<PAGE>
SEMI - ANNUAL REPORT
[PICTURE APPEARS HERE]
SMITH BARNEY
GROWTH
OPPORTUNITY
FUND
_______________________________
June 30, 1997
[LOGO] Smith Barney Mutual Funds
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
SMITH BARNEY GROWTH OPPORTUNITY FUND
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Growth
Opportunity Fund ("Fund") for the period ended June 30, 1997. 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.
FUND PERFORMANCE UPDATE
For the six months ended June 30, 1997, the Smith Barney Growth Opportunity Fund
had a total return of 2.75% for its Class A shares and underperformed versus the
5.14% total return for the Russell 2000 Index over the same period. (The Russell
2000 is an unmanaged index made up of 2,000 of the largest-capitalized U.S.-
based companies whose common stock trades on either the New York, American or
Nasdaq stock exchanges.)
During the reporting period, we became more defensive by reducing our common
stock holdings and increasing our cash position. Moreover, during the past six
months we reduced our weightings in the financial services, biotechnology, radio
and TV and entertainment sectors because of their high valuations and purchased
securities in the insurance industry because of that industry's underlying
strength.
SPECIAL SHAREHOLDER NOTICE
Effective August 1, 1997, Dennis A. Johnson, a Managing Director of Smith Barney
Inc. and President and Chief Investment Officer of the Atlanta-based Peachtree
Asset Management, a division of Smith Barney Mutual Funds Management Inc., the
Fund's investment adviser and administrator, took over responsibility for
managing the day-to-day investment operations of the Fund.
In attempting to achieve the Fund's investment objective of capital
appreciation, Mr. Johnson uses a disciplined approach to identify the equity
securities of companies that have prospects of strong, sustainable earnings
growth and that are believed to afford attractive opportunities for stock price
appreciation. This disciplined approach involves computer-aided quantitative
analysis supported by fundamental research.
Mr. Johnson selects stocks for the Fund's portfolio by sorting a universe of
1,500 stocks into deciles based on earnings and other valuation characteristics.
Those stocks sorted into the top two deciles, or top 20%, are further analyzed
1
<PAGE>
quantitatively and fundamentally to determine if they are attractive
investments. This analysis is also used to determine if a particular stock held
in the Fund's portfolio continues to be an attractive investment and stocks
appearing in the bottom two deciles, or bottom 20%, are sold. Although the Fund
may invest in the stocks of smaller-capitalized companies, the Fund's assets
will be invested primarily in the stocks of mid- and larger-capitalized
companies.
The positive underlying market and economic fundamentals supporting the current
bull market have tended to favor the larger world-class companies at the expense
of smaller-capitalized companies. We expect the current climate to continue to
be positive with a better balance of performance throughout the small-
capitalization market. We anticipate that our new investment approach will allow
the Fund to better reflect the full range of performance potential within the
market.
In closing, we would like to welcome Mr. Johnson to the Smith Barney Growth
Opportunity Fund and thank you for your continued confidence in our investment
management approach.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
August 11, 1997
2
<PAGE>
- ----------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES
- ----------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $13.80 $14.18 $0.00 $0.00 2.75%+
- ----------------------------------------------------------------------------------------------------------------------------------
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
==================================================================================================================================
</TABLE>
- ----------------------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES
- ----------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $13.74 $14.07 $0.00 $0.00 2.40%+
- ----------------------------------------------------------------------------------------------------------------------------------
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
==================================================================================================================================
</TABLE>
- ----------------------------------------
HISTORICAL PERFORMANCE -- CLASS C SHARES
- ----------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $13.78 $14.11 $0.00 $0.00 2.39%+
- ----------------------------------------------------------------------------------------------------------------------------------
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
==================================================================================================================================
</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
==================================================================================================================================
<S> <C> <C> <C>
Six Months Ended 6/30/97+ 2.75% 2.40% 2.39%
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended 6/30/97 8.74 7.89 7.94
- ----------------------------------------------------------------------------------------------------------------------------------
Inception* through 6/30/97 15.89 14.99 12.97
==================================================================================================================================
With Sales Charge(2)
-------------------------------------
Class A++ Class B++ Class C
==================================================================================================================================
Six Months Ended 6/30/97+ (2.41)% (2.60)% 1.39%
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended 6/30/97 3.31 3.30 6.94
- ----------------------------------------------------------------------------------------------------------------------------------
Inception* through 6/30/97 12.96 13.24 12.97
==================================================================================================================================
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Without Sales Charge(1)
==================================================================================================================================
<S> <C>
Class A (May 3, 1994 through 6/30/97)++ 54.98%
- ----------------------------------------------------------------------------------------------------------------------------------
Class B (May 3, 1994 through 6/30/97)++ 52.25
- ----------------------------------------------------------------------------------------------------------------------------------
Class C (Inception* through 6/30/97) 26.02
==================================================================================================================================
</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 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.
4
<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 -- June 1997
[GRAPHIC]
Smith Barney Russell 2000
Growth Opportunity Fund Class A Index
5/94 $ 9,448 $10,000
6/94 9,536 9,552
12/94 9,552 10,027
6/95 10,911 11,474
12/95 12,506 12,880
6/96 13,467 14,215
12/96 14,251 15,005
6/97 14,643 16,535
+ 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, 1997.
(Performance calculations include the historical return information related to
Common Sense for the period from May 3, 1994 through June 30, 1997). 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.
5
<PAGE>
- --------------------------------------------------------------------------------
HISTORICAL PERFORMANCE (UNAUDITED)(CONTINUED)
- --------------------------------------------------------------------------------
GROWTH OF $10,000 INVESTED IN CLASS B SHARES OF
THE SMITH BARNEY GROWTH OPPORTUNITY FUND
VS. RUSSELL 2000 INDEX+
- --------------------------------------------------------------------------------
May 1994 -- June 1997
[GRAPHIC]
Smith Barney Russell 2000
Growth Opportunity Fund Class B Index
5/94 $10,000 $10,000
6/94 10,085 9,552
12/94 10,119 10,027
6/95 11,515 11,474
12/95 13,144 12,880
6/96 14,112 14,215
12/96 14,868 15,005
6/97 15,225 16,535
+ Hypothetical illustration of $10,000 invested in Class B 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 reinvestment
of dividends and capital gains, if any, at net asset value through June 30,
1997. (Performance calculations include the historical return information
related to Common Sense for the period from May 3, 1994 through June 30,
1997). 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
B shares' performance indicated on this chart, depending on whether greater or
lesser 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) JUNE 30, 1997
- -----------------------------------------------
[GRAPHIC]
PORTFOLIO BREAKDOWN
Other Common Stocks 26.2%
Computer Software 2.4%
Financial Services 4.7%
Repurchase Agreements 28.6%
Distribution/Wholesale 2.4%
Retail 4.0%
Telecommunications 6.2%
Pharmaceuticals 2.2%
Household Furnishings/Products 3.3%
Tobacco 5.5%
Entertainment 2.8%
Transportation 3.9%
Insurance 4.6%
Healthcare 3.2%
TOP TEN COMMON STOCK HOLDINGS
Percentage of
Total Investments
=================================================
COMSAT Corp. 3.9%
Loews Corp. 3.6
Foremost Corp. of America Co. 3.1
Handleman Co. 2.4
Leggett & Platt Inc. 2.3
Philip Morris Co. 1.9
H&R Block Inc. 1.6
Columbia Laboratories Inc. 1.6
American Classic Voyages Co. 1.6
Deere & Co. 1.5
=================================================
7
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C>
COMMON STOCKS -- 65.1%
================================================================================
ADVERTISING -- 0.7%
51,500 Advo Inc.+ $ 836,875
- --------------------------------------------------------------------------------
AEROSPACE/DEFENSE -- 0.2%
22,500 Diagnostic Retrieval Systems+ 240,469
- --------------------------------------------------------------------------------
AUTOMOTIVE -- 0.9%
12,500 Copart Inc.+ 206,250
15,000 TRW Inc. 852,188
- --------------------------------------------------------------------------------
1,058,438
- --------------------------------------------------------------------------------
BEVERAGES -- 0.2%
8,500 Glacier Water Services Inc.+ 216,750
- --------------------------------------------------------------------------------
BIOTECHNOLOGY -- 0.5%
73,000 Cell Genesys Inc.+ 360,438
95,000 Targeted Genetics Corp.+ 261,250
- --------------------------------------------------------------------------------
621,688
- --------------------------------------------------------------------------------
BROADCASTING - RADIO & TV -- 0.3%
45,000 Four Media Corp.+ 348,750
- --------------------------------------------------------------------------------
BROKERAGE -- 0.9%
24,000 A.G. Edwards & Sons, Inc. 1,026,000
- --------------------------------------------------------------------------------
BUILDING MATERIALS -- 0.1%
59,000 Metalclad Corp.+ 90,344
- --------------------------------------------------------------------------------
BUSINESS SYSTEMS -- 0.6%
85,000 Unisys Corp.+ 648,125
- --------------------------------------------------------------------------------
COMMERCIAL SERVICES -- 1.7%
5,000 GRC International Inc.+ 27,500
5,000 PhyMatrix Inc.+ 76,875
5,500 Prosoft I - Net Solutions Inc.+ 38,500
88,000 Sotheby's Holdings Inc. 1,485,000
19,000 Vallen Corp.+ 346,750
- --------------------------------------------------------------------------------
1,974,625
- --------------------------------------------------------------------------------
COMMUNICATIONS - EQUIPMENT & SOFTWARE -- 1.0%
85,000 California Microwave Inc.+ 1,190,000
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE -- 2.4%
28,000 Banyan Systems Inc.+ 63,000
95,000 Broadway & Seymour Inc.+ 1,199,375
228,500 Data Broadcasting Corp.+ 1,085,375
140,000 Interleaf Inc.+ 210,000
90,000 Multi-Corp Inc.+ 225,000
- --------------------------------------------------------------------------------
2,782,750
- --------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C>
CONSUMER PRODUCTS -- 1.7%
35,000 Lowe's Cos., Inc. $1,299,374
27,500 Whitman Corp. 696,094
- --------------------------------------------------------------------------------
1,995,468
- --------------------------------------------------------------------------------
DISTRIBUTION/WHOLESALE -- 2.4%
437,300 Handleman Co.+ 2,787,787
- --------------------------------------------------------------------------------
DIVERSIFIED OPERATIONS -- 0.5%
91,800 Giant Group Ltd.+ 619,650
- --------------------------------------------------------------------------------
DRUG & HEALTH CARE -- 0.3%
35,000 National Patent Development Corp.+ 273,437
37,500 Quidel Corp.+ 121,875
- --------------------------------------------------------------------------------
395,312
- --------------------------------------------------------------------------------
EDUCATION -- 0.4%
25,000 Childtime Learning Centers+ 231,250
65,700 Whitman Education Group Inc.+ 279,225
- --------------------------------------------------------------------------------
510,475
- --------------------------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 0.8%
72,000 American Superconductor Corp.+ 882,000
5,000 Graham Corp. 88,125
- --------------------------------------------------------------------------------
970,125
- --------------------------------------------------------------------------------
ELECTRONICS -- 1.8%
64,800 Ampex Corp., Class A Shares+ 376,650
12,500 Arrow Electronics Inc.+ 664,062
10,000 EDO Corp. 80,000
65,400 Kollmorgen Corp. 1,034,137
- --------------------------------------------------------------------------------
2,154,849
- --------------------------------------------------------------------------------
ENERGY EXPLORATION -- 0.2%
5,000 Triton Energy Ltd.+ 229,062
- --------------------------------------------------------------------------------
ENGINEERING -- 0.3%
20,000 Emcor Group Inc.+ 317,500
- --------------------------------------------------------------------------------
ENTERTAINMENT -- 2.3%
171,000 American Classic Voyages Co.+ 1,838,250
94,582 Ascent Entertainment Group+ 863,068
- --------------------------------------------------------------------------------
2,701,318
- --------------------------------------------------------------------------------
FINANCIAL SERVICES -- 4.7%
30,000 Equitable Cos. Inc. 997,500
7,500 Glendale Federal Bank FSB+ 195,938
60,000 H&R Block Inc. 1,935,000
428,000 Mercury Finance Co. 1,043,250
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C>
FINANCIAL SERVICES -- 4.7% (CONTINUED)
43,250 Stifel Financial Corp. $ 513,594
30,000 United Asset Management Corp. 849,375
- --------------------------------------------------------------------------------
5,534,657
- --------------------------------------------------------------------------------
FOOD AND BEVERAGE -- 0.1%
29,500 EPL Technologies Inc.+ 175,156
- --------------------------------------------------------------------------------
HEALTHCARE -- 0.3%
300,300 Avatex Corp.+ 356,606
- --------------------------------------------------------------------------------
HOLDING COMPANIES - DIVERSIFIED -- 1.6%
71,500 Anixter Corp.+ 1,228,906
265,000 WorldCorp Inc.+ 679,063
- --------------------------------------------------------------------------------
1,907,969
- --------------------------------------------------------------------------------
HOTEL/GAMING -- 1.3%
70,000 Aztar Corp.+ 494,375
50,000 Chartwell Leisure Inc.+ 668,750
5,000 Four Seasons Hotels Inc. 148,125
5,000 Jackpot Enterprises Inc. 56,875
22,500 U.S. Franchise Systems Inc.+ 222,188
- --------------------------------------------------------------------------------
1,590,313
- --------------------------------------------------------------------------------
HOUSEHOLD FURNISHINGS/PRODUCTS -- 3.3%
12,500 Bassett Furniture Industries, Inc. 353,906
79,000 Crown Crafts Inc. 829,500
62,000 Leggett & Platt Inc. 2,666,000
- --------------------------------------------------------------------------------
3,849,406
- --------------------------------------------------------------------------------
INSURANCE -- 4.6%
78,200 Capsure Holdings Corp.+ 1,011,713
60,500 Foremost Corp. of America Co. 3,622,438
35,000 USF&G Corp. 840,000
- --------------------------------------------------------------------------------
5,474,151
- --------------------------------------------------------------------------------
LEISURE TIME -- 1.1%
155,000 Bell Sports Corp.+ 1,259,375
- --------------------------------------------------------------------------------
MACHINERY -- 1.5%
33,000 Deere & Co. 1,810,875
- --------------------------------------------------------------------------------
MANUFACTURING -- 0.8%
32,000 Central Sprinkler Corp.+ 896,000
- --------------------------------------------------------------------------------
MEDICAL -- 0.4%
30,000 Diametrics Medical Inc.+ 240,000
10,000 Vivus, Inc.+ 238,125
- --------------------------------------------------------------------------------
478,125
- --------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
- ------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) JUNE 30, 1997
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
========================================================================
<S> <C>
METALS/MINING -- 0.9%
20,000 Mueller Industries Inc.+ $ 875,000
34,000 Uranium Resources, Inc.+ 199,750
- -----------------------------------------------------------------------
1,074,750
- -----------------------------------------------------------------------
OIL/GAS -- 0.9%
10,500 Box Energy Corp. + 76,125
39,200 Lufkin Industries Inc. 1,029,000
- -----------------------------------------------------------------------
1,105,125
- -----------------------------------------------------------------------
PHARMACEUTICALS -- 2.2%
115,000 Columbia Laboratories Inc.+ 1,883,125
115,000 Imclone Systems Inc.+ 704,375
- -----------------------------------------------------------------------
2,587,500
- -----------------------------------------------------------------------
PROPERTY & CASUALTY INSURANCE -- 0.9%
35,000 TIG Holdings, Inc. 1,093,750
- -----------------------------------------------------------------------
PUBLISHING -- 0.4%
40,000 Golden Books Family Entertainment+ 500,000
- -----------------------------------------------------------------------
REAL ESTATE -- 2.1%
5,000 California Real Estate Investment Trust 30,000
65,000 Manufactured Home Communities, Inc. 1,499,062
45,000 Merry Land & Investment Co., Inc. 975,937
- -----------------------------------------------------------------------
2,504,999
- -----------------------------------------------------------------------
RETAIL -- 4.0%
21,000 Bombay Co.+ 105,000
15,000 CDW Computer Centers, Inc.+ 795,938
132,000 CML Group Inc. 239,250
85,000 Chart House Enterprises, Inc.+ 648,125
15,000 Federated Department Stores, Inc.+ 521,250
4,000 The Finish Line, Inc., Class A Shares+ 58,500
35,000 Lillian Vernon Corp. 590,625
30,000 Riddell Sports Inc.+ 168,750
102,622 Right Start Inc.+ 320,694
25,000 The Sports Authority Inc.+ 485,938
15,000 Walgreen Co. 804,375
- -----------------------------------------------------------------------
4,738,445
- -----------------------------------------------------------------------
TECHNOLOGY -- 1.1%
12,500 Creative BioMolecules, Inc.+ 88,281
27,500 Storage Technology Inc.+ 1,223,750
- -----------------------------------------------------------------------
1,312,031
- -----------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
- --------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1997
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
==========================================================================
<S> <C>
TELECOMMUNICATIONS -- 5.4%
7,500 Associated Group Inc. Class A Shares+ $ 48,000
1,200 Associated Group Inc. Class B Shares+ 290,625
193,500 COMSAT Corp. 4,607,719
42,500 Frontier Corp. 847,344
25,000 General DataComm Industries Inc.+ 178,125
22,000 InteliData Technologies Corp.+ 105,875
10,000 Qwest Communications International Inc. + 272,500
- --------------------------------------------------------------------------
6,350,188
- --------------------------------------------------------------------------
TOBACCO -- 5.5%
42,500 Loews Corp. 4,255,313
50,000 Philip Morris Cos. Inc.# 2,218,750
- --------------------------------------------------------------------------
6,474,063
- --------------------------------------------------------------------------
TRANSPORTATION -- 1.8%
40,000 Dynamex Inc.+ 330,000
7,500 Federal Express Corp.+ 433,125
192,300 Greyhound Lines, Inc.+ 853,331
15,000 Illinois Central Corp. 524,062
- --------------------------------------------------------------------------
2,140,518
- --------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $75,906,366) 76,930,362
==========================================================================
CONVERTIBLE PREFERRED STOCKS -- 3.9%
==========================================================================
ENTERTAINMENT -- 0.5%
10,000 Golden Books Family Entertainment,
Convertible 8.75%++ 618,750
- --------------------------------------------------------------------------
HEALTHCARE -- 1.0%
145,078 Avatex Corp., Series A, Convertible $4.20 1,160,624
- --------------------------------------------------------------------------
TELECOMMUNICATIONS -- 0.8%
40,000 General DataComm Industries Inc.,
Convertible 9.00%++ 900,000
- --------------------------------------------------------------------------
TRANSPORTATION -- 1.6%
65,000 Greyhound Lines, Inc., Convertible 8.50%++ 1,909,375
- --------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost -- $5,285,766) 4,588,749
==========================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
- -------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED) JUNE 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
<S> <C>
===============================================================================
CONVERTIBLE BONDS -- 2.4%
===============================================================================
HEALTHCARE -- 1.9%
$ 2,500,000 Synetic Inc., 5.00% due 2/15/07 $2,184,375
- -------------------------------------------------------------------------------
TRANSPORTATION -- 0.5%
1,000,000 WorldCorp Inc., 7.00% due 5/15/04 636,250
- -------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost -- $3,315,618) 2,820,625
===============================================================================
SUBTOTAL INVESTMENTS
(Cost -- $84,507,750) 84,339,736
===============================================================================
REPURCHASE AGREEMENTS -- 28.6%
25,000,000 Chase Manhattan Bank, 5.750% due 7/1/97;
Proceeds at maturity -- $25,003,993;
(Fully collateralized by U.S. Treasury
Notes, 7.875% due 11/30/04;
Market value -- $25,503,969) 25,000,000
8,809,000 Citibank Securities, 6.000% due 7/1/97;
Proceeds at maturity -- $8,810,468;
(Fully collateralized by U.S. Treasury
Notes, 5.750% due 12/31/98;
Market value -- $8,987,475) 8,809,000
- -------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $33,809,000) 33,809,000
===============================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $118,316,750*) $118,148,736
===============================================================================
</TABLE>
+ Non-income producing security.
# Security segregated by Custodian to cover written call options.
++ Security is exempt from registration under Rule 144A of the Securities
Act of 1933. This security may be resold 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.
13
<PAGE>
- -----------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1997
- -----------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments, at value (Cost -- $84,507,750) $ 84,339,736
Repurchase agreements (Cost -- $33,809,000) 33,809,000
Cash 852
Dividends and interest receivable 125,411
- -----------------------------------------------------------------------------------------
TOTAL ASSETS 118,274,999
- -----------------------------------------------------------------------------------------
LIABILITIES:
Management fees payable 104,702
Payable for options written (Note 5) 44,250
Accrued expenses 192,296
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES 341,248
- -----------------------------------------------------------------------------------------
TOTAL NET ASSETS $ 117,933,751
=========================================================================================
NET ASSETS:
Par value of capital shares $ 8,342
Capital paid in excess of par value 106,611,806
Accumulated net investment loss (922,904)
Accumulated net realized gain from security transactions and options 12,295,527
Net unrealized depreciation of investments and options (59,020)
- -----------------------------------------------------------------------------------------
TOTAL NET ASSETS $ 117,933,751
=========================================================================================
SHARES OUTSTANDING:
Class A 5,236,178
- -----------------------------------------------------------------------------------------
Class B 3,093,317
- -----------------------------------------------------------------------------------------
Class C 12,511
- -----------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A (and redemption price) $14.18
- -----------------------------------------------------------------------------------------
Class B * $14.07
- -----------------------------------------------------------------------------------------
Class C ** $14.11
- -----------------------------------------------------------------------------------------
CLASS A MAXIMUM PUBLIC OFFERING PRICE PER SHARE
(net asset value plus 5.26% of net asset value per share) $14.93
=========================================================================================
</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 CDSC if shares are redeemed within
the first year reduced by a 1.00% of purchase.
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
- -----------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
- -----------------------------------
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997
INVESTMENT INCOME:
<S> <C>
Interest $ 642,502
Dividends 458,750
- ------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 1,101,252
- ------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 563,060
Distribution fees (Note 2) 297,096
Shareholder and system servicing fees 101,270
Registration fees 57,380
Shareholder communications 45,062
Audit and legal 25,708
Directors' fees 7,316
Custody 6,881
Other 4,853
- ------------------------------------------------------------------------
TOTAL EXPENSES 1,108,626
- ------------------------------------------------------------------------
NET INVESTMENT LOSS (7,374)
- ------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND OPTIONS (NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 8,281,459
Options written (30,770)
- ------------------------------------------------------------------------
NET REALIZED GAIN 8,250,689
- ------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments and Options:
Beginning of period 5,156,379
End of period (59,020)
- ------------------------------------------------------------------------
INCREASE IN NET UNREALIZED DEPRECIATION (5,215,399)
- ------------------------------------------------------------------------
NET GAIN ON INVESTMENTS 3,035,290
- ------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS $ 3,027,916
========================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
- -----------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- -----------------------------------
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 1996
1997 1996
=================================================================================================
OPERATIONS:
<S> <C> <C>
Net investment loss $ (7,374) $ (210,289)
Net realized gain 8,250,689 20,150,920
Increase in net unrealized depreciation (5,215,399) (6,581,661)
- --------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS 3,027,916 13,358,970
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --- (641,248)
Net realized gain --- (15,974,305)
- -------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM
DISTRIBUTIONS TO SHAREHOLDERS --- (16,615,553)
- -------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 10,751,229 22,596,576
Net asset value of shares issued
for reinvestment of dividends --- 16,598,514
Cost of shares reacquired (11,347,091) (10,903,217)
- -------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM
FUND SHARE TRANSACTIONS (595,862) 28,291,873
- -------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS 2,432,054 25,035,290
NET ASSETS:
Beginning of period 115,501,697 90,466,407
- -------------------------------------------------------------------------------------------------
END OF PERIOD* $117,933,751 $115,501,697
=================================================================================================
* Includes accumulated net investment loss of: $ (922,904) $ (915,530)
=================================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
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
this 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 semi-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
value; (e) dividend income is recorded on ex-dividend date and interest income
is recorded on an 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 or 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 Portfolio's capital accounts to reflect
permanent book/tax differences and income and gains
17
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
available for distributions under income tax regulations. Accordingly, a portion
of 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 these changes; 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
six months ended June 30, 1997, SB received sales charges of approximately
$4,000 on sales of the Portfolio's Class A shares and brokerage commissions
of $7,284.
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 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 six months ended June 30, 1997, CDSCs paid to SB for
Class B shares were approximately $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 an annual
rate of 0.75% of the average daily net assets of each class, respectively. For
the
18
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
six months ended June 30, 1997, total Distribution Plan fees incurred by the
Portfolio were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $88,307 $207,949 $840
================================================================================
</TABLE>
All officers and one Director of the Fund are employees of SB.
3. INVESTMENTS
During the six months ended June 30, 1997, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Purchases $66,961,530
- --------------------------------------------------------------------------------
Sales 96,082,576
================================================================================
</TABLE>
At June 30, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
================================================================================
<S> <C>
Gross unrealized appreciation $ 10,713,911
Gross unrealized depreciation (10,881,925)
- --------------------------------------------------------------------------------
Net unrealized depreciation $ (168,014)
================================================================================
</TABLE>
4. REPURCHASE AGREEMENTS
The Portfolio purchases (and its custodian takes possession of) U.S.
government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day), at an agreed-upon higher repurchase price. The Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. 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 a 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
19
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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 June 30, 1997, the Portfolio had no purchased put or call options.
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 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 originally received will reduce
the cost of the security which the Portfolio purchased upon exercise. When a
written index option is 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 loss if the market price of the underlying security
declines.
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUM
=================================================================================
<S> <C> <C>
Options written, outstanding at December 31, 1996 0 $ 0
Options written during the period ended June 30, 1997 1,000 214,242
Options cancelled in closing purchase transactions (170) (20,739)
Options expired (330) (40,259)
- ---------------------------------------------------------------------------------
Options written, outstanding at June 30, 1997 500 $153,244
=================================================================================
</TABLE>
The following represents the covered call option written contracts open as
of June 30, 1997:
<TABLE>
<CAPTION>
NUMBER OF STRIKE
CONTRACTS EXPIRATION PRICE VALUE
==========================================================================================
<S> <C> <C> <C> <C>
340 Philip Morris Co. 7/19/97 $45 $(38,250)
160 Philip Morris Co. 7/19/97 48 (6,000)
- ------------------------------------------------------------------------------------------
TOTAL COVERED CALL OPTIONS WRITTEN
(Premiums received -- $153,244) $(44,250)
==========================================================================================
</TABLE>
20
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
6. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contracts. 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 received or made 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 June 30, 1997, the Portfolio had no open futures contracts.
7. CAPITAL SHARES
At June 30, 1997, 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 June 30, 1997, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
================================================================================
<S> <C> <C> <C>
Total Paid-in Capital $66,404,446 $40,038,014 $177,688
================================================================================
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1997 DECEMBER 31, 1996
--------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT
=============================================================================================
<S> <C> <C> <C> <C>
CLASS A
Shares sold 542,079 $ 7,259,168 919,099 $13,273,879
Shares issued on reinvestment -- -- 789,890 10,459,184
Shares redeemed (537,013) (7,230,172) (510,041) (7,322,036)
- ---------------------------------------------------------------------------------------------
Net Increase 5,066 $ 28,996 1,198,948 $16,411,027
=============================================================================================
CLASS B
Shares sold 55,730 $ 3,435,550 626,244 $ 9,084,836
Shares issued on reinvestment -- -- 463,511 6,114,715
Shares redeemed (302,528) (4,060,078) (239,986) (3,410,585)
- ---------------------------------------------------------------------------------------------
Net Increase (Decrease) (46,798) $ (624,528) 849,769 $11,788,966
=============================================================================================
CLASS C
Shares sold 4,123 $ 56,511 16,080 $ 237,861
Shares issued on reinvestment -- -- 1,860 24,615
Shares redeemed (4,231) (56,841) (11,481) (170,596)
- ---------------------------------------------------------------------------------------------
Net Increase (Decrease) (108) $ (330) 6,459 $ 91,880
=============================================================================================
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------ -------------------------------
1997(1) 1996 1995(2) 1997(1) 1996 1995(2)
===========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD $13.80 $14.31 $13.36 $13.74 $14.27 $13.36
- -----------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (loss) 0.02 0.01 0.03 (0.03) (0.09) (0.02)
Net realized and unrealized gain 0.36 1.85 1.87 0.36 1.84 1.86
- -----------------------------------------------------------------------------------------------------------
Total Income From Operations 0.38 1.86 1.90 0.33 1.75 1.84
- -----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- (0.11) (0.02) -- (0.02) --
Net realized gain -- (2.26) (0.93) -- (2.26) (0.93)
- -----------------------------------------------------------------------------------------------------------
Total Distributions -- (2.37) (0.95) -- (2.28) (0.93)
- -----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.18 $13.80 $14.31 $14.07 $13.74 $14.27
- -----------------------------------------------------------------------------------------------------------
TOTAL RETURN 2.75%++ 13.96% 14.61%++ 2.40%++ 13.12% 14.15%++
- -----------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $74,242 $72,180 $57,693 $43,515 $43,148 $32,685
- -----------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.69%+ 1.78% 1.72%+ 2.44%+ 2.53% 2.46%+
Net investment income (loss) 0.27+ 0.13 0.46+ (0.48)+ (0.63) (0.27)+
- -----------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 73% 183% 51% 73% 183% 51%
- -----------------------------------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER
SHARE PAID ON EQUITY
SECURITY TRANSACTIONS $0.06 $0.06 $0.06 $0.06 $0.06 $0.06
===========================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) 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.
23
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
CLASS C SHARES 1997(1) 1996 1995(2)
================================================================================
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.78 $14.29 $14.05
- --------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income (loss) (0.03) (0.08) 0.01
Net realized and unrealized gain 0.36 1.85 1.16
- --------------------------------------------------------------------------------
Total Income From Operations 0.33 1.77 1.17
- --------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- (0.02) --
Net realized gain -- (2.26) (0.93)
- --------------------------------------------------------------------------------
Total Distributions -- (2.28) (0.93)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.11 $13.78 $14.29
- --------------------------------------------------------------------------------
TOTAL RETURN 2.39%++ 13.24% 8.69%++
- --------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000s) $177 $174 $88
- --------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.44%+ 2.40% 2.29%+
Net investment income (0.48)+ (0.48) 0.13+
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 73% 183% 51%
- --------------------------------------------------------------------------------
AVERAGE COMMISSIONS PER SHARE PAID ON
EQUITY SECURITY TRANSACTIONS $0.06 $0.06 $0.06
================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) For the period from August 8, 1995 (inception date) to December 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
24
<PAGE>
SMITH BARNEY
GROWTH OPPORTUNITY
FUND
DIRECTORS
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank J. Hubbard
Heath B. McLendon, Chairman
Ken Miller
John F. White
OFFICERS
Heath B. McLendon
Chief Executive Officer
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 MANAGER
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 Growth Opportunity 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
GROWTH OPPORTUNITY
FUND
388 Greenwich Street
New York, New York 10013
FD01155 8/97
- --------------------------------------------------------------------------------
SEMI-ANNUAL REPORT
================================================================================
[GRAPHIC OMITTED]
Smith Barney
Investment
Grade Bond
Fund
- ------------------
June 30, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Investment Grade Bond Fund
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Investment
Grade Bond Fund ("Fund") for the period ended June 30, 1997. 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.
Fund Performance Update
For the six months ended June 30, 1997, the Smith Barney Investment Grade Bond
Fund generated an average total return of 2.57% on Class A shares. In
comparison, the Fund's Lipper Analytical Services, Inc. peer group generated an
average total return of 2.68% for the same period. (Lipper Analytical Services,
Inc. is a major fund-tracking organization.) For the one-year period ended June
30, 1997, we are pleased to report that your Fund generated an average annual
total return for Class A shares of 10.35% exceeding the annual total return of
Fund's Lipper peer group of 7.69% for the same period.
Economic Update
During the first quarter of 1997, the U.S. economy experienced above-average
growth. However, for the second quarter of the year, the U.S. economy slowed
slightly and grew moderately. We believe real economic growth will be in the
range of 2.5% as compared to the 5.9% rate achieved in the first quarter of
1997.
In our opinion, one reason for the economic slowdown has been consumer behavior.
In the first quarter, consumer spending rose at a 5.6% rate boosted by year-end
tax refunds and sizable bonus payments to an ever-increasing number of U.S.
workers. These are one-time events and the pace of consumer spending has clearly
slowed in the second quarter. Weak automotive sales figures and heavy incentive
financing packages being offered by the auto makers are additional evidence of
the sluggishness in consumer spending.
If you look at the rest of the U.S. economy, housing starts have moved within a
fairly narrow range during the past two years. With demand for housing probably
exhausted for this cycle, housing activity will probably not be a significant
contributor to economic growth for the remainder of 1997. Inventory building
surged in the first quarter, adding 2% to Gross Domestic Product (GDP) growth.
(GDP is the total output of goods and services.) We believe that these high
inventory levels may act to slow down the economy in the months ahead.
1
<PAGE>
The U.S. economy has experienced a new order surge in technology equipment while
orders for industrial equipment remain sluggish. Because capital goods add to
capacity, strong capital spending is generally deflationary, not inflationary.
The federal deficit will be less than 1% of GDP in fiscal 1997. By contrast, the
deficit averaged more than 4% of GDP during the 1980s and more than 3% of GDP
during 1990-1996. Moreover, net U.S. Treasury issuance has shrunk sharply
relative to potential investor demand.
Investment Strategy Update
As rates rose during the first quarter of 1997, we added longer-term maturities
to the Fund's portfolio. In the bank and finance industries, we added Banc One
to the Fund's portfolio. In addition, we purchased Amgen because of the
tremendous growth prospects we have identified in the biotechnology industry.
Lastly, we purchased U.S. Treasury bonds yielding close to 7% early in the year.
Market Outlook
We think long-term Treasury yields will continue to gravitate towards the 6%
level. Neither do we see any serious imbalances that could cause a recession,
nor do we see large pockets of demand developing in the economy. While monetary
policy has remained somewhat restrictive, analysts continue to miss the mark on
the news about inflation.
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 Vice President and
Investment Officer
July 18, 1997
2
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $12.27 $12.17 $ 0.40 $ 0.00 $ 0.00 2.57%+
- -----------------------------------------------------------------------------------------------------------------------
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 $ 3.94 $ 0.73 $ 0.04
=======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $12.29 $12.18 $ 0.37 $ 0.00 $ 0.00 2.23%+
- -----------------------------------------------------------------------------------------------------------------------
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 $ 8.95 $ 1.62 $ 0.06
=======================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $12.30 $12.18 $ 0.38 $ 0.00 $ 0.00 2.20%+
- -----------------------------------------------------------------------------------------------------------------------
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 $ 3.39 $ 0.73 $ 0.03
=======================================================================================================================
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $12.28 $12.17 $ 0.42 $ 0.00 $ 0.00 2.65%+
- -----------------------------------------------------------------------------------------------------------------------
Inception*-12/31/96 13.03 12.28 0.72 0.12 0.00 1.01+
=======================================================================================================================
Total $ 1.14 $ 0.12 $ 0.00
=======================================================================================================================
</TABLE>
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
================================================================================
Six Months Ended 6/30/97+ 2.57% 2.23% 2.20% 2.65%
- --------------------------------------------------------------------------------
Year Ended 6/30/97 10.35 9.73 9.82 10.58
- --------------------------------------------------------------------------------
Five Years Ended 6/30/97 N/A 8.87 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/97 N/A 9.49 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/97 9.70 11.67 7.43 2.63
================================================================================
With Sales Charge(2)
------------------------------------------
Class A Class B Class C Class Y
================================================================================
Six Months Ended 6/30/97+ (2.06)% (2.23)% 1.20% 2.65%
- --------------------------------------------------------------------------------
Year Ended 6/30/97 5.38 5.23 8.82 10.58
- --------------------------------------------------------------------------------
Five Years Ended 6/30/97 N/A 8.73 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/97 N/A 9.49 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/97 8.61 11.67 7.43 2.63
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 6/30/97) 53.77%
- --------------------------------------------------------------------------------
Class B (6/30/87 through 6/30/97) 147.56
- --------------------------------------------------------------------------------
Class C (Inception* through 6/30/97) 36.52
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/97) 3.69
================================================================================
(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 CDSCis incurred.
Class C shares reflect the deduction of a 1.00% CDSC, which applies if
shares are redeemed within the first year of purchase.
* Inception dates for Class A, B, C and 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.
4
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS DEPICTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
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+
- --------------------------------------------------------------------------------
June 1987 -- June 1997
Smith Barney Lehman Brothers Lipper Corporate
Investment Grade Long-Term Corporate Debt A-Rated
Bond Fund Bond Index Average
---------------- ------------------- ----------------
10,000 10,000 10,000
10,095 9,924 10,225
10,744 10,762 11,296
12,417 12,414 13,026
12,787 13,280 13,870
15,664 14,696 16,780
16,973 17,172 18,347
20,038 19,941 20,851
18,149 19,180 19,649
24,433 22,817 25,137
24,216 26,612 25,261
24,756 27,434 25,951
+ Hypothetical illustration of $10,000 invested in Class B shares on June
30, 1987 assuming reinvestment of dividends and capital gains, if any, at
net asset value through June 30, 1997. 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 June 30, 1997. The performance of the Fund's other
classes may be greater or less than the Class B shares' performance
indicated on this chart, depending on whether greater or lesser sales
charges and fees were incurred by shareholders investing in the other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
5
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) June 30, 1997
- --------------------------------------------------------------------------------
[THE FOLLOWING TABLE WAS DEPICTED AS A PIE CHART IN THE PRINTED MATERIAL]
Portfolio Breakdown
Aerospace/Defense 7.8%
Other Bonds and Notes 27.7%
Airlines 10.1%
Automotive 7.9%
Foods 7.0%
Beverages - Soft Drinks 4.4%
Banking 8.5%
Media Groups 8.4%
Entertainment 6.4%
Publishing 5.1%
U.S. Government Agencies and Obligations 6.7%
Top Ten Bond Holdings by Issuer
Percentage of
Total Investments
- --------------------------------------------------------------------------------
U.S. Treasury Strip 5.7%
NationsBank Corp. 4.9
Time Warner Inc. 4.5
IBM Corp. 4.3
American General Corp. 4.3
Ford Motor Co. 4.2
News America Holdings Inc. 4.1
The Walt Disney Corp. 4.1
Boeing Co. 3.8
General Motors Corp. 3.7
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================================================
<C> <C> <S> <C>
CORPORATE BONDS AND NOTES -- 89.8%
===========================================================================================================================
Aerospace/Defense -- 7.8%
$18,500,000 AA Boeing Co., Debentures, 6.875% due 10/15/43 $17,274,375
2,000,000 A3* Lockheed Martin Corp., Debentures, 7.750% due 5/1/26 2,050,000
17,500,000 A3* Loral Corp., Debentures, 7.000% due 9/15/23 16,384,375
- ---------------------------------------------------------------------------------------------------------------------------
35,708,750
- ---------------------------------------------------------------------------------------------------------------------------
Airlines -- 10.1%
AMR Corp., Debentures:
12,500,000 BBB- 9.000% due 9/15/16 13,906,250
4,500,000 BBB- 9.880% due 6/15/20 5,445,000
Delta Air Lines, Inc., Debentures:
10,735,000 Baa3* 9.000% due 5/15/16 11,902,431
5,000,000 Baa3* 9.750% due 5/15/21 5,987,500
7,650,000 Baa3* United Airlines, Inc., Debentures, 9.750% due 8/15/21 9,065,250
- ---------------------------------------------------------------------------------------------------------------------------
46,306,431
- ---------------------------------------------------------------------------------------------------------------------------
Automotive -- 7.9%
19,400,000 A+ Ford Motor Co., Notes, 7.700% due 5/15/2097 19,448,500
17,500,000 A- General Motors Corp., Debentures, 7.400% due 9/1/25 17,084,375
- ---------------------------------------------------------------------------------------------------------------------------
36,532,875
- ---------------------------------------------------------------------------------------------------------------------------
Banking -- 8.5%
Bank One Corp., Debentures:
8,000,000 A+ 7.750% due 7/15/25 8,040,000
8,500,000 A+ 7.625% due 10/15/26 8,404,375
23,500,000 A NationsBank Corp., Debentures, 7.250% due 10/15/25 22,442,500
- ---------------------------------------------------------------------------------------------------------------------------
38,886,875
- ---------------------------------------------------------------------------------------------------------------------------
Beverages-Alcoholic -- 3.6%
18,300,000 A Seagram Co., Ltd., Debentures, 6.875% due 9/1/23 16,698,750
- ---------------------------------------------------------------------------------------------------------------------------
Beverages-Soft Drinks -- 4.4%
Coca Cola Enterprises Inc., Debentures:
12,000,000 AA- 6.750% due 9/15/23 10,980,000
10,000,000 AA- 6.950% due 11/15/26 9,387,500
- ---------------------------------------------------------------------------------------------------------------------------
20,367,500
- ---------------------------------------------------------------------------------------------------------------------------
Bio-Medical -- 2.5%
11,000,000 A Amgen Inc., Debentures, 8.125% due 4/1/2097 11,343,750
- ---------------------------------------------------------------------------------------------------------------------------
Consumer Products -- 1.2%
6,000,000 BBB Fruit of the Loom, Inc., Debentures, 7.375% due 11/15/23 5,452,500
- ---------------------------------------------------------------------------------------------------------------------------
Electronics/Computers -- 4.3%
21,000,000 NR IBM Corp., Debentures, 7.125% due 12/1/2096 19,871,250
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================================================
<C> <C> <S> <C>
Entertainment -- 6.4%
$12,000,000 BB+ Paramount Communications, Inc., Sr. Debentures,
7.500% due 7/15/23 $ 10,575,000
19,000,000 A The Walt Disney Co., Sr. Debentures,
7.550% due 7/15/2093 18,881,250
- ---------------------------------------------------------------------------------------------------------------------------
29,456,250
- ---------------------------------------------------------------------------------------------------------------------------
Foods -- 7.0%
16,750,000 BB+ Borden Inc., Notes, 7.875% due 2/15/23 15,284,375
16,000,000 A- Ralston Purina Co., Debentures, 8.125% due 2/1/23 16,800,000
- ---------------------------------------------------------------------------------------------------------------------------
32,084,375
- ---------------------------------------------------------------------------------------------------------------------------
Healthcare -- 3.0%
14,495,000 A- Columbia/HCA Healthcare, Debentures,
7.500% due 11/15/2095 14,114,506
- ---------------------------------------------------------------------------------------------------------------------------
Insurance -- 4.3%
20,000,000 AA- American General Corp., Debentures, 7.500% due 7/15/25 19,825,000
- ---------------------------------------------------------------------------------------------------------------------------
Media Groups -- 8.4%
17,500,000 BB CBS Inc., Notes, 7.125% due 11/1/23 15,093,750
2,500,000 BBB- Time Warner Entertainment, Debentures,
8.375% due 7/15/23 2,546,875
19,000,000 BBB- Time Warner Inc., Debentures, 9.150% due 2/1/23 20,923,750
- ---------------------------------------------------------------------------------------------------------------------------
38,564,375
- ---------------------------------------------------------------------------------------------------------------------------
Metals & Mining -- 2.3%
10,000,000 BBB Asarco Inc., Debentures, 8.500% due 5/1/25 10,550,000
- ---------------------------------------------------------------------------------------------------------------------------
Oil & Gas -- 2.0%
9,500,000 BBB+ Apache Corp., Debentures, 7.625% due 11/1/2096 9,310,000
- ---------------------------------------------------------------------------------------------------------------------------
Paper & Forest Products -- 0.1%
500,000 BBB- Georgia-Pacific Corp., Debentures, 9.625% due 3/15/22 551,875
- ---------------------------------------------------------------------------------------------------------------------------
Publishing -- 5.1%
20,000,000 BBB News America Holdings Inc., Notes, 7.900% due 12/1/2095 19,000,000
4,745,000 A+ Times Mirror Co., Debentures, 7.250% due 11/15/2096 4,543,338
- ---------------------------------------------------------------------------------------------------------------------------
23,543,338
- ---------------------------------------------------------------------------------------------------------------------------
Super National Entity -- 0.9%
42,860,000 AAA International Bank of Reconstruction and Development,
zero coupon due 7/15/29 3,964,550
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $407,056,541) 413,132,950
===========================================================================================================================
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================================================
<C> <C> <S> <C>
U. S. GOVERNMENT AGENCIES AND OBLIGATIONS -- 6.7%
$170,000,000 U.S. Treasury Strip, zero coupon due 2/15/25 $ 26,241,200
Financing Corp. Strips, Series 19:
2,400,000 NR Zero coupon due 12/6/18 506,736
21,400,000 NR Zero coupon due 6/6/19 4,339,064
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL U. S. GOVERNMENT AGENCIES
AND OBLIGATIONS
(Cost-- $31,164,255) 31,087,000
===========================================================================================================================
YANKEE BONDS -- 3.5%
1,600,000 A+ Hydro-Quebec Debentures, Series HE,
8.625% due 6/15/29 1,768,000
15,000,000 A+ Quebec Province, 7.125% due 2/9/24 14,118,750
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL YANKEE BONDS
(Cost-- $15,164,610) 15,886,750
===========================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $453,385,406**) $460,106,700
===========================================================================================================================
</TABLE>
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 10 for definition of ratings.
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
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 "BB" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standings within the major
rating categories.
AAA --Bonds rated "AAA"' have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA --Bonds rated "AA" have a very strong capacity to pay interest and repay
principal and differ from the highest rated issue only in small degree.
A --Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in
higher rated categories.
BBB --Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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 bonds in this category than in higher
rated categories.
BB --Bonds rated "BB" have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties of
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments.
Moody's--Numerical modifiers 1, 2, and 3 may be applied to each generic rating
from "Aa" to "Baa," where 1 is the highest and 3 the lowest rating within its
generic category.
Aaa --Bonds that are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa --Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A --Bonds that are rated "A" possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment some time in
the future.
Baa --Bonds that are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
NR --Indicates that the bond is not rated by Standard & Poor's or Moody's.
10
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) June 30, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $453,385,406) $460,106,700
Receivable for Fund shares sold 467,264
Interest receivable 8,864,787
- --------------------------------------------------------------------------------
Total Assets 469,438,751
- --------------------------------------------------------------------------------
LIABILITIES:
Payable to bank 2,197,322
Investment advisory fees payable 177,781
Administration fees payable 78,974
Distribution fees payable 67,190
Payable for Fund shares purchased 4,643
Accrued expenses 47,638
- --------------------------------------------------------------------------------
Total Liabilities 2,573,548
- --------------------------------------------------------------------------------
Total Net Assets $466,865,203
================================================================================
NET ASSETS:
Par value of capital shares $ 38,358
Capital paid in excess of par value 453,304,745
Undistributed net investment income 112,417
Accumulated net realized gain on security transactions 6,688,389
Net unrealized appreciation of investments 6,721,294
- --------------------------------------------------------------------------------
Total Net Assets $466,865,203
================================================================================
Shares Outstanding:
Class A 16,192,943
----------------------------------------------------------------------------
Class B 19,370,001
----------------------------------------------------------------------------
Class C 601,448
----------------------------------------------------------------------------
Class Y 2,193,327
----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 12.17
----------------------------------------------------------------------------
Class B* $ 12.18
----------------------------------------------------------------------------
Class C** $ 12.18
----------------------------------------------------------------------------
Class Y (and redemption price) $ 12.17
----------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $ 12.74
================================================================================
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if
shares are redeemed within the first year of purchase (See Note 2).
** Redemption price is NAV of Class C shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1997
INVESTMENT INCOME:
Interest $ 18,090,749
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 1,169,669
Investment advisory fees (Note 2) 1,046,620
Administration fees (Note 2) 465,164
Shareholder and system servicing fees 163,597
Registration fees 28,067
Shareholder communications 27,439
Audit and legal 12,893
Custody 10,712
Directors' fees 9,917
Other 4,102
- --------------------------------------------------------------------------------
Total Expenses 2,938,180
- --------------------------------------------------------------------------------
Net Investment Income 15,152,569
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 3):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 116,791,305
Cost of securities sold 121,537,929
- --------------------------------------------------------------------------------
Net Realized Loss (4,746,624)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 6,512,323
End of period 6,721,294
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 208,971
- --------------------------------------------------------------------------------
Net Loss on Investments (4,537,653)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 10,614,916
================================================================================
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1997 (unaudited) and
the Year Ended December 31, 1996
<TABLE>
<CAPTION>
1997 1996
==========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 15,152,569 $ 30,913,830
Net realized gain (loss) (4,746,624) 17,859,048
Increase (decrease) in net unrealized appreciation 208,971 (53,599,658)
- ------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 10,614,916 (4,826,780)
- ------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (15,032,807) (28,812,734)
Net realized gains -- (4,763,509)
- ------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions To Shareholders (15,032,807) (33,576,243)
- ------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 32,119,082 95,481,067
Net asset value of shares issued for
reinvestment of dividends 9,700,227 24,865,353
Cost of shares reacquired (59,767,285) (111,387,406)
- ------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (17,947,976) 8,959,014
- ------------------------------------------------------------------------------------------
Decrease in Net Assets (22,365,867) (29,444,009)
NET ASSETS:
Beginning of period 489,231,070 518,675,079
- ------------------------------------------------------------------------------------------
End of period* $ 466,865,203 $ 489,231,070
==========================================================================================
* Includes undistributed (overdistributed)
net investment income of: $ 112,417 $ (7,345)
==========================================================================================
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
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
this 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 semi-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 value; (e) dividend income is recorded on ex-dividend date
and interest income is recorded on an accrual basis; (f) gains or losses on the
sale of securities are calculated by 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.
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.
14
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)(continued)
- --------------------------------------------------------------------------------
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 six months ended June 30, 1997, SB received sales
charges of approximately $52,000 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 six months ended June 30, 1997, CDSCs paid to SB for Class B
shares were approximately $207,000.
Pursuant to a Distribution Plan, the Portfolio pays a service fee with
respect to 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 an annual
rate of 0.50% and 0.45% of the average daily net assets for each class,
respectively. For the six months ended June 30, 1997, total Distribution Plan
fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $245,264 $900,696 $23,709
================================================================================
All officers and one Director of the Fund are employees of SB.
3. INVESTMENTS
During the six months ended June 30, 1997, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $ 96,993,646
- --------------------------------------------------------------------------------
Sales 116,791,305
================================================================================
15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)(continued)
- --------------------------------------------------------------------------------
At June 30, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $15,199,959)
Gross unrealized depreciation (8,478,665)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 6,721,294)
================================================================================
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 June 30, 1997, 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 June 30, 1997, total paid-in capital amounted to the following for each
class:
Class A Class B Class C Class Y
================================================================================
Total Paid-in Capital $180,578,592 $239,145,930 $7,273,924 $26,344,657
================================================================================
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)(continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996*
---------------------------- ----------------------------
Shares Amount Shares Amount
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
=================================================================================================
Class A
Shares sold 768,593 $ 9,242,739 2,058,458 $ 25,299,353
Shares issued on reinvestment 403,029 4,820,022 991,797 12,112,796
Shares redeemed (1,761,496) (21,245,173) (3,352,017) (40,540,251)
- -------------------------------------------------------------------------------------------------
Net Decrease (589,874) $ (7,182,412) (301,762) $ (3,128,102)
=================================================================================================
Class B
Shares sold 1,083,568 $ 13,023,794 3,938,648 $ 48,026,162
Shares issued on reinvestment 393,385 4,710,334 1,016,702 12,428,663
Shares redeemed (3,134,693) (37,746,897) (5,704,337) (69,325,860)
- -------------------------------------------------------------------------------------------------
Net Decrease (1,657,740) $(20,012,769) (748,987) $ (8,871,035)
=================================================================================================
Class C
Shares sold 104,813 $ 1,259,054 362,134 $ 4,404,390
Shares issued on reinvestment 14,176 169,871 26,633 323,894
Shares redeemed (64,311) (775,215) (126,244) (1,521,295)
- -------------------------------------------------------------------------------------------------
Net Increase 54,678 $ 653,710 262,523 $ 3,206,989
=================================================================================================
Class Y
Shares sold 713,851 $ 8,593,495 1,479,476 $ 17,751,162
Shares redeemed -- -- -- --
- -------------------------------------------------------------------------------------------------
Net Increase 713,851 $ 8,593,495 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.
17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares 1997(1) 1996 1995(2) 1994(2) 1993(2) 1992(3)
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 12.27 $ 13.25 $ 10.67 $ 13.01 $ 11.89 $ 11.67
- ----------------------------------------------------------------------------------------------------------------------------
Income (Loss)
From Operations:
Net investment income 0.41 0.80 0.83 0.74 0.88 0.14
Net realized and
unrealized gain (loss) (0.11) (0.90) 2.80 (1.88) 1.27 0.23
- ----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.30 (0.10) 3.63 (1.14) 2.15 0.37
- ----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.40) (0.76) (0.89) (0.86) (0.89) (0.14)
Net realized gains -- (0.12) (0.16) (0.31) (0.14) --
Capital -- -- -- (0.03) -- (0.01)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.40) (0.88) (1.05) (1.20) (1.03) (0.15)
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $ 12.17 $ 12.27 $ 13.25 $ 10.67 $ 13.01 $ 11.89
- ----------------------------------------------------------------------------------------------------------------------------
Total Return 2.57%++ (0.47)% 35.29% (8.95)% 18.45% 3.25%++
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $196,991 $206,002 $226,373 $181,334 $ 10,136 $ 933
- ----------------------------------------------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses(4) 1.02%+ 1.04% 1.11% 1.11% 1.11% 1.03%+
Net investment income 6.76+ 6.63 7.02 7.35 6.67 7.53+
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 48% 49% 18% 65% 47%
============================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) For the period from November 6, 1992 (inception date) to December 31,
1992.
(4) For the year ended December 31, 1992, the expense ratio excludes interest
expense. The expense ratio including interest expense would have been
1.04% (annualized).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
18
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class B Shares 1997(1) 1996 1995(2) 1994(2) 1993(2) 1992
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 12.29 $ 13.25 $ 10.67 $ 13.01 $ 11.89 $ 11.80
- ----------------------------------------------------------------------------------------------------------------------------
Income (Loss)
From Operations:
Net investment income 0.38 0.74 0.77 0.82 0.80 0.83
Net realized and
unrealized gain (loss) (0.12) (0.90) 2.80 (2.02) 1.29 0.12
- ----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.26 (0.16) 3.57 (1.20) 2.09 0.95
- ----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.37) (0.68) (0.83) (0.80) (0.83) (0.83)
Net realized gains -- (0.12) (0.16) (0.31) (0.14) --
Capital -- -- -- (0.03) -- (0.03)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.37) (0.80) (0.99) (1.14) (0.97) (0.86)
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $ 12.18 $ 12.29 $ 13.25 $ 10.67 $ 13.01 $ 11.89
- ----------------------------------------------------------------------------------------------------------------------------
Total Return 2.23%++ (0.89)% 34.63% (9.41)% 18.06% 8.36%
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $235,843 $258,331 $288,533 $221,120 $476,088 $431,783
- ----------------------------------------------------------------------------------------------------------------------------
Ratios to Average
Net Assets:
Expenses(3) 1.51%+ 1.54% 1.61% 1.57% 1.58% 1.57%
Net investment income 6.27+ 6.13 6.51 6.89 6.20 6.99
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 48% 49% 18% 65% 47%
============================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) For the year ended December 31, 1992, the expense ratio excludes interest
expense. The expense ratio including interest expense was 1.58%.
++ 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 period:
<TABLE>
<CAPTION>
Class C Shares 1997(1) 1996 1995(2) 1994(2) 1993(2)(3)
============================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.30 $ 13.26 $ 10.67 $ 13.01 $ 12.56
- ----------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.37 0.75 0.78 0.75 0.63
Net realized and unrealized gain (loss) (0.11) (0.90) 2.80 (1.95) 0.65
- ----------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.26 (0.15) 3.58 (1.20) 1.28
- ----------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.38) (0.69) (0.83) (0.80) (0.69)
Net realized gains -- (0.12) (0.16) (0.31) (0.14)
Capital -- -- -- (0.03) --
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.38) (0.81) (0.99) (1.14) (0.83)
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 12.18 $ 12.30 $ 13.26 $ 10.67 $ 13.01
- ----------------------------------------------------------------------------------------------------------------------------
Total Return 2.20%++ (0.83)% 34.74% (9.41)% 10.38%++
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 7,328 $ 6,724 $ 3,769 $ 999 $ 208
- ----------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.47%+ 1.42% 1.56% 1.57% 1.61%+
Net investment income 6.31+ 6.28 6.55 6.89 6.17+
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 48% 49% 18% 65%
============================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) For the period from February 26, 1993 (inception date) to December 31,
1993.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
Class Y Shares 1997(1) 1996(2)
================================================================================
Net Asset Value, Beginning of Period $ 12.28 $ 13.03
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.42 0.75
Net realized and unrealized loss (0.11) (0.66)
- --------------------------------------------------------------------------------
Total Income From Operations 0.31 0.09
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.42) (0.72)
Net realized gains -- (0.12)
- --------------------------------------------------------------------------------
Total Distributions (0.42) (0.84)
- --------------------------------------------------------------------------------
Net Asset Value, End of Period $ 12.17 $ 12.28
- --------------------------------------------------------------------------------
Total Return++ 2.65% 1.01%
- --------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 26,703 $ 18,174
- --------------------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.69% 0.72%
Net investment income 7.09 7.34
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 21% 48%
================================================================================
(1) For the six months ended June 30, 1997 (unaudited).
(2) 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>
Smith Barney
Investment
Grade Bond
Fund
Directors
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank G. Hubbard
Heath B. McLendon, Chairman
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
George E. Mueller Jr.
Vice President and
Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
------------
A Member of TravelersGroup [LOGO]
Investment Advisor
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 information.
Smith Barney
Investment
Grade Bond
Fund
388 Greenwich Street
New York, New York 10013
FD0317 8/97
<PAGE>
[PHOTO]
[PHOTO] Smith Barney
Special
Equities Fund
--------------------
SEMI-ANNUAL REPORT
--------------------
June 30, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(sm)
<PAGE>
Smith Barney
Special Equities Fund
================================================================================
The Smith Barney Special Equities Fund seeks to provide long-term capital
appreciation by investing in equity securities that are believed to have
superior appreciation potential. They may be securities of companies in their
development stage, or may be older companies that appear to be entering a new
stage of more rapid growth.
Smith Barney Special Equities Fund
Average Annual Total Returns Ended
June 30, 1997
<TABLE>
<CAPTION>
Without Sales Charge*
-----------------------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Six-Month+ (4.06)% (4.44)% (4.40)%
- --------------------------------------------------------------------------------
One-Year (16.30) (16.90) (16.89)
- --------------------------------------------------------------------------------
Five-Year N/A 18.65 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 8.05 N/A
- --------------------------------------------------------------------------------
Since Inception++ 16.50 9.84 5.72
================================================================================
<CAPTION>
With Sales Charge**
-----------------------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Six-Month+ (8.85)% (9.21)% (5.35)%
- --------------------------------------------------------------------------------
One-Year (20.48) (20.97) (17.71)
- --------------------------------------------------------------------------------
Five-Year N/A 18.55 N/A
- --------------------------------------------------------------------------------
Ten-Year N/A 8.05 N/A
- --------------------------------------------------------------------------------
Since Inception++ 15.23 9.84 5.72
================================================================================
</TABLE>
* 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 Class C shares.
** 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 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. Thereafter, this CDSC declines 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.
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.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ Inception dates for Class A, B and C shares are November 6, 1992, December
13, 1982 and October 18, 1993, respectively.
================================================================================
OUR INVESTMENT PHILOSOPHY
================================================================================
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.
================================================================================
NASDAQ SYMBOL
================================================================================
Class A HSEAX
Class B HSPEX
Class C HSECX
================================================================================
WHAT'S INSIDE
================================================================================
Shareholder Letter ...................................................... 1
Historical Performance .................................................. 3
Smith Barney Special Equities Fund
at a Glance ............................................................. 6
Schedule of Investments ................................................. 7
Statement of Assets and Liabilities ..................................... 10
Statement of Operations ................................................. 11
Statements of Changes in Net Assets ..................................... 12
Notes to Financial Statements ........................................... 13
Financial Highlights .................................................... 17
<PAGE>
================================================================================
Shareholder Letter
================================================================================
[PHOTO] [PHOTO]
HEATH B. GEORGE V.
MCLENDON NOVELLO
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Special
Equities Fund ("Fund") for the period ended June 30, 1997. In this report, we
discuss stock market conditions and outline our investment strategy in 1997. A
more detailed summary of performance and current holdings can be found in the
appropriate sections that follow.
Fund Performance
During the past six months, the Fund's performance was affected by the relative
underperformance of the small-capitalization stocks as large companies continued
to dominate the equity market. Moreover, performance varied widely among the
smaller issues with value stocks largely outperforming growth stocks -- the
Fund's mainstay. For instance, the Russell 2000 Value Index returned 14.81%
while the Russell 2000 Growth Index returned only 5.14% for the first half of
1997. (The Russell 2000 Value Index measures the performance of those Russell
2000 companies with lower price-to-book ratios and lower forecasted growth
values. The Russell 2000 Growth Index measures the performance of those Russell
2000 companies with higher price-to-book ratios and higher forecasted growth
values.) In addition, the Fund's performance was negatively impacted by a few
disappointing holdings, particularly Boston Chicken, Inc., PETsMART, Inc. and
Einstein/Noah Bagel Corp. For the six months ended June 30, 1997, the Fund
returned -4.06% per Class A share.
Market Overview
After a challenging first quarter, the equity markets rebounded off their
mid-April lows to finish the second quarter of 1997 with significant strength.
The record rise of the stock market continues to be fueled primarily by the
stocks of larger-capitalization companies. For example, the S&P 500 Index
returned 20.6% over the past six months. In comparison, the Russell 2000 Index,
which is more representative of smaller companies, posted a return of about
10.2% for the same period. While the broader market posted greater highs in the
second quarter, emerging growth stocks continued to underperform on a relative
basis, a scenario that began nearly a year ago. In June of 1996, investor
sentiment began to shift away from emerging growth stocks in favor of the
perceived greater value and liquidity often found in the larger issues. However,
there is growing evidence that emerging growth stocks are beginning to recover.
During the second quarter small-cap stocks (as defined by the S&P 600 Small Cap
Index) showed tremendous resiliency, beating the S&P 500 by 5.8% in May,
excluding dividends.
In our opinion, small company stocks also stand to benefit from an improved
inflationary outlook and falling interest rates. A surge in U.S. economic growth
in early 1997 and heightened concerns of higher inflationary pressure caused the
Federal Reserve Board ("Fed") to raise the federal-funds rate by 0.25%. (The
federal-funds rate is the interest rate banks charge each other for overnight
loans and a closely watched indicator of the direction of interest rates.) The
Fed declined to further tighten monetary policy after subsequent government
figures indicated a much more subdued economic expansion. As a result, the bond
market ignored the stronger-than-expected growth and focused more on the
positive inflationary outlook, driving the benchmark 30 year U.S. Treasury yield
down from 7.1% on March 31, 1997 to 6.8% by the end of June 1997. Given the
recent strength in emerging growth stocks, we believe these economic and market
conditions are the prelude to a long-awaited small-cap recovery and
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 1
<PAGE>
expect these stocks to benefit from these important developments: 1) lower
interest rates; 2) a more favorable equity risk premium versus large-caps; and
3) the recent reduction in the capital gains tax. (The total return of
small-caps is typically more a function of price appreciation rather than
dividend distribution.)
Investment Strategy
We continue to focus on high-quality emerging growth stocks with the belief
that, despite their inherent volatility, small-capitalization companies offer
investors significant potential for total return over the long term. In
selecting investments for the Fund, we search for companies with sound
fundamentals and strong earnings growth. Moreover, we favor relatively new
companies which appear poised for a sustained period of growth or established
companies entering a new stage of rapid earnings growth due to a change in
direction, management or new products technology. After a prolonged rise of
large-capitalization stocks, we believe that investors may be shifting their
attention back to the superior growth potential of many small company stocks.
At the end of the reporting period, the Fund's top-five holdings were:
o Starbucks Corp., the largest specialty coffee retailer and wholesaler. The
company recently introduced a bottled version of its frappucino in a joint
venture with Pepsi.
o Planet Hollywood, the premier theme restaurant-merchandise store operator
in the country, whose success is linked to prominent Hollywood celebrities.
o Callaway Golf Co., a high quality golf club designer and manufacturer.
o Evergreen Media Corp., owns and operates radio stations across the U.S.,
including stations in the nation's largest radio markets (Los Angeles, New
York, Chicago, San Francisco, Washington D.C. and Houston).
o Gucci Group NV, a world-renowned designer, producer and distributor of high
quality personal luxury accessories and apparel. Gucci products include
leather goods, shoes, ties, scarves, watches, gifts, jewelry, eyewear and
perfume.
Outlook
We remain optimistic on the prospects of high-quality-emerging growth stocks and
continue to believe that the small-cap universe offers the greatest potential
return to long-term investors over a full market cycle. We believe that
small-cap investors should benefit from a long-term approach, since these less
liquid issues tend to move rapidly and with great volatility. With the initial
public offering (IPO) market picking up, we believe this is a particularly
attractive time to invest in the small-cap sector on a relative valuation basis
because many large-cap stocks are trading at significant premiums relative to
their growth rates.
In closing, we thank you for your investment in the 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 Vice President and
Investment Officer
July 21, 1997
<TABLE>
<CAPTION>
================================================================================
Top Ten Holdings* As of June 30, 1997
================================================================================
<S> <C>
1. Starbucks Corp. 6.9%
- --------------------------------------------------------------------------------
2. Planet Hollywood International Inc. 6.0
- --------------------------------------------------------------------------------
3. Callaway Golf Co. 5.2
- --------------------------------------------------------------------------------
4. Evergreen Media Corp. 4.9
- --------------------------------------------------------------------------------
5. Gucci Group NV 4.7
- --------------------------------------------------------------------------------
6. Baan Co., NV 3.3
- --------------------------------------------------------------------------------
7. General Cigar Holdings, Inc. 3.1
- --------------------------------------------------------------------------------
8. Eagle Hardware & Garden, Inc. 2.8
- --------------------------------------------------------------------------------
9. Sykes Enterprises, Inc. 2.7
- --------------------------------------------------------------------------------
10. PeopleSoft Inc. 2.6
- --------------------------------------------------------------------------------
</TABLE>
* As a percentage of total common stocks.
- --------------------------------------------------------------------------------
2 1997 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Historical Performance -- Class A Shares
====================================================================================================================================
Net Asset Value
-----------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $28.11 $26.97 $0.00 $0.00 $0.00 (4.06)%+
- ------------------------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================================
<CAPTION>
====================================================================================================================================
Historical Performance -- Class B Shares
====================================================================================================================================
Net Asset Value
-----------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $27.28 $26.07 $0.00 $0.00 $0.00 (4.44)%+
- ------------------------------------------------------------------------------------------------------------------------------------
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
====================================================================================================================================
<CAPTION>
====================================================================================================================================
Historical Performance -- Class C Shares
====================================================================================================================================
Net Asset Value
-----------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $27.28 $26.08 $0.00 $0.00 $0.00 (4.40)%+
- ------------------------------------------------------------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 3
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================================
Historical Performance -- Class Y Shares
====================================================================================================================================
Net Asset Value
-----------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $28.21 $27.12 $0.00 $0.00 $0.00 (3.86)%+
- ------------------------------------------------------------------------------------------------------------------------------------
Inception*--12/31/96 28.99 28.21 0.00 0.28 0.36 (0.75)+
====================================================================================================================================
Total $0.00 $0.28 $0.36
====================================================================================================================================
<CAPTION>
====================================================================================================================================
Historical Performance -- Class Z Shares
====================================================================================================================================
Net Asset Value
-----------------------------
Beginning End Income Capital Gain Return Total
Period Ended of Period of Period Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $28.26 $27.16 $0.00 $0.00 $0.00 (3.89)%+
- ------------------------------------------------------------------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
====================================================================================================================================
Average Annual Total Return
====================================================================================================================================
Without Sales Charge(1)
---------------------------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 6/30/97+ (4.06)% (4.44)% (4.40)% (3.86)% (3.89)%
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended 6/30/97 (16.30) (16.90) (16.89) (15.94) (15.92)
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 6/30/97 N/A 18.65 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 6/30/97 N/A 8.05 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 6/30/97 16.50 9.84 5.72 (3.21) 4.14
====================================================================================================================================
<CAPTION>
With Sales Charge(2)
---------------------------------------------------------------------------------------------
Class A Class B Class C Class Y Class Z
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 6/30/97+ (8.85)% (9.21)% (5.35)% (3.86)% (3.89)%
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended 6/30/97 (20.48) (20.97) (17.71) (15.94) (15.92)
- ------------------------------------------------------------------------------------------------------------------------------------
Five Years Ended 6/30/97 N/A 18.55 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Ten Years Ended 6/30/97 N/A 8.05 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
Inception* through 6/30/97 15.23 9.84 5.72 (3.21) 4.14
====================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
4 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Cumulative Total Return
================================================================================
<TABLE>
<CAPTION>
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (Inception* through 6/30/97) 103.11%
- --------------------------------------------------------------------------------
Class B (6/30/87 through 6/30/97) 116.91
- --------------------------------------------------------------------------------
Class C (Inception* through 6/30/97) 22.84
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/97) (4.52)
- --------------------------------------------------------------------------------
Class Z (Inception* through 6/30/97) 7.34
================================================================================
</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.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
* 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.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 5
<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*
- -------------------------------------------------------------------------------
June 1987 - June 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL]
Smith Barney
Date Special Equities Fund S&P 500 Index
- --------------------------------------------------------------------
6/87 $ 10,000 $ 10,000
12/87 8,909 8,259
12/88 10,032 9,627
12/89 11,899 12,672
12/90 8,959 12,279
12/91 12,969 16,012
12/92 14,148 17,232
12/93 18,666 18,964
12/94 17,495 19,213
12/95 28,394 26,424
12/96 26,564 32,488
6/30/97 21,677 39,181
* Hypothetical illustration of $10,000 invested in Class B shares on June 30,
1987, assuming reinvestment of dividends and capital gains, if any, at net
asset value through June 30, 1997. The Standard & Poor's 500 Index is
composed of 500 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 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 shareholders tax liability on dividends or capital gains.
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Industry Diversification of Common Stocks** Percentage
- --------------------------------------------------------------------------------
<S> <C>
Broadcasting 6.1%
Business Services 6.1%
Communications 7.0%
Computer Services 7.2%
Entertainment & Leisure 7.1%
Pharmaceuticals/Medical Products 6.4%
Restaurant 18.5%
Retail 14.2%
Semiconductor & Electronics 8.2%
Software 10.7%
Other 8.5%
</TABLE>
** As a percentage of total common stocks
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Investment Breakdown Percentage
- -------------------------------------------------------------------------------
<S> <C>
Repurchase Agreement 10.1%
Common Stocks and Warrant 89.9%
</TABLE>
- --------------------------------------------------------------------------------
6 1997 Semi-Annual Report to Shareholders
<PAGE>
===============================================================================
Schedule of Investments (unaudited) June 30, 1997
===============================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
============================================================================================
<S> <C> <C>
COMMON STOCKS -- 89.9%
Advertising -- 0.6%
165,000 Snyder Communications, Inc.+ $ 4,444,687
- --------------------------------------------------------------------------------------------
BROADCASTING -- 5.5%
675,000 Evergreen Media Corp., Class A Shares+ 30,121,875
200,000 Univision Communications, Inc.+ 7,825,000
- --------------------------------------------------------------------------------------------
37,946,875
- --------------------------------------------------------------------------------------------
Business Services -- 5.5%
300,000 Abacus Direct Corp.+ 9,750,000
113,000 DBT Online, Inc.+ 6,073,750
125,000 First USA Paymentech, Inc.+ 3,617,187
90,000 Startek, Inc.+ 1,355,625
276,400 U.S. Rentals Inc.+ 6,996,375
350,000 Whittman-Hart, Inc.+ 9,843,750
- --------------------------------------------------------------------------------------------
37,636,687
- --------------------------------------------------------------------------------------------
Communications -- 6.3%
350,000 ACC Corp.+ 10,806,250
150,000 Ascend Communications, Inc.+ 5,906,250
400,000 Aspect Telecommunications Corp.+ 8,900,000
305,000 Ciena Corp.+ 14,373,125
100,000 Telco Communications Corp.+ 3,250,000
- --------------------------------------------------------------------------------------------
43,235,625
- --------------------------------------------------------------------------------------------
Computer Services -- 6.5%
150,000 Ciber, Inc.+ 5,128,125
250,000 Computer Horizons Corp.+ 8,562,500
600,000 Ingram Micro, Inc., Class A Shares+ 14,475,000
2,000 RWD Technologies, Inc.+ 34,500
637,500 Sykes Enterprises, Inc.+ 16,575,000
- --------------------------------------------------------------------------------------------
44,775,125
- --------------------------------------------------------------------------------------------
Entertainment and Leisure -- 6.4%
900,000 Callaway Golf Co. 31,950,000
100,000 Panavision, Inc.+ 1,993,750
300,000 Penske Motorsports, Inc.+ 9,862,500
- --------------------------------------------------------------------------------------------
43,806,250
- --------------------------------------------------------------------------------------------
Healthcare -- 1.8%
200,000 OccuSystems, Inc.+ 5,800,000
200,000 PhyCor, Inc.+ 6,887,500
- --------------------------------------------------------------------------------------------
12,687,500
- --------------------------------------------------------------------------------------------
Machine Tools -- 0.2%
40,000 JLK Direct Distribution, Inc., Class A Shares+ 1,025,000
- --------------------------------------------------------------------------------------------
Personal Care -- 1.5%
400,000 Nu Skin Asia Pacific, Inc.+ 10,600,000
- --------------------------------------------------------------------------------------------
Pharmaceuticals/Medical Products -- 5.8%
400,000 Capstone Pharmacy Services, Inc.+ 4,350,000
500,000 Gilead Sciences, Inc.+ 13,812,500
200,000 Liposome Co., Inc.+ 1,787,500
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 7
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1997
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
============================================================================================
<S> <C> <C>
Pharmaceuticals/Medical Products -- 5.8% (continued)
150,000 Medicis Pharmaceuticals Corp., Class A Shares+ $ 7,481,250
100,000 Physicians Sales & Service, Inc.+ 1,900,000
350,000 Safeskin Corp.+ 10,303,125
- --------------------------------------------------------------------------------------------
39,634,375
- --------------------------------------------------------------------------------------------
Restaurant -- 16.7%
1,000,000 Boston Chicken, Inc.+@ 14,000,000
800,000 Einstein/Noah Bagel Corp.+@ 9,550,000
300,000 Papa John's International, Inc.+ 11,025,000
1,610,000 Planet Hollywood International, Inc., Class A Shares+ 37,030,000
1,100,000 Starbucks Corp.+ 42,831,250
- --------------------------------------------------------------------------------------------
114,436,250
- --------------------------------------------------------------------------------------------
Retail -- 12.8%
250,000 Abercrombie & Fitch Co., Class A Shares+ 4,625,000
750,000 Eagle Hardware & Garden, Inc.+ 17,156,250
450,000 Gucci Group NV 28,968,750
400,000 Guitar Center, Inc.+ 6,750,000
1,000,000 PETsMART, Inc.+ 11,500,000
200,000 Pier 1 Imports, Inc. 5,300,000
300,000 Polo Ralph Lauren Corp.+ 8,212,500
100,000 Ross Stores, Inc.+ 3,268,750
300,000 Sunglass Hut International, Inc.+ 1,893,750
- --------------------------------------------------------------------------------------------
87,675,000
- --------------------------------------------------------------------------------------------
Semiconductor and Electronics -- 7.4%
250,000 ANADIGICS, Inc.+ 7,750,000
275,000 Cymer, Inc.+ 13,406,250
150,000 Kulicke & Soffa Industries, Inc.+ 4,870,313
100,000 Sanmina Corp.+ 6,350,000
200,000 3D Labs Inc., Ltd.+ 5,800,000
300,000 Triquint Semiconductor, Inc.+ 10,312,500
100,000 VLSI Technology, Inc.+ 2,362,500
- --------------------------------------------------------------------------------------------
50,851,563
- --------------------------------------------------------------------------------------------
Software -- 9.6%
300,000 Baan Co., NV+ 20,662,500
100,000 Check Point Software Technologies Ltd.+ 2,337,500
38,000 Genesys Telecommunications Laboratories, Inc.+ 1,054,500
200,000 LHS Group, Inc.+ 8,762,500
300,000 Pegasystems, Inc.+ 9,412,500
300,000 PeopleSoft, Inc.+ 15,825,000
139,700 Puma Technology, Inc.+ 1,169,988
74,100 SELECT Software Tools ADR+ 981,825
595,000 SRS Labs, Inc.+ 6,024,375
- --------------------------------------------------------------------------------------------
66,230,688
- --------------------------------------------------------------------------------------------
Steel -- 0.5%
150,000 Steel Dynamics, Inc.+ 3,750,000
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1997
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
============================================================================================
<S> <C> <C>
Tobacco -- 2.8%
650,000 General Cigar Holdings, Inc.+@ $ 19,134,375
- --------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $497,775,422) 617,870,000
============================================================================================
WARRANT -- 0.0% 696 Jan Bell Marketing Inc., Expire 12/16/98
(Cost-- $0) 7
============================================================================================
SUB-TOTAL INVESTMENTS
(Cost-- $497,775,422) 617,870,007
============================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
============================================================================================
<S> <C> <C>
REPURCHASE AGREEMENT -- 10.1%
$ 69,182,000 Chase Manhattan Bank, 5.750% due 7/1/97; Proceeds at
maturity --$69,193,050; (Fully collateralized by
U.S. Treasury Notes, 5.875% due 11/30/05; Market
value -- $70,565,640) (Cost -- $69,182,000) 69,182,000
============================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $566,957,422*) $687,052,007
============================================================================================
</TABLE>
+ Non-income producing security.
@ Security on loan (Note 8).
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 9
<PAGE>
================================================================================
Statement of Assets and Liabilities (unaudited) June 30, 1997
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $497,775,422) $617,870,007
Repurchase Agreement, at value (Cost-- $69,182,000) 69,182,000
Cash and cash equivalents (Note 8) 30,775,063
Receivable for securities sold 6,966,556
Receivable for Fund shares sold 732,447
Dividends and interest receivables 98,142
- --------------------------------------------------------------------------------
Total Assets 725,624,215
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities loaned (Note 8) 30,775,000
Payable for securities purchased 911,200
Investment advisory fees payable 317,116
Administration fees payable 114,507
Distribution fees payable 109,204
Accrued expenses 53,259
- --------------------------------------------------------------------------------
Total Liabilities 32,280,286
- --------------------------------------------------------------------------------
Total Net Assets $693,343,929
================================================================================
NET ASSETS:
Par value of capital shares $ 26,103
Capital paid in excess of par value 632,901,177
Accumulated net investment loss (3,328,051)
Accumulated net realized loss from security transactions (56,349,885)
Net unrealized appreciation of investments 120,094,585
- --------------------------------------------------------------------------------
Total Net Assets $693,343,929
================================================================================
Shares Outstanding:
Class A 7,599,913
------------------------------------------------------------------------------
Class B 11,954,817
------------------------------------------------------------------------------
Class C 922,185
------------------------------------------------------------------------------
Class Y 5,070,917
------------------------------------------------------------------------------
Class Z 555,286
------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $26.97
------------------------------------------------------------------------------
Class B* $26.07
------------------------------------------------------------------------------
Class C** $26.08
------------------------------------------------------------------------------
Class Y (and redemption price) $27.12
------------------------------------------------------------------------------
Class Z (and redemption price) $27.16
------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $28.39
================================================================================
</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 Note 2).
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Statement of Operations (unaudited) For the Six Months Ended June 30, 1997
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $1,697,294
Interest 126,200
- -------------------------------------------------------------------------------
Total Investment Income 1,823,494
- -------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 1,992,458
Investment advisory fees (Note 2) 1,883,667
Administration fees (Note 2) 684,970
Shareholder and system servicing fees 370,786
Shareholder communications 74,556
Registration fees 69,589
Custody 26,018
Directors' fees 21,918
Audit and legal 15,373
Other 5,248
- -------------------------------------------------------------------------------
Total Expenses 5,144,583
- -------------------------------------------------------------------------------
Net Investment Loss (3,321,089)
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 3):
Realized Loss From Security Transactions
(excluding short-term securities):
Proceeds from sales 321,573,967
Cost of securities sold 367,732,940
- -------------------------------------------------------------------------------
Net Realized Loss (46,158,973)
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 99,765,533
End of period 120,094,585
- -------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 20,329,052
- -------------------------------------------------------------------------------
Net Loss on Investments (25,829,921)
- -------------------------------------------------------------------------------
Decrease in Net Assets From Operations $(29,151,010)
===============================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 11
<PAGE>
================================================================================
Statements of Changes in Net Assets
================================================================================
For the Six Months Ended June 30, 1997 (unaudited)
and the Year Ended December 31, 1996
<TABLE>
<CAPTION>
1997 1996
==================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment loss $ (3,321,089) $ (5,480,480)
Net realized loss (46,158,973) (9,712,090)
Increase (decrease) in net unrealized appreciation 20,329,052 (51,828,623)
- --------------------------------------------------------------------------------------------------
Decrease in Net Assets From Operations (29,151,010) (67,021,193)
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net realized gains -- (5,788,148)
Capital -- (7,183,275)
- --------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders -- (12,971,423)
- --------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 277,785,519 668,556,473
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
Cost of shares reacquired (287,977,508) (381,382,713)
- --------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (10,191,989) 467,501,339
- --------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (39,342,999) 387,508,723
NET ASSETS:
Beginning of period 732,686,928 345,178,205
- --------------------------------------------------------------------------------------------------
End of period* $693,343,929 $ 732,686,928
==================================================================================================
* Includes accumulated net investment loss of: $(3,328,051) $ (6,962)
==================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)
================================================================================
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
semi-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 value; (d) dividend income is recorded on ex-dividend date and
interest income is recorded on an 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 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 advisor to the Fund. The
Portfolio pays SBMFM an investment advisory fee calculated at an annual rate of
0.55% of the average daily net assets. This fee is calculated daily and paid
monthly.
SBMFM also acts as the Fund's administrator for which the Portfolio pays a fee
calculated at an annual rate of 0.20% of the average daily net assets. This fee
is calculated daily and paid monthly.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of Fund
shares and primary broker for its portfolio agency transactions. For the six
months ended June 30, 1997, SB received sales charges of approximately $281,000
on sales of the Portfolio's Class A shares and brokerage commissions of $50,748.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 13
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)(continued)
================================================================================
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 six months ended June 30, 1997, CDSCs
paid to SB were approximately:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
CDSCs $18,000 $685,000 $11,000
================================================================================
</TABLE>
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 six months ended June 30, 1997, total Distribution Plan fees incurred were:
<TABLE>
<CAPTION>
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Distribution Plan Fees $266,218 $1,605,680 $120,560
================================================================================
</TABLE>
All officers and one Director of the Fund are employees of SB.
3. Investments
During the six months ended June 30, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
================================================================================
<S> <C>
Purchases $293,304,021
- --------------------------------------------------------------------------------
Sales 321,573,967
================================================================================
</TABLE>
At June 30, 1997, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $162,278,224
Gross unrealized depreciation (42,183,639)
- --------------------------------------------------------------------------------
Net unrealized appreciation $120,094,585
================================================================================
</TABLE>
4. Repurchase Agreements
The Portfolio purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Portfolio requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. Capital Shares
At June 30, 1997, 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 June 30, 1997, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Amount
================================================================================
<S> <C>
Class A $152,192,497
- --------------------------------------------------------------------------------
Class B 289,443,980
- --------------------------------------------------------------------------------
Class C 26,561,530
- --------------------------------------------------------------------------------
Class Y 148,411,203
- --------------------------------------------------------------------------------
Class Z 16,318,070
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
14 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996*
--------------------------------- ----------------------------------
Shares Amount Shares Amount
===================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 7,158,616 $ 189,716,182 10,652,763 $ 327,836,971
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
Shares redeemed (8,004,232) (213,068,536) (9,442,083) (289,227,515)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (845,616) $ (23,352,354) 3,211,030 $ 100,868,316
===================================================================================================================================
Class B
Shares sold 1,298,826 $ 33,583,310 6,525,207 $201,058,070
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
Shares redeemed (2,621,968) (67,836,739) (2,843,971) (83,581,409)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (1,323,142) $ (34,253,429) 7,529,523 $ 233,903,071
===================================================================================================================================
Class C
Shares sold 197,568 $ 5,037,058 888,975 $ 27,449,605
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
Shares redeemed (246,027) (6,332,133) (280,031) (8,245,131)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (48,459) $ (1,295,075) 654,235 $ 20,573,306
===================================================================================================================================
Class Y
Shares sold 1,741,288 $ 45,752,706 3,329,725 $ 103,595,400
Shares issued on reinvestment -- --
Shares redeemed -- -- (96) (3,030)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase 1,741,288 $ 45,752,706 3,329,629 $ 103,592,370
===================================================================================================================================
Class Z
Shares sold 134,726 $ 3,696,263 274,522 $ 8,616,427
Shares issued on reinvestment -- -- 8,768 273,477
Shares redeemed (27,869) (740,100) (10,978) (325,628)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Increase 106,857 $ 2,956,163 272,312 $ 8,564,276
===================================================================================================================================
</TABLE>
* For Class Y shares, transactions are for the period from January 31, 1996
(inception date) to December 31, 1996.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 15
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (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 and
the total net assets of SBTG and the Portfolio on the date of the transfer were
as follows:
<TABLE>
<CAPTION>
Shares Total Net Total Net
Acquired Issued by Assets of Assets of
Fund the Portfolio SBTG the Portfolio
================================================================================
<S> <C> <C> <C>
SBTG 5,537,278 $169,172,249 $631,093,322
================================================================================
</TABLE>
The total net assets of SBTG before acquisition including 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. Fees earned by the Portfolio on securities lending are recorded
as 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.
As of June 30, 1997, the Portfolio loaned common stocks having a value of
approximately $28,859,550 and received cash collateral of $30,775,000 for the
loan.
- --------------------------------------------------------------------------------
16 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares 1997(1) 1996(2) 1995 1994(2) 1993(2) 1992(3)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $28.11 $30.44 $19.10 $20.23 $15.47 $14.13
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.09) (0.19) (0.27) (0.13) (0.08) (0.01)
Net realized and unrealized gain (loss) (1.05) (1.50) 12.37 (1.00) 5.17 1.35
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.14) (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 Period $26.97 $28.11 $30.44 $19.10 $20.23 $15.47
Total Return (4.06)%++ (5.81)% 63.48% (5.59)% 32.90% 9.48%++
Net Assets, End of Period (000s) $204,987 $237,435 $159,316 $101,052 $50,121 $195
Ratios to Average Net Assets:
Expenses 1.20%+ 1.17% 1.43% 1.49% 1.67% 1.51%+
====================================================================================================================================
Net investment loss (0.67)+ (0.61) (1.05) (0.94) (0.46) (0.97)+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 47% 118% 113% 123% 112% 211%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (4) $0.06 $0.06 $0.06 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Class B Shares 1997(1) 1996(2) 1995 1994(2) 1993(2) 1992
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $27.28 $29.76 $18.82 $20.08 $15.47 $14.18
- ------------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.19) (0.41) (0.37) (0.27) (0.20) (0.26)
Net realized and unrealized gain (loss) (1.02) (1.43) 12.07 (0.99) 5.14 1.55
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.21) (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 Period $26.07 $27.28 $29.76 $18.82 $20.08 $15.47
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (4.44)%++ (6.44)% 62.30% (6.27)% 31.93% 9.10%
Net Assets, End of Period (000s) $311,697 $362,163 $171,081 $93,920 $138,401 $78,130
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.95%+ 1.91% 2.04% 2.21% 2.34% 2.32%
Net investment loss (1.42)+ (1.36) (1.61) (1.66) (1.13) (1.77)
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 47% 118% 113% 123% 112% 211%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (4) $0.06 $0.06 $0.06 -- -- --
====================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) For the period from November 6, 1992 (inception date) to December 31, 1992.
(4) 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 17
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class C Shares 1997(1) 1996(2) 1995 1994(2) 1993(2)(3)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $27.28 $29.77 $18.82 $20.08 $22.62
- --------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.19) (0.41) (0.42) (0.25) (0.16)
Net realized and unrealized gain (loss) (1.01) (1.44) 12.13 (1.01) (2.05)
- --------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.20) (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 Period $26.08 $27.28 $29.77 $18.82 $20.08
- --------------------------------------------------------------------------------------------------------------------------------
Total Return (4.40)%++ (6.44)% 62.35% (6.27)% (9.77)%++
- --------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $24,047 $26,480 $9,417 $1,528 $185
- --------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.96%+ 1.90% 2.25% 2.15% 2.19%+
Net investment loss (1.43)+ (1.34) (1.79) (1.60) (0.98)+
- --------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 47% 118% 113% 123% 112%
- --------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (4) $0.06 $0.06 $0.06 -- --
================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) For the period from October 18, 1993 (inception date) to December 31, 1993.
(4) 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 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class Y Shares Class Z Shares
--------------------------- ---------------------------------------------
1997(1) 1996(2)(3) 1997(1) 1996(2) 1995(4)
===================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $28.21 $28.99 $28.26 $30.46 $26.49
- -----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.03) (0.08) (0.03) (0.08) (0.06)
Net realized and unrealized gain (loss) (1.06) (0.06) (1.07) (1.48) 4.79
- -----------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.09) (0.14) (1.10) (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 Period $27.12 $28.21 $27.16 $28.26 $30.46
- -----------------------------------------------------------------------------------------------------------------------------------
Total Return (3.86)%++ (0.75)%++ (3.89)%++ (5.37)% 17.95%++
- -----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $137,530 $93,938 $15,083 $12,671 $5,364
- -----------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.81%+ 0.82%+ 0.82%+ 0.80% 1.10%+
Net investment loss (0.25)+ (0.29)+ (0.28)+ (0.24) (0.86)+
- -----------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 47% 118% 47% 118% 113%
Average commissions per share
paid on equity transactions $0.06 $0.06 $0.06 $0.06 $0.06
===================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) For the period from January 31, 1996 (inception date) to December 31, 1996.
(4) 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.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 19
<PAGE>
[This page intentionally left blank]
<PAGE>
Smith Barney
Special Equities Fund
Directors Investment Manager
Paul R. Ades Smith Barney Mutual Funds Management Inc.
Herbert Barg
Dwight B. Crane
Frank G. Hubbard Distributor
Heath B. McLendon, Chairman Smith Barney Inc.
Ken Miller
John F. White
Custodian
PNC Bank, N.A.
Officers
Heath B. McLendon Shareholder Servicing Agent
Chief Executive Officer First Data Investor Services Group, Inc.
P.O. Box 9134
Lewis E. Daidone Boston, MA 02205-9134
Senior Vice President and Treasurer
George V. Novello
Vice President and Investment Officer This report is for the information of
shareholders of Smith Barney Special
Thomas M. Reynolds Equities Fund, but it may also be used
Controller as sales literature when preceded or
accompanied by the current prospectus,
Christina T. Sydor which gives details about charges,
Secretary expenses, investment objectives and
operating policies of the Fund. If used
as sales material after September 30,
1997, this report must be accompanied by
performance information for the most
recently completed calendar quarter.
SMITH BARNEY
-------------------------------------
A Member of TravelersGroup [LOGO]
Smith Barney Special Equities Fund
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
FD0405 8/97
SEMI - ANNUAL REPORT
SMITH BARNEY
GOVERNMENT
SECURITIES
FUND
- ------------------------------------
June 30, 1997
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
SMITH BARNEY GOVERNMENT SECURITIES FUND
- --------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Government
Securities Fund ("Fund") as of June 30, 1997. 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.
Fund Performance Update
For the six months ended June 30, 1997, the Fund's Class A shares posted a total
return of 3.41% and outperformed its Lipper Analytical Services, Inc. peer group
average of 2.47%. (Lipper is an independent fund-tracking organization.)
Moreover, over the past six months, the Fund distributed income dividends
totaling $0.30 per Class A share.
Market Update and Outlook
After more than six years of uninterrupted growth, the U.S. economy continued
its vigorous expansion over the past six months. An annualized rate of increase
in the Gross Domestic Product (GDP) of 5.6% reported for the first quarter of
1997, coming on the heels of an already brisk 3.8% annualized GDP growth for the
fourth quarter of 1996, raised the concerns of many investors that the Federal
Reserve ("Fed") would be forced to raise short-term interest rates. The Fed has
stated that it considers an annual growth rate of approximately 2.0% to 2.5% to
be the limit the U.S. economy can absorb without increasing inflationary
pressures. As a result of the unexpected strength in the U.S. economy, the Fed
raised the federal-funds rate by 25 basis points, or 0.25%, at its March 1997
meeting. (The federal-funds rate is the interest rate banks charge each other
for overnight loans and a closely watched indicator of the direction of interest
rates.)
Despite robust growth and historically low unemployment, inflationary pressures
have been nearly absent in the U.S. economy. In fact, the cost of manufactured
goods has been declining and consumer prices have risen less than a 2% annual
rate so far this year, as represented by the Producers Price Index (PPI) and the
Consumers Price Index (CPI), respectively.
In our view, much of the performance of financial markets in recent years has
been driven by demographic factors. As baby boomers reach their peak earning
years, they have tended to put those earnings to work in financial assets. This
tendency, combined with their sheer size, has resulted in continued record
inflows into managed financial products, especially mutual funds.
1
<PAGE>
We remain bullish on the bond market in the coming months. We expect
that interest rates should continue to go down for the remainder of the
year with the benchmark 30-year U.S. Treasury bond yield falling to around
6%. Moreover, we believe that fixed-income investments should benefit
from the continued steady growth of the U.S. economy with little or no
threat of higher inflationary pressures.
Yields from U.S. Treasuries
Low High
12/31/96 6/30/97 2/14/97 4/11/97
-------- ------- ------- -------
3 Month Bill 5.186% 5.172% 5.079% 5.277%
6 Month Bill 5.297 5.251 5.155 5.636
1 Year Note 5.488 5.651 5.417 6.000
2 Year Note 5.868 6.059 5.761 6.489
3 Year Note 6.010 6.209 5.898 6.650
5 Year Note 6.206 6.372 6.053 6.839
10 Year Bond 6.418 6.491 6.265 6.968
30 Year Bond 6.641 6.780 6.528 7.166
Fund's Investment Strategy
Given our expectations of falling interest rates, we reduced the Fund's exposure
to mortgage-backed securities during the reporting period from a high of nearly
65% to approximately 35% of its holdings (excluding repurchase agreements). We
replaced those mortgage-backed securities with U.S. Treasuries, divided equally
between zero coupon U.S. Treasuries and various interest-bearing U.S.
Treasuries. As of June 30, 1997, U.S. Treasuries made up about 65% of the Fund's
holdings. In addition, because of our positive outlook for the bond market, we
roughly doubled the Fund's duration from approximately 4.7 to 9 years. (Duration
is a measure of volatility relative to a given change in interest rates.)
In closing, we thank you for investing in the Smith Barney Government Securities
Fund. We look forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President and
Investment Officer
July 18, 1997
2
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------
Period Beginning End Income Capital Gain Return Total
Ended of Period of Period Dividends Distributions of Capital Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $ 9.34 $ 9.35 $0.30 $0.00 $0.00 3.41%+
- --------------------------------------------------------------------------------
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 $2.87 $0.00 $0.10
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------
Period Beginning End Income Capital Gain Return Total
Ended of Period of Period Dividends Distributions of Capital Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $ 9.38 $ 9.39 $0.28 $0.00 $0.00 3.17%+
- --------------------------------------------------------------------------------
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 $6.33 $0.45 $0.36
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Historical Performance -- Class C Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------
Period Beginning End Income Capital Gain Return Total
Ended of Period of Period Dividends Distributions of Capital Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $ 9.38 $ 9.39 $0.28 $0.00 $0.00 3.19%+
- --------------------------------------------------------------------------------
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 $2.50 $0.00 $0.08
================================================================================
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
---------------
Period Beginning End Income Capital Gain Return Total
Ended of Period of Period Dividends Distributions of Capital Returns(1)
================================================================================
<S> <C> <C> <C> <C> <C> <C>
6/30/97 $9.34 $9.36 $0.31 $0.00 $0.00 3.67%+
- --------------------------------------------------------------------------------
Inception* -
12/31/96 9.71 9.34 0.56 0.00 0.01 2.30+
================================================================================
Total $0.87 $0.00 $0.01
================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY AND
CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------------------
Average Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
-------------------------------------
Class A Class B Class C Class Y
================================================================================
Six Months Ended 6/30/97+ 3.41% 3.17% 3.19% 3.67%
- --------------------------------------------------------------------------------
Year Ended 6/30/97 9.15 8.47 8.64 9.45
- --------------------------------------------------------------------------------
Five Years Ended 6/30/97 N/A 5.97 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/97 N/A 7.33 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/97 6.39 7.97 5.05 4.28
================================================================================
With Sales Charge(2)
-------------------------------------
Class A Class B Class C Class Y
================================================================================
Six Months Ended 6/30/97+ (1.25)% (1.33)% 2.19% 3.67%
- --------------------------------------------------------------------------------
Year Ended 6/30/97 4.25 3.97 7.64 9.45
- --------------------------------------------------------------------------------
Five Years Ended 6/30/97 N/A 5.81 N/A N/A
- --------------------------------------------------------------------------------
Ten Years Ended 6/30/97 N/A 7.33 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 6/30/97 5.35 7.97 5.05 4.28
================================================================================
4
<PAGE>
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 6/30/97) 33.39%
- --------------------------------------------------------------------------------
Class B (6/30/87 through 6/30/97) 102.80
- --------------------------------------------------------------------------------
Class C (Inception* through 6/30/97) 24.24
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/97) 6.06
================================================================================
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales 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.
5
<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+
- --------------------------------------------------------------------------------
June 1987 -- June 1997
GRAPHIC
Smith Barney Lehman Brother Lipper General
Government Government U.S. Government
Securities Fund Bond Index Peer Group Average
--------------- ---------- ------------------
6/87 $ 10,000 $ 10,000 $ 10,000
12/87 9,919 10,280 10,204
12/88 10,589 11,003 10,884
12/89 12,133 12,568 12,241
12/90 12,981 13,663 13,231
12/91 15,059 15,755 15,155
12/92 15,917 16,893 16,128
12/93 17,581 18,694 17,632
12/94 17,022 18,062 16,840
12/95 19,383 21,374 19,791
12/96 19,658 21,968 20,130
6/97 20,280 22,546 20,628
+ Hypothetical illustration of $10,000 invested in Class B shares on June 30,
1987, 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 187 mutual funds investing in U.S.
Government securities as of June 30, 1997. The index is unmanaged and is
not subject to the same management and trading expenses as a mutual fund.
The performance of the Fund's other classes may be greater or less than the
Class B shares' performance indicated on this chart, depending on whether
greater or lesser sales charges and fees were incurred by shareholders
investing in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
6
<PAGE>
- --------------------------------------------------------------------------------
Portfolio Highlights (unaudited) June 30, 1997
- --------------------------------------------------------------------------------
Portfolio Breakdown
PIE CHART
Mortgage Backed Securities 25.6%
U.S. Treasury Obligations 50.4%
Repurchase Agreements 24.0%
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.
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) June 30, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
==============================================================================
U.S. TREASURY OBLIGATIONS -- 50.4%
$ 107,000,000 U.S. Treasury Notes, 6.500% due 10/15/06+ ++ $106,543,110
72,500,000 U.S. Treasury Notes, 6.250% due 2/15/07++ 70,959,375
337,000,000 U.S. Treasury Strips, zero coupon due 2/15/15+ 101,787,480
300,000,000 U.S. Treasury Strips, zero coupon due 8/15/17+ 75,135,000
- ------------------------------------------------------------------------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost -- $352,926,771) 354,424,965
==============================================================================
MORTGAGE-BACKED SECURITIES -- 25.6%
801 FNMA 30 Year, 8.000% due 6/1/07 825
126,487 GNMA 30 Year, 11.000% due 10/15/10# 140,598
32,306 GNMA 30 Year, 10.000% due 3/15/16 35,436
62,058 GNMA 30 Year, 10.500% due 3/15/16 68,419
91,902,204 GNMA 30 Year, 9.000% due 12/15/17+ 99,053,115
273,680 GNMA 30 Year, 9.500% due 5/15/20# 295,318
78,656,045 GNMA 30 Year, 8.000% due 10/15/26# 80,498,957
- ------------------------------------------------------------------------------
TOTAL MORTGAGE-BACKED SECURITIES
(Cost -- $174,010,600) 180,092,668
==============================================================================
SUB-TOTAL INVESTMENTS
(Cost -- $526,937,371) 534,517,633
==============================================================================
REPURCHASE AGREEMENTS -- 24.0%
73,043,750 Morgan Stanley Group, Inc., 5.490% due 7/1/97;
Proceeds at maturity -- $73,121,724; (Fully collateralized by:
FNMA Pool 289515, 6.030% due 4/1/34;
FNMA Pool 333918, 6.072% due 12/1/35;
FHLMC Pool 775551, 7.103% due 8/1/20)
(Market value -- $74,534,661) 73,043,750
95,781,250 Morgan Stanley Group, Inc., 5.470% due 7/1/97;
Proceeds at maturity -- $95,868,571; (Fully collateralized by:
FNMA Pool 289515, 6.030% due 4/1/34;
FNMA Pool 302831, 7.000% due 6/1/24;
FNMA Pool 378669, 5.505% due 6/1/27;
FHLMC Pool 609742, 7.980% due 6/1/24;
FHLMC Pool 845357, 7.900% due 7/1/23;
FHLMC Pool 846419, 7.812% due 8/1/24;
FHLMC Pool 972003, 8.320% due 7/1/20;
PC GOLD Pool G00411, 8.000% due 11/1/25)
(Market value -- $97,734,546) 95,781,250
- ------------------------------------------------------------------------------
TOTAL REPURCHASE AGREEMENTS
(Cost -- $168,825,000) 168,825,000
==============================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $695,762,371*) $703,342,633
==============================================================================
+ Security has been partially segregated by custodian.
++ Security serves as collateral for reverse repurchase agreements.
# 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.
8
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $526,937,371) $534,517,633
Repurchase agreements (Cost -- $168,825,000) 168,825,000
Interest receivable 4,548,624
Receivable for Fund shares sold 1,019,497
Receivable from broker -- variation margin 393,750
- --------------------------------------------------------------------------------
Total Assets 709,304,504
- --------------------------------------------------------------------------------
LIABILITIES:
Reverse repurchase agreements (Note 6) 176,825,000
Payable to bank 1,213,577
Investment advisory fees payable 154,735
Interest payable 150,902
Administration fees payable 91,971
Distribution fees payable 62,550
Accrued expenses 103,319
- --------------------------------------------------------------------------------
Total Liabilities 178,602,054
- --------------------------------------------------------------------------------
Total Net Assets $530,702,450
================================================================================
NET ASSETS:
Par value of capital shares $ 56,709
Capital paid in excess of par value 600,468,034
Undistributed net investment income 347,335
Accumulated net realized loss
from security transactions, options and futures contracts (77,822,256)
Net unrealized appreciation of investments and futures contracts 7,652,628
- --------------------------------------------------------------------------------
Total Net Assets $530,702,450
================================================================================
Shares Outstanding:
Class A 38,798,284
------------------------------------------------------------------------------
Class B 11,530,875
------------------------------------------------------------------------------
Class C 168,541
------------------------------------------------------------------------------
Class Y 6,211,740
------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $9.35
------------------------------------------------------------------------------
Class B* $9.39
------------------------------------------------------------------------------
Class C** $9.39
------------------------------------------------------------------------------
Class Y (and redemption price) $9.36
------------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 4.71% of net asset value per share) $9.79
================================================================================
</TABLE>
* 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.
9
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest $22,670,926
Less: Interest expense (Note 6) (2,596,439)
- --------------------------------------------------------------------------------
Total Investment Income 20,074,487
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 930,991
Distribution fees (Note 2) 891,229
Administration fees (Note 2) 531,995
Shareholder and system servicing fees 196,592
Shareholder communications 37,295
Directors' fees 18,348
Audit and legal 17,348
Custody 16,477
Registration fees 15,870
Other 1,965
- --------------------------------------------------------------------------------
Total Expenses 2,658,110
- --------------------------------------------------------------------------------
Net Investment Income 17,416,377
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, OPTIONS AND FUTURES
CONTRACTS (NOTES 3, 7 AND 8):
Realized Loss From:
Security transactions (excluding short-term securities) (7,998,857)
Options purchased (332,188)
Futures contracts (540,706)
- --------------------------------------------------------------------------------
Net Realized Loss (8,871,751)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments and Futures Contracts:
Beginning of period (1,447,731)
End of period 7,652,628
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 9,100,359
- --------------------------------------------------------------------------------
Net Gain on Investments, Options and Futures Contracts 228,608
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $17,644,985
================================================================================
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended June 30, 1997 (unaudited)
and the Year Ended December 31, 1996
<TABLE>
<CAPTION>
1997 1996
=====================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 17,416,377 $ 34,087,304
Net realized gain (loss) (8,871,751) 2,068,882
Increase in net unrealized appreciation
(depreciation) 9,100,359 (27,047,512)
- -------------------------------------------------------------------------------------
Increase in Net Assets From Operations 17,644,985 9,108,674
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (17,069,042) (34,910,628)
Capital -- (592,035)
- -------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (17,069,042) (35,502,663)
- -------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares 28,762,429 69,365,690
Net asset value of shares issued for
reinvestment of dividends 10,257,200 22,924,466
Cost of shares reacquired (60,459,780) (125,806,899)
- -------------------------------------------------------------------------------------
Decrease in Net Assets From
Fund Share Transactions (21,440,151) (33,516,743)
- -------------------------------------------------------------------------------------
Decrease in Net Assets (20,864,208) (59,910,732)
NET ASSETS:
Beginning of period 551,566,658 611,477,390
- -------------------------------------------------------------------------------------
End of period* $530,702,450 $551,566,658
=====================================================================================
* Includes undistributed net investment income of: $347,335 --
=====================================================================================
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Government Securities Fund ("Portfolio"), a separate
investment fund of 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 semi-
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 maturing within 60 days are valued at cost plus accreted discount, or
minus amortized premium, which approximates value; (d) dividend income is
recorded on ex-dividend date and interest income, adjusted for accretion of
original issue discount, is recorded on the accrual basis; (e) gains or losses
on the sale of securities are calculated by using the specific identification
method; (f) dividends and distributions to shareholders are recorded on the ex-
dividend date; (g) direct expenses are charged to each portfolio and each class;
management fees and general expenses are allocated on the basis of the relative
net assets; (h) the Portfolio intends to comply with the applicable provisions
of the Internal Revenue Code of 1986, as amended, pertaining to regulated
investment companies and to make distributions of taxable income sufficient to
relieve it from substantially all Federal income and excise taxes; (i) the
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. At December 31, 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
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.
12
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (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 Portfolio. 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 also acts as the Portfolio'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 six months ended June 30, 1997, SB received sales charges
of approximately $19,000 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 six months ended June 30, 1997, CDSCs paid to SB for Class B
shares were approximately $98,000.
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 six months ended June 30, 1997, total Distribution Plan
fees incurred were:
Class A Class B Class C
================================================================================
Distribution Plan Fees $462,065 $423,973 $5,191
================================================================================
All officers and one Director of the Fund are employees of SB.
13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
3. Investments
During the six months ended June 30, 1997, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $561,459,910
- --------------------------------------------------------------------------------
Sales 710,102,085
================================================================================
At June 30, 1997, aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
===============================================================================
Gross unrealized appreciation $11,534,960
- -------------------------------------------------------------------------------
Gross unrealized depreciation (3,954,698)
- -------------------------------------------------------------------------------
Net unrealized appreciation $ 7,580,262
===============================================================================
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.
6. Reverse Repurchase Agreements
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.
14
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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 June 30, 1997, the Portfolio had the following open reverse repurchase
agreements:
FACE
AMOUNT SECURITY VALUE
================================================================================
$ 73,043,750 Reverse Repurchase Agreement with Morgan Stanley
Group, Inc., dated 6/24/97 bearing 4.84% to be
repurchased at $73,112,492 on 7/1/97,
collateralized by U.S. Treasury Notes, 6.25%
due 2/15/07 $ 73,043,750
103,781,250 Reverse Repurchase Agreement with Morgan Stanley
Group, Inc., dated 6/25/97 bearing 4.75% to be
repurchased at $103,863,410 on 7/1/97,
collateralized by U.S. Treasury Notes, 6.50%
due 10/15/06 103,781,250
- --------------------------------------------------------------------------------
TOTAL REVERSE REPURCHASE AGREEMENTS $176,825,000
================================================================================
During the six months ended June 30, 1997, the maximum and average amount
of reverse repurchase agreements outstanding were as follows:
================================================================================
Maximum amount outstanding $177,209,375
- --------------------------------------------------------------------------------
Average amount outstanding $130,240,375
================================================================================
Interest rates on reverse repurchase agreements ranged from 3.65% to 4.84%
during the period. Total market value of the collateral for the reverse
repurchase agreements is $177,502,485.
For the six months ended June 30, 1997, interest expense on reverse
repurchase agreements totalled $2,596,439.
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
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
15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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 June 30, 1997, the Portfolio had the following open futures
contracts:
Expiration # of Basis Market Unrealized
Month/Year Contracts Value Value Gain
================================================================================
Future contracts to sell:
U.S. Long Bond 9/97 700 $77,816,116 $77,743,750 $72,366
================================================================================
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 June 30, 1997, the Portfolio held no purchase put or call options.
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
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.
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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 six months ended June 30, 1997, 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 June 30, 1997, the Portfolio held no TBA securities.
10. Capital Shares
At June 30, 1997, 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 June 30, 1997, total paid-in capital amounted to the following for each
class:
Class A Class B Class C Class Y
================================================================================
Total Paid-in Capital $354,965,633 $186,527,650 $1,596,475 $57,434,985
================================================================================
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996*
------------------------ ----------------------
Shares Amount Shares Amount
============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 544,174 $ 5,046,300 1,535,869 $ 14,470,892
Shares issued on reinvestment 860,177 7,938,033 1,868,453 17,348,871
Shares redeemed (4,221,699) (39,178,368) (8,104,977) (75,644,753)
- --------------------------------------------------------------------------------------------
Net Decrease (2,817,348) $(26,194,035) (4,700,655) $(43,824,990)
============================================================================================
Class B
Shares sold 548,905 $ 5,088,024 1,580,979 $ 14,793,615
Shares issued on reinvestment 247,042 2,291,318 590,814 5,515,212
Shares redeemed (2,256,469) (21,023,164) (5,296,153) (49,706,247)
- --------------------------------------------------------------------------------------------
Net Decrease (1,460,522) $(13,643,822) (3,124,360) $(29,397,420)
============================================================================================
Class C
Shares sold 39,640 $ 368,534 90,317 $ 850,795
Shares issued on reinvestment 3,004 27,849 6,474 60,383
Shares redeemed (27,981) (258,248) (48,604) (455,899)
- --------------------------------------------------------------------------------------------
Net Increase 14,663 $ 138,135 48,187 $ 455,279
============================================================================================
Class Y
Shares sold 1,966,354 $ 18,259,571 4,245,386 $ 39,250,388
Shares issued on reinvestment -- -- -- --
Shares redeemed -- -- -- --
- --------------------------------------------------------------------------------------------
Net Increase 1,966,354 $ 18,259,571 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.
18
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares 1997(1) 1996 1995(2) 1994 1993(2) 1992(3)
=====================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 9.34 $ 9.77 $ 9.17 $ 10.01 $ 9.69 $ 9.56
- -----------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (4) 0.31 0.61 0.67 0.52 0.81 0.10
Net realized and
unrealized gain (loss) 0.00* (0.44) 0.62 (0.80) 0.23 0.13
- -----------------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.31 0.17 1.29 (0.28) 1.04 0.23
- -----------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.30) (0.59) (0.69) (0.49) (0.72) (0.08)
Capital -- (0.01) -- (0.07) -- (0.02)
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.30) (0.60) (0.69) (0.56) (0.72) (0.10)
- -----------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $ 9.35 $ 9.34 $ 9.77 $ 9.17 $10.01 $ 9.69
- -----------------------------------------------------------------------------------------------------
Total Return 3.41%++ 1.96% 14.50% (2.76)% 10.87% 2.41%++
- -----------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $362,703 $388,563 $453,378 $482,404 $7,067 $ 275
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (4)(5) 0.92%+ 0.93% 0.94% 1.00% 0.92% 0.68%+
Net investment income 6.63+ 6.16 6.70 6.18 7.76 6.24+
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 102% 420% 294% 276% 540% 426%
=====================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) For the period from November 6, 1992 (inception date) to December 31, 1992.
(4) 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%.
(5) 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.
* Per share amount represents less than $0.01.
++ 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 period:
<TABLE>
<CAPTION>
Class B Shares 1997(1) 1996 1995(2) 1994 1993(2) 1992
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 9.38 $ 9.81 $ 9.17 $ 10.01 $ 9.68 $ 9.81
- ----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (3) 0.29 0.56 0.59 0.46 0.73 0.53
Net realized and
unrealized gain (loss) 0.00* (0.44) 0.65 (0.78) 0.27 (0.02)
- ----------------------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.29 0.12 1.24 (0.32) 1.00 0.51
- ----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.28) (0.54) (0.60) (0.45) (0.67) (0.53)
Capital -- (0.01) -- (0.07) -- (0.11)
- ----------------------------------------------------------------------------------------------------------
Total Distributions (0.28) (0.55) (0.60) (0.52) (0.67) (0.64)
- ----------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $ 9.39 $ 9.38 $ 9.81 $ 9.17 $ 10.01 $ 9.68
- ----------------------------------------------------------------------------------------------------------
Total Return 3.17%++ 1.42% 13.87% (3.25)% 10.45% 5.45%
- ----------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (000s) $108,294 $121,894 $158,459 $172,705 $851,350 $1,046,921
- ----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (3)(4) 1.44%+ 1.45% 1.45% 1.48% 1.40% 1.45%
Net investment income 6.11+ 5.64 6.19 5.69 7.28 5.47
- ----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 102% 420% 294% 276% 540% 426%
==========================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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 $0.01 and the expense ratio would
have been 1.61%.
(4) 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.
* Per share amount represents less than $0.01.
++ 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 period:
<TABLE>
<CAPTION>
Class C Shares 1997(1) 1996 1995(2) 1994 1993(2)(3)
===============================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.38 $ 9.81 $ 9.17 $ 10.01 $ 9.90
- -------------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (4) 0.29 0.57 0.60 0.49 0.68
Net realized and
unrealized gain (loss) 0.00* (0.44) 0.65 (0.81) 0.04
- -------------------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.29 0.13 1.25 (0.32) 0.72
- -------------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.28) (0.55) (0.61) (0.45) (0.61)
Capital -- (0.01) -- (0.07) --
- -------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.28) (0.56) (0.61) (0.52) (0.61)
- -------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.39 $ 9.38 $ 9.81 $ 9.17 $ 10.01
- -------------------------------------------------------------------------------------------------------------------------------
Total Return 3.19%++ 1.47% 13.93% (3.25)% 7.36%++
- -------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $ 1,582 $1,443 $1,039 $ 646 $ 213
- -------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (4)(5) 1.31%+ 1.38% 1.37% 1.47% 1.40%+
Net investment income 6.24+ 5.71 6.27 5.71 7.28+
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 102% 420% 294% 276% 540%
===============================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) For the period from February 4, 1993 (inception date) to December 31, 1993.
(4) 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).
(5) 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.
* Per share amount represents less than $0.01.
++ 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 period:
<TABLE>
<CAPTION>
Class Y Shares 1997(1) 1996(2)
==================================================================
<S> <C> <C>
Net Asset Value, Beginning of Period $ 9.34 $ 9.71
- ------------------------------------------------------------------
Income From Operations:
Net investment income 0.32 0.57
Net realized and unrealized loss 0.01 (0.37)
- ------------------------------------------------------------------
Total Income From Operations 0.33 0.20
- ------------------------------------------------------------------
Less Distributions From:
Net investment income (0.31) (0.56)
Capital -- (0.01)
- ------------------------------------------------------------------
Total Distributions (0.31) (0.57)
- ------------------------------------------------------------------
Net Asset Value, End of Period $ 9.36 $ 9.34
- ------------------------------------------------------------------
Total Return++ 3.67% 2.30%
- ------------------------------------------------------------------
Net Assets, End of Period (000s) $58,123 $39,667
- ------------------------------------------------------------------
Ratios to Average Net Assets+:
Expenses 0.58% 0.44%
Net investment income 7.00 6.49
- ------------------------------------------------------------------
Portfolio Turnover Rate 102% 420%
==================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) 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>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
SMITH BARNEY
GOVERNMENT
SECURITIES
FUND
Directors
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank J. Hubbard
Heath B. McLendon, Chairman
Ken Miller
John F. White
Officers
Heath B. McLendon
Chief Executive Officer
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
FD0408 8/97
<PAGE>
[PHOTO]
[PHOTO] Smith Barney
Managed
Growth Fund
--------------------
SEMI-ANNUAL REPORT
--------------------
June 30, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(sm)
<PAGE>
Smith Barney
Managed Growth Fund
================================================================================
The Smith Barney Managed Growth Fund seeks long-term growth of capital through a
contrarian approach to stock investing. The Fund invests primarily in the stocks
of companies that are currently out of favor, price depressed or undervalued and
trading at or near their 52-week price lows. The Fund's primary goal is to
acquire good companies at inexpensive prices and to limit downside risk.
Smith Barney Managed Growth Fund
Average Annual Total Returns Ended
June 30, 1997
<TABLE>
<CAPTION>
Without Sales Charges*
--------------------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Six Months+ 9.99% 9.55% 9.62%
- --------------------------------------------------------------------------------
One-Year 17.50 16.59 16.67
- --------------------------------------------------------------------------------
Since Inception++ 13.98 13.11 13.15
================================================================================
<CAPTION>
With Sales Charges**
--------------------------------------------------
Class A Class B Class C
================================================================================
<S> <C> <C> <C>
Six Months+ 4.46% 4.55% 8.62%
- --------------------------------------------------------------------------------
One-Year 11.62 11.59 15.67
- --------------------------------------------------------------------------------
Since Inception++ 11.10 11.33 13.15
================================================================================
</TABLE>
* 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 charge, with respect to Class A shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and C
shares.
** 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. Thereafter, the CDSC declines 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.
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.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ The inception date for Class A, B and C shares is June 30, 1995.
================================================================================
OUR INVESTMENT PHILOSOPHY
================================================================================
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.
================================================================================
NASDAQ SYMBOL
================================================================================
Class A SBMGX
Class B SBMBX
Class C SBMCX
================================================================================
WHAT'S INSIDE
================================================================================
Shareholder Letter ........................................................... 1
Historical Performance........................................................ 3
Smith Barney Managed Growth Fund
at a Glance .................................................................. 5
Schedule of Investments....................................................... 6
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
<PAGE>
================================================================================
Shareholder Letter
================================================================================
[PHOTO] [PHOTO]
HEATH B. DOUGLAS
MCLENDON JOHNSTON
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the semi-annual report for the Smith Barney Managed
Growth Fund ("Fund") for the period ended June 30, 1997. For your convenience,
we have outlined the investment philosophy of the Fund and its current portfolio
strategy. A detailed summary of performance and current holdings for the Fund
can be found in the appropriate sections that follow.
Performance and Market Update
For the six months ended June 30, 1997, the Class A shares of the Smith Barney
Managed Growth Fund generated a total return of 9.99%, trailing the gain of
20.6% for the Standard & Poor's 500 Stock Index ("S&P 500"), an index that
measures the performance of 500 widely held common stocks. During the reporting
period, large-capitalization companies continued to lead the ongoing stock
market advance into new record and longevity highs while stocks of smaller-sized
companies generally lagged larger companies. In our opinion, the recent success
of large capitalization stocks can be attributed in large part to the growing
popularity of index mutual funds. As market indices continue to advance, these
funds attract even more investment capital and their outstanding performance in
effect becomes a self-fulfilling prophecy. Currently, the Managed Growth Fund is
mostly made up of the stocks of small- and middle-sized companies. Moreover, the
Fund's Class A total return of 9.99% kept pace with the Russell 2000 Index
return of 10.20%, an index that is more representative of the performance of
smaller-sized companies. (The Russell 2000 Index is made up of 2,000
smaller-capitalized U.S.-based companies whose common stocks trade on either the
New York, American or Nasdaq stock exchanges.)
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 continue to follow a bottom-up investment approach,
evaluating individual companies as businesses rather than identifying and acting
on economic or market trends. In selecting investments for the Fund, we search
for strong, competitive companies, but whose stock prices are trading at or near
their 52-week lows.
We believe that these types of companies offer great upside potential with
limited downside risk. In evaluating these companies, we carefully consider a
number of factors. One of the chief characteristics we look for in a prospective
company is free cash flow because we believe that companies that generate a lot
of free cash will always have value in the market. In addition, we also consider
the relative price-to-earnings ratio, market cap-to-sales ratio, price-to-book
value, historical dividend yield and private market value.
We continue to employ a disciplined sell process and we strongly believe that
knowing when to sell a stock is just as important as choosing the right time to
buy. We determine a specific target price for each company when we buy it. When
a mature company hits the specific price target, the holding is sold. However,
for young companies, we tend to be more flexible due to their dynamic, long-term
growth potential.
Portfolio Update
In the early part of the year, the stock market experienced significant
volatility as many investors anticipated a further tightening of monetary policy
by the Federal Reserve ("Fed") at its March meeting. Evidence of especially
robust growth in the U.S. econo-
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 1
<PAGE>
my in the fourth quarter of 1996 and the possibility of even greater expansion
in the first quarter of 1997 prompted the Fed to raise the federal funds rate by
25 basis points, or 0.25%. (The federal funds rate is the interest rate banks
charge each other for overnight loans and a closely watched indicator of the
direction of interest rates.) Because financial services companies are lightly
represented among the Fund's holdings, the Fund is less sensitive to interest
rate changes and outperformed the S&P 500 during the correction that took place
prior to the Fed action in March. (The cost of money is the most significant
expense for financial services companies.) Also, the out-of-favor companies that
dominate the Fund's portfolio tend to hold up better during market downturns
because their stock prices have already bottomed out and are less vulnerable to
changes in investor sentiment. In fact, the Managed Growth Fund currently has
less than half the volatility of the S&P 500 as measured by the Fund's beta of
approximately 0.40 as of June 30, 1997. (Beta is a measure of a security's
volatility relative to the rest of the market. The S&P 500 has a beta of one. A
higher beta figure indicates a security that is more volatile than the market
and a security with a beta figure less than one is less volatile than the
market.)
During this turbulent period we remained committed to our defensive strategy. We
continue to emphasize long-term performance while striving to minimize risk.
Moreover, the reporting period presented us with an opportunity to add a number
of new names to the Fund. Over the last six months, we added PETsMART (pet
supply retailer), Intergraph (computer hardware and software), Allergan
(pharmaceuticals), Broderbund (educational software), Quickturn (computer
engineering software) and Scholastic (educational publications). We also added
Tupperware, a strong international franchise, after an announcement of
lower-than-expected earnings caused its stock price to decline. All of these
companies were very attractively priced and most had either a substantial amount
of cash on the balance sheet or generated free cash flow.
The Managed Growth Fund has also benefited from several companies which were
taken over in the first half of 1997. Currently, we have received or are about
to receive cash or stock for Stant (automotive parts), Crosscom
(communications), PHAMIS (health care), Giddings & Lewis Inc. (machinery) and
Value Health (health care). In addition, we also sold some of the securities we
bought in prior periods as they hit their price targets. These stocks include
Dean Foods (food products), McClatchy Newspapers (publishing) and Pittston
Burlington Group (transportation). We continue to be overweighted in the
healthcare and technology sectors because we believe that they have excellent
long-term growth prospects.
Market Outlook
The recent volatility in the stock market has reminded many investors that
markets can go down as well as up. Although recent market turbulence has opened
up more investment opportunities for the Fund, we remain true to our
disciplined, contrarian approach to investing. We will therefore not attempt to
forecast where the market may be heading. The most we can say about the future
is that it will provide us with new investment opportunities.
In closing, 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 Vice President and
Investment Officer
July 8, 1997
- --------------------------------------------------------------------------------
2 1997 Semi-Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
Historical Performance -- Class A Shares
===============================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $13.42 $14.76 $0.00 $0.00 9.99%+
- ----------------------------------------------------------------------------------------------
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
==============================================================================================
<CAPTION>
==============================================================================================
Historical Performance -- Class B Shares
==============================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $13.41 $14.69 $0.00 $0.00 9.55%+
- ----------------------------------------------------------------------------------------------
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
==============================================================================================
<CAPTION>
==============================================================================================
Historical Performance -- Class C Shares
==============================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $13.41 $14.70 $0.00 $0.00 9.62%+
- ----------------------------------------------------------------------------------------------
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
==============================================================================================
<CAPTION>
==============================================================================================
Historical Performance -- Class Y Shares
==============================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $13.43 $14.81 $0.00 $0.00 10.28%+
- ----------------------------------------------------------------------------------------------
Inception*-- 12/31/96 12.21 13.43 0.13 0.46 14.97
==============================================================================================
Total $0.13 $0.46
==============================================================================================
<CAPTION>
==============================================================================================
Historical Performance -- Class Z Shares
==============================================================================================
Net Asset Value
-----------------------
Beginning End Income Capital Gain Total
Period Ended of Period of Period Dividends Distributions Returns(1)
==============================================================================================
<S> <C> <C> <C> <C> <C>
6/30/97 $13.43 $14.80 $0.00 $0.00 10.20%+
- ----------------------------------------------------------------------------------------------
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 3
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
Average Annual Total Return
==============================================================================================
Without Sales Charge(1)
----------------------------------------------------------
Class A Class B Class C Class Y Class Z
==============================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 6/30/97+ 9.99% 9.55% 9.62% 10.28% 10.20%
- -----------------------------------------------------------------------------------------------
Year Ended 6/30/97 17.50 16.59 16.67 17.99 17.91
- -----------------------------------------------------------------------------------------------
Inception* through 6/30/97 13.98 13.11 13.15 18.24 17.54
===============================================================================================
<CAPTION>
With Sales Charge(2)
----------------------------------------------------------
Class A Class B Class C Class Y Class Z
==============================================================================================
<S> <C> <C> <C> <C> <C>
Six Months Ended 6/30/97+ 4.46% 4.55% 8.62% 10.28% 10.20%
- ----------------------------------------------------------------------------------------------
Year Ended 6/30/97 11.62 11.59 15.67 17.99 17.91
- ----------------------------------------------------------------------------------------------
Inception* through 6/30/97 11.10 11.33 13.15 18.24 17.54
==============================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Cumulative Total Return
================================================================================
Without Sales Charge(1)
================================================================================
<S> <C>
Class A (Inception* through 6/30/97) 29.91%
- --------------------------------------------------------------------------------
Class B (Inception* through 6/30/97) 27.94
- --------------------------------------------------------------------------------
Class C (Inception* through 6/30/97) 28.03
- --------------------------------------------------------------------------------
Class Y (Inception* through 6/30/97) 26.79
- --------------------------------------------------------------------------------
Class Z (Inception* through 6/30/97) 32.53
================================================================================
</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.
- --------------------------------------------------------------------------------
4 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Smith Barney Managed Growth Fund at a Glance (unaudited)
================================================================================
Growth of $10,000 Invested in Class A, B and C Shares of the Smith Barney
Managed Growth Fund vs. the Standard & Poor's 500 Index*
- --------------------------------------------------------------------------------
June 1995 - June 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Smith Barney Smith Barney Smith Barney Standard
Managed Growth Fund Managed Growth Fund Managed Growth Fund & Poor's
Class A Class B Class C 500 Index
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
6/30/95 $ 9,501 $ 10,000 $ 10,000 $ 10,000
12/95 9,647 10,108 10,116 11,443
6/96 10,505 10,974 10,974 12,598
12/96 11,222 11,679 11,679 14,069
6/30/97 12,343 12,794 12,803 16,967
</TABLE>
* The above chart represents a hypothetical illustration of $10,000 invested in
Class A, B and C shares at inception on June 30, 1995, assuming deduction of
the maximum 5.00% sales charge at the time of investment for Class A shares,
the deduction of the maximum 5.00% CDSC for Class B shares and the deduction
of the 1.00% CDSC for Class C shares. 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.
<TABLE>
<CAPTION>
Industry Diversification of Common Stocks
- -------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Industry Percent
- ------------------- --------------
<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>
<TABLE>
<CAPTION>
Investment Breakdown
- ------------------------------------------------------------
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
Investment Percent
- ------------------- --------------
<S> <C>
Repurchase Agreement 1.8%
U.S. Government Agency Obligations 11.9%
Common Stock and Warrants 86.3%
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 5
<PAGE>
================================================================================
Schedule of Investments (unaudited) June 30, 1997
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
COMMON STOCKS -- 86.1%
Building and Construction -- 0.9%
450,000 Cameron Ashley Building Products Inc.+ 6,243,750
150,000 Giant Cement Holdings, Inc.+ 2,812,500
- -------------------------------------------------------------------------------
9,056,250
- -------------------------------------------------------------------------------
Chemicals -- 6.0%
560,000 A. Schulman, Inc. 13,790,000
139,600 Crompton & Knowles Corp. 3,106,100
310,000 Great Lakes Chemical Corp. 16,236,250
228,300 NCH Corp. 14,268,750
300,000 Penwest Ltd. 10,125,000
- -------------------------------------------------------------------------------
57,526,100
- -------------------------------------------------------------------------------
Closed End Mutual Funds -- 1.0%
37,400 Morgan Stanley Africa Investment Fund, Inc. 668,525
367,800 Swiss Helvetia Fund 9,424,875
- --------------------------------------------------------------------------------
10,093,400
- --------------------------------------------------------------------------------
Communications Equipment -- 1.8%
335,000 California Microwave, Inc.+ 4,690,000
559,600 Network Equipment Technologies, Inc.+ 10,072,800
113,347 Olicom A/S+++ 1,771,055
140,000 Standard Microsystems Corp.+ 1,242,500
- --------------------------------------------------------------------------------
17,776,355
- --------------------------------------------------------------------------------
Computer Software -- 5.1%
575,000 Broderbund Software, Inc.+ 14,195,312
600,000 Infinium Software, Inc.+ 5,850,000
760,000 INTERSOLV+ 7,125,000
1,200,000 Mentor Graphics Corp.+ 11,100,000
700,000 Quickturn Design System, Inc.+ 8,225,000
225,000 Santa Cruz Operation, Inc.+ 801,563
200,000 Texas Micro Inc.+ 675,000
40,000 Wall Data, Inc.+ 1,055,000
- --------------------------------------------------------------------------------
49,026,875
- --------------------------------------------------------------------------------
Computer Systems -- 5.6%
95,000 Applied Voice Technology, Inc.+ 1,757,500
450,000 ECC International Corp.+ 2,362,500
1,500,000 Intergraph Corp.+ 12,750,000
110,000 Network Computing Devices, Inc.+ 1,278,750
470,000 Sequent Computer Systems, Inc.+ 9,899,375
325,000 Silicon Graphics, Inc.+ 4,875,000
425,000 Stratus Computer, Inc.+ 21,250,000
- --------------------------------------------------------------------------------
54,173,125
- --------------------------------------------------------------------------------
Cosmetics -- 0.4%
45,200 Gillette Corp.# 4,282,700
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
6 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1997
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Distributor-Consumer Products -- 3.3%
255,500 Amway Asia Pacific Ltd. $ 11,146,187
400,000 Swiss Army Brands, Inc.+ 4,850,000
425,000 Tupperware Corp.++ 15,512,500
- --------------------------------------------------------------------------------
31,508,687
- --------------------------------------------------------------------------------
Electric -- 2.5%
480,000 Ansaldo Signal N.V.+ 2,100,000
575,000 Cherry Corp., Class A Shares+ 7,475,000
10,000 Cherry Corp., Class B Shares+ 140,000
382,500 Lincoln Electric Co., Class A Shares 14,630,625
- --------------------------------------------------------------------------------
24,345,625
- --------------------------------------------------------------------------------
Electronics -- 2.2%
327,200 AVX Corp. 8,834,400
10,000 Wandel & Goltermann Tecnologies, Inc.+ 91,250
392,700 Watkins-Johnson Co. 12,075,525
- --------------------------------------------------------------------------------
21,001,175
- --------------------------------------------------------------------------------
Environmental Control -- 1.6%
350,000 Fluor Daniel/GTI, Inc.+ 2,362,500
450,000 Safety-Kleen Corp. 7,593,750
294,600 Wellman, Inc. 5,118,675
- --------------------------------------------------------------------------------
15,074,925
- --------------------------------------------------------------------------------
Financial Services -- 2.6%
320,000 First Savings Bank of Washington Bancorp, Inc. 7,120,000
1,150,000 Phoenix Duff & Phelps Corp. 8,481,250
500,000 SPS Transaction Services Corp.+ 9,250,000
27,500 Washington Federal, Inc. 706,406
- --------------------------------------------------------------------------------
25,557,656
- --------------------------------------------------------------------------------
FOOD -- 0.9%
93,000 Golden Enterprises, Inc. 662,625
420,000 Lance, Inc. 8,032,500
- --------------------------------------------------------------------------------
8,695,125
- --------------------------------------------------------------------------------
Healthcare -- 9.5%
725,000 Humana, Inc.+ 16,765,625
882,600 Mid Atlantic Medical Services, Inc.+ 13,735,463
605,000 Neuromedical Systems, Inc.+ 3,346,406
160,000 PHAMIS, Inc.+ 3,960,000
450,000 United Healthcare Corp. 23,400,000
514,500 Value Health, Inc.+ 10,418,625
450,020 Wellpoint Health Networks, Inc.+ 20,644,668
- --------------------------------------------------------------------------------
92,270,787
- --------------------------------------------------------------------------------
Household Furniture & Appliances -- 2.0%
250,000 Flexsteel Industries, Inc. 2,937,500
134,900 National Presto Industries, Inc. 5,438,156
600,000 Singer Co. N.V.++ 11,400,000
- --------------------------------------------------------------------------------
19,775,656
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 7
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1997
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Iron/Steel -- 2.2%
800,000 LTV Corp. $ 11,400,000
535,000 Worthington Industries, Inc. 9,797,188
- --------------------------------------------------------------------------------
21,197,188
- --------------------------------------------------------------------------------
Machinery -- 4.7%
850,000 Giddings & Lewis, Inc. 17,743,750
539,000 Lawson Products, Inc. 14,553,000
520,000 Stewart & Stevenson Services, Inc. 13,520,000
- --------------------------------------------------------------------------------
45,816,750
- --------------------------------------------------------------------------------
Manufacturing -- 1.1%
425,000 Watts Industries, Inc., Class A Shares 10,200,000
- --------------------------------------------------------------------------------
Medical Supply -- 1.5%
300,000 The York Group, Inc. 5,625,000
302,600 West Co., Inc. 8,661,925
- --------------------------------------------------------------------------------
14,286,925
- --------------------------------------------------------------------------------
Metal Fabricators -- 1.1%
409,600 Century Aluminum Co. 5,990,400
150,000 Trinity Industries, Inc. 4,762,500
- --------------------------------------------------------------------------------
10,752,900
- --------------------------------------------------------------------------------
Mining -- 0.9%
300,000 Ashland Coal, Inc. 8,550,000
- --------------------------------------------------------------------------------
Office Equipment and Supplies -- 0.8%
528,400 A.T. Cross Co., Class A Shares 6,737,100
66,500 Hunt Manufacturing Co. 1,246,875
- --------------------------------------------------------------------------------
7,983,975
- --------------------------------------------------------------------------------
Oil -- 1.1%
300,000 Holly Corp. 7,443,750
156,000 Wiser Oil Co. 2,876,250
- --------------------------------------------------------------------------------
10,320,000
- --------------------------------------------------------------------------------
Oil Service -- 0.3%
126,000 Offshore Logistics, Inc.+ 2,378,250
51,500 RPC, Inc.+ 759,625
- --------------------------------------------------------------------------------
3,137,875
- --------------------------------------------------------------------------------
Paper and Forest Products -- 1.4%
450,000 Crown Vantage, Inc.+ 3,375,000
497,000 Louisiana Pacific Corp. 10,499,125
- --------------------------------------------------------------------------------
13,874,125
- --------------------------------------------------------------------------------
Pharmaceuticals -- 7.2%
375,000 Allergan, Inc. 11,929,687
830,000 Forest Labs Inc., Class A Shares+ 34,548,750
1,000,000 Mylan Laboratories++ 14,750,000
650,000 Perrigo Co.+ 8,125,000
- --------------------------------------------------------------------------------
69,353,437
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1997
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Photography/Imaging -- 0.7%
790,000 Scitex Corp. $ 6,961,875
- --------------------------------------------------------------------------------
Publishing/Printing -- 5.4%
125,000 Houghton Mifflin Co. 8,343,750
650,000 Readers Digest Association Inc., Class A Shares++ 18,646,875
425,000 Scholastic Corp.+ 14,875,000
338,800 Torstar Corp., Class B Shares 10,559,872
- --------------------------------------------------------------------------------
52,425,497
- --------------------------------------------------------------------------------
Retail-Specialty -- 2.2%
50,000 Nordstrom, Inc. 2,453,125
1,350,000 PETsMART, Inc.+ 15,525,000
410,000 TBC Corp.+ 3,433,750
- --------------------------------------------------------------------------------
21,411,875
- --------------------------------------------------------------------------------
Semiconductors --- 1.4%
528,500 Alpha Industries, Inc.+ 4,393,156
492,000 Bell Microproducts, Inc.+ 5,227,500
335,000 Quality Semiconductor, Inc.+ 3,559,375
- --------------------------------------------------------------------------------
13,180,031
- --------------------------------------------------------------------------------
Shoes -- 0.5%
368,500 Stride Rite Corp.++ 4,744,437
- --------------------------------------------------------------------------------
Specialized Services -- 0.8%
400,000 Rollins, Inc. 8,050,000
- --------------------------------------------------------------------------------
Telephone -- 2.3%
342,900 Century Telephone Enterprises, Inc. 11,551,444
285,900 Telephone and Data Systems, Inc. 10,864,200
- --------------------------------------------------------------------------------
22,415,644
- --------------------------------------------------------------------------------
Textiles & Apparel -- 0.7%
365,000 Haggar Corp. 4,653,750
513,000 Norton McNaughton, Inc.+ 2,500,875
- --------------------------------------------------------------------------------
7,154,625
- --------------------------------------------------------------------------------
Tobacco -- 1.7%
595,000 UST, Inc. 16,511,250
- --------------------------------------------------------------------------------
Transportation -- 1.6%
250,000 Airborne Freight Corp.# 10,468,750
174,200 Pittston Brink's Group 5,226,000
- --------------------------------------------------------------------------------
15,694,750
- --------------------------------------------------------------------------------
Trucking -- 1.1%
450,000 Frozen Foods Express Industries, Inc. 3,881,250
320,000 Yellow Corp.+ 7,160,000
- --------------------------------------------------------------------------------
11,041,250
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $722,358,938) 835,228,850
================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 9
<PAGE>
================================================================================
Schedule of Investments (unaudited)(continued) June 30, 1997
================================================================================
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
WARRANTS -- 0.2%
425,000 Olicom A/S, Expire 9/12/00 (Cost -- $383,277) $ 1,620,313
================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 11.9%
$50,000,000 Federal Home Loan Bank, 6.000% due 7/1/97 50,000,000
20,000,000 Federal Home Loan Mortgage Corp.,
5.400% due 7/3/97 19,994,000
20,000,000 Federal Home Loan Mortgage Corp.,
5.430% due 7/3/97 19,993,967
25,000,000 Federal Home Loan Mortgage Corp.,
5.430% due 7/14/97 24,950,979
- --------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost -- $114,938,946) 114,938,946
================================================================================
REPURCHASE AGREEMENT -- 1.8%
17,118,000 Chase Manhattan Bank, 5.750% due 7/1/97;
Proceeds at maturity -- $17,120,734; (Fully
collateralized by U.S. Treasury Notes, 5.625%
due 2/28/06;
Market value -- $17,463,150)(Cost -- $17,118,000) 17,118,000
================================================================================
TOTAL INVESTMENTS --100%
(Cost -- $854,799,161*) $968,906,109
================================================================================
</TABLE>
+ Non-income producing security.
++ Security on loan (Note 7).
# Security segregated by Custodian to cover written call options.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Statement of Assets and Liabilities (unaudited) June 30, 1997
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $854,799,161) $968,906,109
Cash and cash equivalents (Note 7) 25,644,517
Receivable for Fund shares sold 1,217,475
Dividends and interest receivable 373,439
Receivable for securities sold 170,454
Other assets 265,037
- --------------------------------------------------------------------------------
Total Assets 996,577,031
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities loaned (Note 7) 25,644,273
Options written (Note 5) 1,525,175
Management fees payable 689,368
Distribution fees payable 202,085
Accrued expenses 70,420
- --------------------------------------------------------------------------------
Total Liabilities 28,131,321
- --------------------------------------------------------------------------------
Total Net Assets $968,445,710
================================================================================
NET ASSETS:
Par value of capital shares $ 65,769
Capital paid in excess of par value 805,779,613
Undistributed net investment income 585,467
Accumulated net realized gain from security transactions 48,177,192
Net unrealized appreciation of investments and options 113,837,669
- --------------------------------------------------------------------------------
Total Net Assets $968,445,710
================================================================================
Shares Outstanding:
Class A 15,822,874
---------------------------------------------------------------------------
Class B 36,417,671
---------------------------------------------------------------------------
Class C 5,141,550
---------------------------------------------------------------------------
Class Y 6,526,271
---------------------------------------------------------------------------
Class Z 1,860,594
---------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $14.76
---------------------------------------------------------------------------
Class B* $14.69
---------------------------------------------------------------------------
Class C** $14.70
---------------------------------------------------------------------------
Class Y (and redemption price) $14.81
---------------------------------------------------------------------------
Class Z (and redemption price) $14.80
---------------------------------------------------------------------------
Class A Maximum Public Offering Price Per Share
(net asset value plus 5.26% of net asset value per share) $15.54
================================================================================
</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 11
<PAGE>
================================================================================
Statement of Operations (unaudited) For the Six Months Ended June 30, 1997
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $ 4,831,094
Interest 3,281,762
Less: Foreign witholding tax (19,107)
- --------------------------------------------------------------------------------
Total Investment Income 8,093,749
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 3,788,849
Distribution fees (Note 2) 3,113,666
Shareholder and system servicing fees 538,130
Registration fees 141,085
Shareholder communications 84,494
Directors' fees 33,307
Audit and legal 17,712
Custody 17,566
Other 6,741
- --------------------------------------------------------------------------------
Total Expenses 7,741,550
- --------------------------------------------------------------------------------
Net Investment Income 352,199
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND
OPTIONS (NOTES 3 AND 5):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 138,186,514
Cost of securities sold 86,309,046
- --------------------------------------------------------------------------------
Net Realized Gain 51,877,468
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investments and Options Written:
Beginning of period 79,894,015
End of period 113,837,669
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 33,943,654
- --------------------------------------------------------------------------------
Net Gain on Investments and Options 85,821,122
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 86,173,321
================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Statements of Changes in Net Assets
================================================================================
For the Six Months Ended June 30, 1997 (unaudited)
and the Year Ended December 31, 1996
<TABLE>
<CAPTION>
1997 1996
================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 352,199 $ 2,523,667
Net realized gain 51,877,468 35,218,574
Increase in net unrealized appreciation 33,943,654 66,836,563
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 86,173,321 104,578,804
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (2,350,122)
Net realized gains -- (27,955,155)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders -- (30,305,277)
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 91,205,342 367,727,487
Net asset value of shares issued for
reinvestment of dividends -- 27,018,959
Cost of shares reacquired (68,667,945) (122,341,524)
- --------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 22,537,397 272,404,922
- --------------------------------------------------------------------------------
Increase in Net Assets 108,710,718 346,678,449
NET ASSETS:
Beginning of period 859,734,992 513,056,543
- --------------------------------------------------------------------------------
End of period* $968,445,710 $859,734,992
================================================================================
* Includes undistributed net investment income of: $585,467 $233,268
================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 13
<PAGE>
================================================================================
Notes to Financial Statements (unaudited)
================================================================================
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 semi-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 six
months ended June 30, 1997, SB received brokerage commissions of $53,412 and
sales charges of approximately $340,000 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 and
declines thereafter by 1.00% per year until no CDSC is incurred. Class C shares
have a 1.00% CDSC, which applies if redemption occurs within the first year of
purchase.
For the six months ended June 30, 1997, CDSCs paid to SB were:
<TABLE>
<CAPTION>
Class B Class C
================================================================================
<S> <C> <C>
CDSCs $674,000 $6,000
================================================================================
</TABLE>
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
- --------------------------------------------------------------------------------
14 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
average daily net assets of each class, respectively. For the six months ended
June 30, 1997, total Distribution Plan fees incurred were:
<TABLE>
<CAPTION>
Class A Class B Class C
==========================================================================
<S> <C> <C> <C>
Distribution Plan Fees $275,995 $2,487,069 $350,602
==========================================================================
</TABLE>
All officers and one Director of the Fund are employees of SB.
3. Investments
During the six months ended June 30, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
==========================================================================
<S> <C>
Purchases $117,832,667
- --------------------------------------------------------------------------
Sales 138,186,514
==========================================================================
</TABLE>
At June 30, 1997, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
==========================================================================
<S> <C>
Gross unrealized appreciation $151,388,990
Gross unrealized depreciation (37,282,042)
- --------------------------------------------------------------------------
Net unrealized appreciation $114,106,948
==========================================================================
</TABLE>
4. Repurchase Agreements
The Portfolio purchases (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Portfolio requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. 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 June 30, 1997, 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 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 loss if the market price of the underlying security
declines.
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 15
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
The following covered call option transactions occurred during the six months
ended June 30, 1997:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
================================================================================
<S> <C> <C>
Options written, outstanding at December 31, 1996 0 $ 0
Options written during the period ended June 30, 1997 2,952 1,255,896
Options cancelled in closing purchase transactions 0 0
- --------------------------------------------------------------------------------
Options written, outstanding at June 30, 1996 2,952 $1,255,896
================================================================================
</TABLE>
The following represents the covered call option written contracts open as of
June 30, 1997:
<TABLE>
<CAPTION>
Number of Strike
Contracts Expiration Price Value
================================================================================
<S> <C> <C> <C>
2,500 Airborne Freight Corp. 12/20/97 $40 $(1,203,125)
452 Gillette Corp. 11/22/97 95 (322,050)
- --------------------------------------------------------------------------------
Total Covered Call Options Written
(Premiums received-- $1,255,896) $(1,525,175)
================================================================================
</TABLE>
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 June 30, 1997, the Portfolio had no open futures contracts.
7. 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. 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 has market risk on the collateral received.
At June 30, 1997, the Portfolio loaned common stocks having a value of
approximately $23,845,468 and received cash collateral of $25,644,273 for the
loan.
8. Capital Shares
At June 30, 1997, 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 June 30, 1997, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
Amount
================================================================================
<S> <C>
Class A $190,624,501
- --------------------------------------------------------------------------------
Class B 444,121,675
- --------------------------------------------------------------------------------
Class C 62,675,584
- --------------------------------------------------------------------------------
Class Y 85,359,758
- --------------------------------------------------------------------------------
Class Z 23,063,864
================================================================================
</TABLE>
- --------------------------------------------------------------------------------
16 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Notes to Financial Statements (unaudited) (continued)
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, 1997 December 31, 1996*
-------------------------------- -----------------------------------
Shares Amount Shares Amount
====================================================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,167,174 $15,968,399 6,547,295 $83,402,855
Shares issued on reinvestment -- -- 652,504 8,491,496
Shares redeemed (1,661,482) (22,806,193) (4,228,289) (54,332,568)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (494,308) $(6,837,794) 2,971,510 $37,561,783
====================================================================================================================================
Class B
Shares sold 3,029,571 $41,349,427 14,235,807 $180,384,752
Shares issued on reinvestment -- -- 1,200,715 15,429,195
Shares redeemed (2,763,409) (37,897,160) (4,233,215) (54,002,913)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 266,162 $ 3,452,267 11,203,307 $141,811,034
====================================================================================================================================
Class C
Shares sold 542,769 $ 7,407,705 2,445,713 $31,099,403
Shares issued on reinvestment -- -- 168,277 2,164,043
Shares redeemed (497,298) (6,789,592) (1,054,014) (13,533,051)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 45,471 $ 618,113 1,559,976 $19,730,395
====================================================================================================================================
Class Y
Shares sold 1,650,183 $22,557,463 4,876,088 $62,802,295
Shares issued on reinvestment -- -- -- --
Shares redeemed -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 1,650,183 $22,557,463 4,876,088 $62,802,295
====================================================================================================================================
Class Z
Shares sold 287,160 $ 3,922,348 790,471 $10,038,182
Shares issued on reinvestment -- -- 71,480 934,225
Shares redeemed (86,569) (1,175,000) (36,475) (472,992)
- ------------------------------------------------------------------------------------------------------------------------------------
Net Increase 200,591 $ 2,747,348 825,476 $10,499,415
====================================================================================================================================
</TABLE>
* For Class Y shares, transactions are for the period from January 31, 1996
(inception date) to December 31, 1996.
- --------------------------------------------------------------------------------
Smith Barney Managed Growth Fund 17
<PAGE>
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class A Shares Class B Shares
-------------------------------------------- -------------------------------------------
1997(1) 1996(2) 1995(2)(3) 1997(1) 1996(2) 1995(2)(3)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $13.42 $12.03 $12.00 $13.41 $12.02 $12.00
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (loss) 0.04 0.10 0.16 (0.02) 0.01 0.11
Net realized and unrealized gain 1.30 1.84 0.02 1.30 1.84 0.02
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.34 1.94 0.18 1.28 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 Period $14.76 $13.42 $12.03 $14.69 $13.41 $12.02
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 9.99%++ 16.33% 1.53%++ 9.55%++ 15.55% 1.16%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $233,563 $218,927 $160,487 $535,126 $484,673 $300,000
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.30%+ 1.27% 1.19%+ 2.06%+ 2.03% 1.94%+
Net investment income (loss) 0.52+ 0.84 2.74+ (0.25)+ 0.08 1.99+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 15% 34% 6% 15% 34% 6%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $0.06 $0.06 $0.06 $0.06 $0.06 $0.06
====================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) 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.
- --------------------------------------------------------------------------------
18 1997 Semi-Annual Report to Shareholders
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class C Shares Class Y Shares
------------------------------------------ ----------------------------
1997(1) 1996(2) 1995(2)(3) 1997(1) 1996(2)(4)
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $13.41 $12.03 $12.00 $13.43 $12.21
- ------------------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (loss) (0.01) 0.00* 0.11 0.07 0.12
Net realized and unrealized gain 1.30 1.84 0.03 1.31 1.69
- ------------------------------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.29 1.84 0.14 1.38 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 Period $14.70 $13.41 $12.03 $14.81 $13.43
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return 9.62%++ 15.45% 1.16%++ 10.28%++ 14.97%++
- ------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $75,579 $68,340 $42,530 $96,637 $65,499
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.04%+ 2.03% 1.91%+ 0.90%+ 0.92%+
Net investment income (loss) (0.22)+ 0.08 2.02+ 0.92+ 1.12+
- ------------------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 15% 34% 6% 15% 34%
- ------------------------------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $0.06 $0.06 $0.06 $0.06 $0.06
====================================================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) For the period from June 30, 1995 (inception date) to December 31, 1995.
(4) 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 19
<PAGE>
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Class Z Shares 1997(1) 1996(2) 1995(2)(3)
============================================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $13.43 $12.03 $11.83
- ------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.06 0.15 0.04
Net realized and unrealized gain 1.31 1.84 0.32
- ------------------------------------------------------------------------------------------------------------
Total Income From Operations 1.37 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 Period $14.80 $13.43 $12.03
- ------------------------------------------------------------------------------------------------------------
Total Return 10.20%++ 16.69% 3.06%++
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $27,541 $22,296 $10,040
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.96%+ 0.97% 0.90%+
Net investment income 0.86+ 1.12 2.30+
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 15% 34% 6%
- ------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $0.06 $0.06 $0.06
============================================================================================================
</TABLE>
(1) For the six months ended June 30, 1997 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(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.
- --------------------------------------------------------------------------------
20 1997 Semi-Annual Report to Shareholders
<PAGE>
Smith Barney
Managed Growth Fund
Directors Investment Manager
Paul R. Ades Smith Barney Mutual Funds Management Inc.
Herbert Barg
Dwight B. Crane
Frank G. Hubbard Distributor
Heath B. McLendon, Chairman Smith Barney Inc.
Ken Miller
John F. White
Custodian
Officers PNC Bank, N.A.
Heath B. McLendon
Chief Executive Officer
Shareholder Servicing Agent
Lewis E. Daidone First Data Investor Services Group, Inc.
Senior Vice President and Treasurer P.O. Box 9134
Boston, MA 02205-9134
Douglas Johnson
Vice President and Investment Officer
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary This report is for the information of
shareholders of Smith Barney Managed
Growth Fund, but it may also be used as
sales literature when preceded or
accompanied by the current prospectus,
which gives details about charges,
expenses, investment objectives and
operating policies of the Fund. If used as
sales material after September 30, 1997,
this report must be accompanied by
performance information for the most
recently completed calendar quarter.
SMITH BARNEY
------------------------------------
A Member of TravelersGroup [LOGO]
Smith Barney Managed Growth Fund
Smith Barney Mutual Funds
388 Greenwich Street
New York, New York 10013
FD01005 8/97
