26
=============================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A 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 within 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 Y and Z shares is January 31, 1996 and October 2, 1995,
respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
6 1996 Annual Report to Shareholders
<PAGE>
================================================================================
Smith Barney Managed Growth Fund at a Glance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A Shares of the
Smith Barney Managed Growth Fund vs. the Standard & Poor's 500 Index
- --------------------------------------------------------------------------------
June 1995 - December 1996
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Smith Barney Managed Growth Fund S&P 500 Index
-------------------------------- -------------
<S> <C> <C>
June 1995 $ 9,501 $10,000
Dec 1995 9,647 11,443
June 1996 10,505 12,597
Dec 1996 $11,222 $14,069
</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, 1996. 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 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 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 the
redemption value may be more or less than the original cost. No adjustment has
been made for shareholders tax liability on dividends or capital gains.
Industry Diversification of Common Stocks
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
<S> <C>
Basic Materials 11.9%
Capital Goods 9.8%
Consumer Cyclicals 16.9%
Consumer Staples 8.5%
Energy 3.9%
Financial Services 3.5%
Healthcare 18.1%
Technology 19.3%
Transportation 3.3%
Utilities 3.8%
Miscellaneous 1.0%
</TABLE>
Investment Breakdown
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
<S> <C>
Repurchase Agreement 3.2%
U.S. Government Agency Obligations 6.8%
Common Stocks 90.0%
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
COMMON STOCKS -- 90.0%
Auto Related -- 0.9%
515,000 Stant Corp. $ 8,111,250
- ------------------------------------------------------------------------------------------------------------------------------------
Building & Construction -- 1.5%
450,000 Cameron Ashley Building Products+ 6,300,000
425,000 Giant Cement Holding, Inc.+ 6,853,125
- ------------------------------------------------------------------------------------------------------------------------------------
13,153,125
- ------------------------------------------------------------------------------------------------------------------------------------
Chemicals -- 5.3%
560,000 A. Schulman, Inc. 13,720,000
139,600 Crompton & Knowles Corp. 2,687,300
210,000 Great Lakes Chemical Corp. 9,817,500
228,300 NCH Corp. 13,755,075
300,000 Penwest Ltd. 5,250,000
- ------------------------------------------------------------------------------------------------------------------------------------
45,229,875
- ------------------------------------------------------------------------------------------------------------------------------------
Closed-End Mutual Funds -- 0.9%
37,400 Morgan Stanley Africa Investment Fund, Inc. 509,575
367,800 Swiss Helvetia Fund 7,310,025
- ------------------------------------------------------------------------------------------------------------------------------------
7,819,600
- ------------------------------------------------------------------------------------------------------------------------------------
Communications Equipment -- 1.3%
260,000 California Microwave, Inc.+ 3,867,500
362,500 Crosscomm Corp.+ 1,903,125
350,000 Network Equipment Technologies, Inc.+ 5,775,000
- ------------------------------------------------------------------------------------------------------------------------------------
11,545,625
- ------------------------------------------------------------------------------------------------------------------------------------
Computer Software -- 2.5%
760,000 INTERSOLV+ 7,030,000
900,000 Mentor Graphics Corp.+ 8,775,000
225,000 Santa Cruz Operation, Inc.+ 1,575,000
390,000 Software 2000, Inc.+ 3,266,250
40,000 Wall Data, Inc.+ 605,000
- ------------------------------------------------------------------------------------------------------------------------------------
21,251,250
- ------------------------------------------------------------------------------------------------------------------------------------
COMPUTER SYSTEMS -- 7.0%
95,000 Applied Voice Technology, Inc.+ 1,163,750
420,800 ECC International Corp.+ 3,471,600
260,000 Network Computing Devices, Inc.+ 2,632,500
825,000 Read-Rite Corp.+ 20,831,250
695,000 Sequent Computer Systems, Inc.+ 12,336,250
200,000 Sequoia Systems, Inc.+ 450,000
225,000 Silicon Graphics, Inc.+ 5,737,500
500,000 Stratus Computer, Inc.+ 13,625,000
- ------------------------------------------------------------------------------------------------------------------------------------
60,247,850
- ------------------------------------------------------------------------------------------------------------------------------------
Distributor - Consumer Products -- 2.3%
255,500 Amway Asia Pacific Ltd. 10,826,813
50,000 Duracell International, Inc. 3,493,750
400,000 Swiss Army Brands, Inc.+ 5,300,000
- ------------------------------------------------------------------------------------------------------------------------------------
19,620,563
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1996 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
====================================================================================================================================
<S> <C> <C>
Electric -- 2.9%
480,000 Ansaldo Signal N.V.+ $ 3,540,000
575,000 Cherry Corp., Class A Shares+ 9,200,000
10,000 Cherry Corp., Class B Shares+ 157,500
382,500 Lincoln Electric Co., Class A Shares 11,570,625
- ------------------------------------------------------------------------------------------------------------------------------------
24,468,125
- ------------------------------------------------------------------------------------------------------------------------------------
Electronics -- 2.1%
377,200 AVX Corp. 8,109,800
392,700 Watkins-Johnson Co. 9,621,150
- ------------------------------------------------------------------------------------------------------------------------------------
17,730,950
- ------------------------------------------------------------------------------------------------------------------------------------
Environmental Control -- 1.8%
350,000 Fluor Daniel/GTI, Inc.+ 2,756,250
450,000 Safety-Kleen Corp. 7,368,750
294,600 Wellman, Inc. 5,045,025
- ------------------------------------------------------------------------------------------------------------------------------------
15,170,025
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Services -- 2.6%
320,000 First Savings Bank of Washington Bancorp, Inc. 5,880,000
1,150,000 Phoenix Duff & Phelps Corp. 8,193,750
500,000 SPS Transaction Services Corp.+ 7,625,000
25,000 Washington Federal, Inc. 662,500
- ------------------------------------------------------------------------------------------------------------------------------------
22,361,250
- ------------------------------------------------------------------------------------------------------------------------------------
Food -- 3.6%
693,500 Dean Foods Co. 22,365,375
93,000 Golden Enterprises, Inc. 720,750
420,000 Lance, Inc. 7,560,000
- ------------------------------------------------------------------------------------------------------------------------------------
30,646,125
- ------------------------------------------------------------------------------------------------------------------------------------
Healthcare -- 9.9%
875,000 Humana, Inc.+ 16,734,375
882,600 Mid Atlantic Medical Services, Inc.+ 11,804,775
605,000 Neuromedical Systems, Inc.+ 8,016,250
160,000 PHAMIS, Inc.+ 2,060,000
450,000 United Healthcare Corp. 20,250,000
514,500 Value Health, Inc.+ 10,032,750
450,020 Wellpoint Health Networks, Inc.+ 15,469,437
- ------------------------------------------------------------------------------------------------------------------------------------
84,367,587
- ------------------------------------------------------------------------------------------------------------------------------------
Household Furniture & Appliances -- 2.2%
49,700 Ethan Allen Interiors Inc. 1,913,450
250,000 Flexsteel Industries, Inc. 3,250,000
600,000 Singer Co. N.V. 13,425,000
- ------------------------------------------------------------------------------------------------------------------------------------
18,588,450
- ------------------------------------------------------------------------------------------------------------------------------------
Insurance -- 0.5%
250,000 Alexander & Alexander Services, Inc. 4,343,750
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
====================================================================================================================================
<C> <S> <C>
Iron/Steel -- 2.2%
800,000 LTV Corp. $ 9,500,000
535,000 Worthington Industries, Inc. 9,696,875
- ------------------------------------------------------------------------------------------------------------------------------------
19,196,875
- ------------------------------------------------------------------------------------------------------------------------------------
Machinery -- 4.1%
850,000 Giddings & Lewis, Inc. 10,943,750
412,000 Lawson Products, Inc. 9,012,500
520,000 Stewart & Stevenson Services, Inc. 15,145,000
- ------------------------------------------------------------------------------------------------------------------------------------
35,101,250
- ------------------------------------------------------------------------------------------------------------------------------------
Manufacturing -- 1.2%
425,000 Watts Industries, Inc., Class A Shares 10,146,875
- ------------------------------------------------------------------------------------------------------------------------------------
Medical Supply -- 1.7%
300,000 The York Group, Inc. 5,850,000
302,600 West Co., Inc. 8,548,450
- ------------------------------------------------------------------------------------------------------------------------------------
14,398,450
- ------------------------------------------------------------------------------------------------------------------------------------
Metal Fabricators -- 1.5%
409,600 Century Aluminum Co. 7,065,600
150,000 Trinity Industries, Inc. 5,625,000
- ------------------------------------------------------------------------------------------------------------------------------------
12,690,600
- ------------------------------------------------------------------------------------------------------------------------------------
Mining -- 1.0%
300,000 Ashland Coal, Inc. 8,325,000
- ------------------------------------------------------------------------------------------------------------------------------------
Office Equipment & Supplies -- 1.1%
528,400 A.T. Cross Co. 6,142,650
171,300 Hunt Manufacturing Co. 3,104,812
- ------------------------------------------------------------------------------------------------------------------------------------
9,247,462
- ------------------------------------------------------------------------------------------------------------------------------------
Oil -- 3.2%
300,000 Holly Corp. 8,025,000
282,200 Pennzoil Co. 15,944,300
191,000 Wiser Oil Co. 3,772,250
- ------------------------------------------------------------------------------------------------------------------------------------
27,741,550
- ------------------------------------------------------------------------------------------------------------------------------------
OIL SERVICES -- 1.2%
310,000 J. Ray McDermott, S.A.+ 6,820,000
126,000 Offshore Logistics, Inc.+ 2,441,250
51,500 RPC, Inc.+ 772,500
- ------------------------------------------------------------------------------------------------------------------------------------
10,033,750
- ------------------------------------------------------------------------------------------------------------------------------------
Paper & Forest Products -- 1.5%
450,000 Crown Vantage, Inc.+ 3,825,000
422,000 Louisiana Pacific Corp. 8,914,750
- ------------------------------------------------------------------------------------------------------------------------------------
12,739,750
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1996 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
====================================================================================================================================
<C> <C> <S> <C>
Pharmaceutical -- 5.5%
830,000 Forest Labs Inc., Class A Shares+ $27,182,500
850,000 Mylan Laboratories 14,237,500
650,000 Perrigo Co.+ 5,931,250
- ------------------------------------------------------------------------------------------------------------------------------------
47,351,250
- ------------------------------------------------------------------------------------------------------------------------------------
Photography/Imaging -- 0.9%
790,000 Scitex Corp. 7,505,000
- ------------------------------------------------------------------------------------------------------------------------------------
Publishing/Printing -- 6.0%
125,000 Houghton Mifflin Co. 7,078,125
370,000 McClatchy Newspapers, Inc., Class A Shares 12,950,000
575,000 Reader's Digest Association, Inc., Class A Shares 23,143,750
338,800 Torstar Corp., Class B Shares 8,156,708
- ------------------------------------------------------------------------------------------------------------------------------------
51,328,583
- ------------------------------------------------------------------------------------------------------------------------------------
Retail - Specialty -- 0.4%
410,000 TBC Corp.+ 3,075,000
- ------------------------------------------------------------------------------------------------------------------------------------
Semiconductors -- 1.3%
528,500 Alpha Industries, Inc.+ 4,161,938
492,000 Bell Microproducts, Inc.+ 4,366,500
335,000 Quality Semiconductor, Inc.+ 3,015,000
- ------------------------------------------------------------------------------------------------------------------------------------
11,543,438
- ------------------------------------------------------------------------------------------------------------------------------------
Shoes -- 1.2%
1,020,000 Stride Rite Corp. 10,200,000
- ------------------------------------------------------------------------------------------------------------------------------------
Specialized Services -- 0.9%
400,000 Rollins, Inc. 8,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
Telephone -- 2.0%
342,900 Century Telephone Enterprises 10,587,037
185,200 Telephone and Data Systems, Inc. 6,713,500
- ------------------------------------------------------------------------------------------------------------------------------------
17,300,537
- ------------------------------------------------------------------------------------------------------------------------------------
Textile -- 1.2%
365,000 Haggar Corp. 5,794,375
513,000 Norton McNaughton, Inc.+ 4,360,500
10,154,875
Tobacco -- 2.2%
595,000 UST, Inc. 19,263,125
- ------------------------------------------------------------------------------------------------------------------------------------
Transportation -- 1.4%
250,000 Airborne Freight Corp. 5,843,750
174,200 Pittston Brink's Group 4,703,400
87,100 Pittston Burlington Group 1,742,000
- ------------------------------------------------------------------------------------------------------------------------------------
12,289,150
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
====================================================================================================================================
<C> <C> <S> <C>
Trucking -- 1.0%
65,000 Builders Transport Inc.+ $ 174,688
450,000 Frozen Foods Express Industries, Inc. 4,050,000
320,000 Yellow Corp.+ 4,600,000
- ------------------------------------------------------------------------------------------------------------------------------------
8,824,688
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $691,218,593) 771,112,608
====================================================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
====================================================================================================================================
<C> <C> <S> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 6.8%
$50,000,000 Federal Home Loan Mortgage Corp., 5.700% due 1/2/97 49,992,083
8,500,000 Federal Home Loan Mortgage Corp., 5.460% due 1/9/97 8,489,687
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost-- $58,481,770) 58,481,770
====================================================================================================================================
REPURCHASE AGREEMENT -- 3.2%
27,676,000 Chase Manhattan Bank, 6.550% due 1/2/97;
Proceeds at maturity -- $27,686,071; (Fully collateralized by
U.S. Treasury Notes, 5.875% due 10/31/98;
Market value-- $28,943,247) (Cost-- $27,676,000) 27,676,000
====================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $777,376,363*) $857,270,378
====================================================================================================================================
</TABLE>
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1996 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (Cost $777,376,363) $ 857,270,378
Receivable for Fund shares sold 3,144,067
Dividends and interest receivable 483,351
Other assets 285,242
- --------------------------------------------------------------------------------
Total Assets 861,183,038
- --------------------------------------------------------------------------------
LIABILITIES:
Management fees payable 625,402
Payable for Fund shares purchased 389,866
Distribution fees payable 200,202
Payable for securities purchased 137,698
Accrued expenses and other liabilities 94,878
- --------------------------------------------------------------------------------
Total Liabilities 1,448,046
- --------------------------------------------------------------------------------
Total Net Assets $ 859,734,992
================================================================================
NET ASSETS:
Par value of capital shares $ 64,101
Capital paid in excess of par value 783,243,884
Undistributed net investment income 233,268
Accumulated net realized loss from security transactions (3,700,276)
Net unrealized appreciation of investments 79,894,015
- --------------------------------------------------------------------------------
Total Net Assets $ 859,734,992
================================================================================
Shares Outstanding:
Class A 16,317,182
- --------------------------------------------------------------------------------
Class B 36,151,509
- --------------------------------------------------------------------------------
Class C 5,096,079
- --------------------------------------------------------------------------------
Class Y 4,876,088
- --------------------------------------------------------------------------------
Class Z 1,660,003
- --------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 13.42
- --------------------------------------------------------------------------------
Class B* $ 13.41
- --------------------------------------------------------------------------------
Class C** $ 13.41
- --------------------------------------------------------------------------------
Class Y (and redemption price) $ 13.43
- --------------------------------------------------------------------------------
Class Z (and redemption price) $ 13.43
- --------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $ 14.13
================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within 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.
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 13
<PAGE>
<TABLE>
<CAPTION>
Statement of Operations For the Year Ended December 31, 1996
================================================================================
<S> <C>
INVESTMENT INCOME:
Dividends $ 8,962,487
Interest 5,975,218
Less: Foreign withholding tax (80,058)
- --------------------------------------------------------------------------------
Total Investment Income 14,857,647
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 6,034,652
Distribution fees (Note 2) 5,161,552
Shareholder and system servicing fees 637,438
Registration fees 241,770
Shareholder communications 139,720
Directors' fees 43,184
Custody 35,605
Audit and legal 29,064
Other 10,995
- --------------------------------------------------------------------------------
Total Expenses 12,333,980
- --------------------------------------------------------------------------------
Net Investment Income 2,523,667
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 200,768,011
Cost of securities sold 165,549,437
- --------------------------------------------------------------------------------
Net Realized Gain 35,218,574
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 13,057,452
End of year 79,894,015
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 66,836,563
- --------------------------------------------------------------------------------
Net Gain on Investments 102,055,137
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 104,578,804
================================================================================
</TABLE>
See Notes to Financial Statements
- --------------------------------------------------------------------------------
14 1996 Annual Report to Shareholders
<PAGE>
Statements of Changes in Net Assets For the Years Ended December 31,
================================================================================
<TABLE>
<CAPTION>
1996 1995(a)
========================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 2,523,667 $ 5,290,575
Net realized gain (loss) 35,218,574 (10,963,695)
Increase in net unrealized appreciation 66,836,563 13,057,452
- --------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 104,578,804 7,384,332
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (2,350,122) (5,230,852)
Net realized gains (27,955,155) --
- --------------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (30,305,277) (5,230,852)
- --------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 367,727,487 521,385,582
Net asset value of shares issued for
reinvestment of dividends 27,018,959 5,090,062
Cost of shares reacquired (122,341,524) (15,572,581)
- --------------------------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 272,404,922 510,903,063
- --------------------------------------------------------------------------------------------------------
Increase in Net Assets 346,678,449 513,056,543
NET ASSETS:
Beginning of year 513,056,543 --
- --------------------------------------------------------------------------------------------------------
End of year* $859,734,992 $513,056,543
========================================================================================================
* Includes undistributed net investment income of: $233,268 $59,723
========================================================================================================
</TABLE>
(a) For the period from June 30, 1995 (inception date) to December 31, 1995.
See Notes to Financial Statements
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 15
<PAGE>
================================================================================
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"), is a Maryland corporation,
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) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing price on such markets;
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) securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, which
approximates market value; (d) dividend income is recorded on the ex-dividend
date; foreign dividends are recorded on the earlier of the ex-dividend date or
as soon as practical after the Fund determines the existence of a dividend
declaration after exercising reasonable due diligence; (e) interest income is
recorded on the accrual basis; (f) gains or losses on the sale of securities are
calculated by using the specific identification method; (g) direct expenses are
charged to each class; management fees and general portfolio expenses are
allocated on the basis of relative net assets; (h) dividends and distributions
to shareholders are recorded on the ex-dividend date; (i) the Portfolio intends
to comply with the applicable provisions of the Internal Revenue Code of 1986,
as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; 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.
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 year
ended December 31, 1996 SB received brokerage commissions of $166,656 and sales
charges of approximately $1.7 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 within 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. In addition, Class A shares, have a 1.00% CDSC, which applies if
redemption occurs within the first year of purchase. This CDSC only applies to
those purchases of Class A shares, which, when combined with current holdings of
Class A shares, equal or exceed $500,000 in the aggregate. These purchases do
not incur an initial sales charge.
- --------------------------------------------------------------------------------
16 1996 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
For the year ended December 31, 1996, CDSCs paid to SB were:
Class A Class B Class C
===============================================================
CDSCs $10,000 $1,112,000 $27,000
===============================================================
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 year ended December 31, 1996, total Distribution Plan fees incurred were:
Class A Class B Class C
===============================================================
Distribution Plan Fees $495,536 $4,099,207 $566,809
===============================================================
All officers and one Director of the Fund are employees of SB.
3. Investments
During the year ended December 31, 1996, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
===============================================================
Purchases $462,881,733
- ---------------------------------------------------------------
Sales 200,768,011
===============================================================
At December 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
===============================================================
Gross unrealized appreciation $107,050,427*
Gross unrealized depreciation (27,156,412)*
- ---------------------------------------------------------------
Net unrealized appreciation $ 79,894,015*
===============================================================
*Substantially the same for Federal income tax purposes.
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. 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 from 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.
As of December 31, 1996, the Portfolio had no open purchased call or put
options.
When a Portfolio writes a call or put option, an amount equal to the premium
received by the Portfolio is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Portfolio realizes a
gain equal to the amount of the premium received. When the Portfolio enters into
a closing purchase transaction, the Portfolio realizes a gain (or loss if the
cost of the closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised the cost of the security sold will be
decreased by the premium originally received. When a written put option is
exercised, the amount of the premium received will reduce the cost of the
security which the Portfolio purchased upon exercise. When written index option
is exercised, settlement is made in cash. The risk associated with purchasing
options for hedging purpos-
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 17
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
es. The risk in writing a covered call option is that the Portfolio gives up the
opportunity to participate in any increase in the price of the underlying
security beyond the exercise price. The risk in writing a put option is that the
Portfolio is exposed to the risk of loss if the market price of the underlying
security declines.
During the year ended December 31, 1996, the Portfolio did not write any call or
put options.
6. Futures Contracts
Initial margin deposits made upon entering into futures contracts are recognized
as assets. The initial margin is segregated by the custodian and is noted in the
schedule of investments. During the period the futures contract is open, changes
in the value of the contract are recognized as unrealized gains or losses by
"marking-to-market" on a daily basis to reflect the market value of the contract
at the end of each day's trading. Variation margin payments are made or received
and recognized as assets due from or liabilities due to broker, depending upon
whether unrealized gains or losses are incurred. When the contract is closed,
the Portfolio records a realized gain or loss equal to the difference between
the proceeds from (or cost of) the closing transactions and the Portfolio's
basis in the contract. The Portfolio enters into such contracts to hedge a
portion of its portfolio. The Portfolio bears the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts) and the credit risk should a counterparty fail to perform
under such contracts.
As of December 31, 1996, the Portfolio had no open futures contracts.
7. Capital Shares
At December 31, 1996, 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, 1996, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Amount
===============================================================
<S> <C>
Class A $197,462,295
- ---------------------------------------------------------------
Class B 440,669,408
- ---------------------------------------------------------------
Class C 62,057,471
- ---------------------------------------------------------------
Class Y 62,802,295
- ---------------------------------------------------------------
Class Z 20,316,516
===============================================================
</TABLE>
- --------------------------------------------------------------------------------
18 1996 Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996* December 31, 1995**
------------------------------- -------------------------------
Shares Amount Shares Amount
==================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 6,547,295 $ 83,402,855 13,774,175 $164,959,840
Shares issued on reinvestment 652,504 8,491,496 162,519 1,955,093
Shares redeemed (4,228,289) (54,332,568) (591,022) (7,014,421)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase 2,971,510 $ 37,561,783 13,345,672 $159,900,512
==================================================================================================================================
Class B
Shares sold 14,235,807 $180,384,752 25,291,425 $302,851,281
Shares issued on reinvestment 1,200,715 15,429,195 219,534 2,640,980
Shares redeemed (4,233,215) (54,002,913) (562,757) (6,633,887)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase 11,203,307 $141,811,034 24,948,202 $298,858,374
==================================================================================================================================
Class C
Shares sold 2,445,713 $ 31,099,403 3,667,471 $ 43,872,257
Shares issued on reinvestment 168,277 2,164,043 31,113 374,292
Shares redeemed (1,054,014) (13,533,051) (162,481) (1,919,473)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase 1,559,976 $ 19,730,395 3,536,103 $ 42,327,076
==================================================================================================================================
Class Y
Shares sold 4,876,088 $ 62,802,295 -- --
Shares issued on reinvestment -- -- -- --
Shares redeemed -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase 4,876,088 $ 62,802,295 -- --
==================================================================================================================================
Class Z
Shares sold 790,471 $ 10,038,182 824,984 $ 9,702,204
Shares issued on reinvestment 71,480 934,225 9,950 119,697
Shares redeemed (36,475) (472,992) (407) (4,800)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Increase 825,476 $ 10,499,415 834,527 $ 9,817,101
==================================================================================================================================
</TABLE>
* For Class Y shares, transactions are for the period from January 31, 1996
(inception date) to December 31, 1996.
** For Class A, B and C shares, transactions are for the period from June 30,
1995 (inception date) to December 31, 1995. For Class Z shares,
transactions are for the period from October 2, 1995 (inception date) to
December 31, 1995.
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 19
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
--------------------------- ----------------------
1996(1) 1995(1)(2) 1996(1) 1995(1)(2)
====================================================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.03 $12.00 $12.02 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.10 0.16 0.01 0.11
Net realized and unrealized gain 1.84 0.02 1.84 0.02
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.94 0.18 1.85 0.13
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.09) (0.15) --- (0.11)
Net realized gains (0.46) --- (0.46) ---
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.55) (0.15) (0.46) (0.11)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.42 $12.03 $13.41 $12.02
Total Return 16.33% 1.53%++ 15.55% 1.16%++
Net Assets, End of Year (000s) $218,927 $160,487 $484,673 $300,000
Ratios to Average Net Assets:
Expenses 1.27% 1.19%+ 2.03% 1.94%+
Net investment income 0.84 2.74+ 0.08 1.99+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 34% 6% 34% 6%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $0.06 $0.06 $0.06 $0.06
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) For the period from June 30, 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.
- --------------------------------------------------------------------------------
20 1996 Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Class Y
Class C Shares Shares
--------------- --------
1996(1) 1995(1)(2) 1996(1)(3)
====================================================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $12.03 $12.00 $12.21
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.00* 0.11 0.12
Net realized and unrealized gain 1.84 0.03 1.69
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.84 0.14 1.81
Less Distributions From:
Net investment income --- (0.11) (0.13)
Net realized gains (0.46) --- (0.46)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.46) (0.11) (0.59)
Net Asset Value, End of Year $13.41 $12.03 $13.43
Total Return 15.45% 1.16%++ 14.97%++
Net Assets, End of Year (000s) $68,340 $42,530 $65,499
Ratios to Average Net Assets:
Expenses 2.03% 1.91%+ 0.92%+
Net investment income 0.08 2.02+ 1.12+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 34% 6% 34%
Average commissions per share
paid on equity transactions $0.06 $0.06 $0.06
====================================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(2) For the period from June 30, 1995 (inception date) to December 31, 1995.
(3) For the period from January 31, 1996 (inception date) to December 31, 1996.
* Amount represents less than $0.01 per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 21
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of beneficial interest outstanding throughout each year:
<TABLE>
<CAPTION>
Class Z Shares 1996(1) 1995(1)(2)
===========================================================================================================================
<S> <C> <C>
Net Asset Value, Beginning of Year $12.03 $11.83
- ---------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.15 0.04
Net realized and unrealized gain 1.84 0.32
- ---------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.99 0.36
Less Distributions From:
Net investment income (0.13) (0.16)
Net realized gains (0.46) ---
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.59) (0.16)
Net Asset Value, End of Year $13.43 $12.03
Total Return 16.69% 3.06%++
Net Assets, End of Year (000s) $22,296 $10,040
Ratios to Average Net Assets:
Expenses 0.97% 0.90%+
Net investment income 1.12 2.30+
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 34% 6%
Average commissions per share
paid on equity transactions $0.06 $0.06
===========================================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year
since the use of the undistributed income method did not accord with
results of operations.
(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.
- --------------------------------------------------------------------------------
22 1996 Annual Report to Shareholders
<PAGE>
================================================================================
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, 1996, the related statement of
operations for the year then ended, and the statements of changes in net assets
and financial highlights for the year then ended and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Smith Barney Managed Growth Fund of Smith Barney Investment Funds Inc. as of
December 31, 1996, the results of its operations for the year then ended, and
the changes in its net assets and financial highlights for the year then ended
and 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 11, 1997
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 23
<PAGE>
================================================================================
Tax Information (unaudited)
================================================================================
A total of 28.26% of the ordinary income dividends paid by the Portfolio have
qualified for the dividends received deduction available to corporate taxpayers.
- --------------------------------------------------------------------------------
24 1996 Annual Report to Shareholders
<PAGE>
Smith Barney
Managed Growth Fund
Directors
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
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
Douglas Johnson
Vice President and Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
Investment Manager
Smith Barney Mutual Funds Management Inc.
Distibutor
Smith Barney Inc.
Custodian
PNC Bank, N.A.
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 an effective prospectus
for the Fund, which contains information concerning the Fund's investment
policies and expenses as well as other pertinent information.
SMITH BARNEY
- ------------
A member of Travelers Group[LOGO]
Smith Barney Managed Growth Fund
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
FD01070 2/97
