<PAGE>
[GRAPHIC]
Smith Barney
Special
Equities Fund
-------------
ANNUAL REPORT
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December 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.(R)
<PAGE>
Smith Barney
Special Equities Fund
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The Smith Barney Special Equities Fund seeks long-term appreciation by investing
primarily in equity securities that are believed to have superior appreciation
potential and that are not generally within the S&P 500 Composite Stock Price
Index. They may be securities of companies in their development stage or older
companies that appear to be entering a new stage of more rapid growth.
Smith Barney Special Equities Fund
Average Annual Total Returns
December 31, 1998
Without Sales Charges(1)
------------------------------------
Class A Class B Class L(2)
================================================================================
One-Year 10.44% 9.63% 9.63%
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Five-Year 8.66 7.87 7.87
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Ten-Year N/A 10.51 N/A
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Since Inception+ 13.73 9.36 5.45
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With Sales Charges(3)
------------------------------------
Class A Class B Class L(2)
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One-Year 4.91% 4.63% 7.53%
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Five-Year 7.56 7.72 7.66
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Ten-Year N/A 10.51 N/A
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Since Inception+ 12.79 9.36 5.24
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(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 and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B and L shares.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum sales charge of 5.00% and 1.00% respectively; and
Class B shares reflect the deduction of a 5.00% CDSC, which applies if
shares are redeemed within one year from purchase. Thereafter, this CDSC
declines by 1.00% per year until no CDSC is incurred. Class L shares also
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.
+ Inception dates for Class A, B and L shares are November 6, 1992, December
13, 1982 and October 18, 1993, respectively.
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NASDAQ SYMBOL
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Class A HSEAX
Class B HSPEX
Class L HSECX
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WHAT'S INSIDE
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Shareholder Letter ........................................................... 1
Historical Performance ....................................................... 4
Smith Barney Special Equities Fund
at a Glance .................................................................. 6
Schedule of Investments ...................................................... 7
Statement of Assets and Liabilities .......................................... 9
Statement of Operations ......................................................10
Statements of Changes in Net Assets ..........................................11
Notes to Financial Statements ................................................12
Financial Highlights .........................................................16
Independent Auditors' Report .................................................18
Additional Shareholder Information ...........................................19
<PAGE>
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Shareholder Letter
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[PHOTO] [PHOTO]
HEATH B. PAMELA P.
MCLENDON MILUNOVICH
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to present the annual report for the Smith Barney Special
Equities Fund ("Portfolio") for the year ended December 31, 1998. Please note
that on November 6, 1998, Pam Milunovich, Portfolio Manager for the Salomon
Small Cap Growth Fund, assumed management responsibilities for the Special
Equities Fund. A "Special Shareholder Notice" appears on page three with
additional information.
In this report, we briefly discuss stock market conditions and outline our
investment strategy. A more detailed summary of performance and current holdings
can be found in the appropriate sections that follow.
A Classic Series Fund
The Special Equities Fund is part of the Classic Series of Smith Barney Mutual
Funds. Classic Series funds are mutual funds whose investment decisions are
determined by experienced portfolio managers, based on each fund's investment
objectives and guidelines. Funds in the Smith Barney Classic Series can invest
across asset classes and sectors, utilizing a range of strategies in order to
achieve their objectives.
Performance Update and Investment Strategy
For the year ended December 31, 1998, the Portfolio's Class A, B and L shares,
without sales charges, returned 10.44%, 9.63% and 9.63%, respectively which
outperformed the negative 2.55% return for the Russell 2000 Index during the
same period. (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.)
The Portfolio uses a bottom-up approach to select small-capitalization companies
that are growing their earnings faster than the overall market. Ideally, the
companies should be on the verge of a sustainable growth spurt from new
products, technology or consolidation within an industry. The Portfolio invests
in several companies that meet this criteria found primarily in four sectors:
technology, health-care, consumer and financial services.
In the technology and health-care sector, the Portfolio is invested in companies
that have proprietary products, brands or services which are somewhat more
insulated from competition and have more sustainable pricing. We believe smaller
firms will thrive by targeting emerging technologies such as fiber optics
(Uniphase) and Internet access (Earthlink). We believe that the Portfolio should
benefit from the potential explosive growth in data and voice communications
with its investments in Level One, Metromedia Fiber Network and Winstar
Communications.
A change in the Portfolio's investment strategy is that it will no longer employ
the quantitative investment approach that was designed to mitigate price
volatility. We believe the Portfolio should perform better by solely utilizing
fundamental analysis to identify stocks with the ability to grow faster than the
market and which have superior appreciation potential. This will result in the
Portfolio owning a fewer number of stocks than when this quantitative strategy
was used. For example, the Portfolio owned approximately 61
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Smith Barney Special Equities Fund 1
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stocks as of December 1998 down from 199 owned on June 1998. We believe the
Portfolio has already performed better because of our emphasis on active
portfolio management.
The Portfolio's overweight position in the consumer and technology sectors
benefited from the economy's expansion fueled by strong consumer spending and
improvements in productivity due to technological improvements. The Portfolio's
minimal commitment to underperforming sectors such as energy, basic materials
and financials also helped drive its favorable return.
Market Update
The year 1998 was a volatile one as the stock market declined in response to
investors' fears of a U.S. recession, an Asian recession, a global credit
squeeze and the impeachment of our President. The stock market then rebounded
due to the swift moves by the Federal Reserve Board ("Fed") to cut interest
rates. From October 8, 1998 lows, the Russell 2000 Index advanced 36.2% while
the S&P 500 Index rebounded 28.5%. We believe small-capitalization stocks should
continue to do well as they have historically in times when the Fed is easing
interest rates.
We continue to see a generally positive economic environment with moderate
inflation. The economy's expansion was fueled by strong consumer spending and
improvements in productivity due to technological improvements. The Portfolio is
focusing upon companies with powerful franchises and market positions that can
continue to increase earnings in a slower growth U.S. economy.
Small Cap Market Outlook
Small-capitalization stocks are poised to outperform the broader U.S. market
over the next year. Three factors which should drive the outperformance are
strong earnings, deeply discounted valuations and portfolio migration. Small
caps are posting strong earnings results in comparison with larger stocks.
Second, the price/earnings spread between large- and small-cap stocks is as wide
as it has been since 1974 which preceded an eleven-year run of outperformance by
small caps. Lastly, according to Morningstar, Inc., large-capitalization growth
portfolios only had 1.8% of their portfolios invested in small companies with
market capitalizations of $1 billion or less as of July 1998 compared with 12.4%
in such assets in July 1996. If large-cap managers increase their small cap
holdings, small-cap stocks should rally.
On a more somber note, we report with much sadness the passing of Emeritus
Director Allan R. Johnson on November 26, 1998. Allan made many valuable
contributions to the Board and the Fund during his tenure and he will be missed.
In closing, we would like to thank you once again for your investment in Smith
Barney Special Equities Fund.
Sincerely,
/s/ Heath B. McLendon /s/ Pamela P. Milunovich
Heath B. McLendon Pamela P. Milunovich
Chairman Vice President and
Investment Officer
January 22, 1999
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2 1998 Annual Report to Shareholders
<PAGE>
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Special Shareholder Notice
We would like to inform you about some important information regarding your
investment in the Smith Barney Special Equities Fund. On January 7, 1999, the
Board of Directors of Smith Barney Special Equities Fund approved a proposed
merger of the Fund with the Salomon Brothers Small Cap Growth Fund. If this
proposed merger is approved by shareholders, on the merger date each share of
the Fund will be exchanged for an equivalent dollar amount of shares of the
Salomon Brothers Small Cap Growth Fund.
In addition, the proposed merger would enable the Smith Barney Special Equities
Fund shareholders to continue to own an investment composed primarily of
smaller-capitalized companies. As noted in the shareholder letter, Pam
Milunovich took over management responsibilities of the Smtih Barney Special
Equities Fund on November 6, 1998. In addition to managing the Smith Barney
Special Equities Fund, Ms. Milunovich manages the Salomon Brothers Small Cap
Growth Fund. This proposed merger would enable Pam to use her investment
approach more effectively and give her greater possible efficiencies in managing
these assets.
A special meeting of the Smith Barney Special Equities Fund shareholders is
scheduled for May 14, 1999 to consider the proposed merger of the Smith Barney
Special Equities Fund into the Salomon Brothers Small Cap Growth Fund which is
expected to occur in June if approved.
Proxy materials should be mailed some time in the beginning of April 1999. We
ask that you take a few moments to review the proxy statement carefully. If you
do not plan to attend the meeting, we ask that you complete the proxy card and
return it as soon as possible. Your vote is very important. Thank you.
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Smith Barney Special Equities Fund 3
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Historical Performance -- Class A Shares
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<TABLE>
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
============================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/98 $26.52 $29.29 $0.00 $0.00 $0.00 10.44%
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12/31/97 28.11 26.52 0.00 0.00 0.00 (5.66)
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12/31/96 30.44 28.11 0.00 0.28 0.36 (5.81)
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12/31/95 19.10 30.44 0.00 0.76 0.00 63.48
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12/31/94 20.23 19.10 0.00 0.00 0.00 (5.59)
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12/31/93 15.47 20.23 0.00 0.33 0.00 32.90
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Inception* -- 12/31/92 14.13 15.47 0.00 0.00 0.00 9.48+
============================================================================================
Total $0.00 $1.37 $0.36
============================================================================================
</TABLE>
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Historical Performance -- Class B Shares
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<TABLE>
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
============================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/98 $25.54 $28.00 $0.00 $0.00 $0.00 9.63%
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12/31/97 27.28 25.54 0.00 0.00 0.00 (6.38)
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12/31/96 29.76 27.28 0.00 0.28 0.36 (6.44)
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12/31/95 18.82 29.76 0.00 0.76 0.00 62.30
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12/31/94 20.08 18.82 0.00 0.00 0.00 (6.27)
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12/31/93 15.47 20.08 0.00 0.33 0.00 31.93
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12/31/92 14.18 15.47 0.00 0.00 0.00 9.10
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12/31/91 9.82 14.18 0.00 0.00 0.03 44.76
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12/31/90 13.77 9.82 0.29 0.23 0.02 (24.71)
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12/31/89 12.04 13.77 0.27 0.00 0.24 18.60
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Total $0.56 $1.60 $0.65
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</TABLE>
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Historical Performance -- Class L Shares
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<TABLE>
<CAPTION>
Net Asset Value
------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
============================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/98 $25.54 $28.00 $0.00 $0.00 $0.00 9.63%
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12/31/97 27.28 25.54 0.00 0.00 0.00 (6.38)
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12/31/96 29.77 27.28 0.00 0.28 0.36 (6.44)
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12/31/95 18.82 29.77 0.00 0.76 0.00 62.35
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12/31/94 20.08 18.82 0.00 0.00 0.00 (6.27)
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Inception* -- 12/31/93 22.62 20.08 0.00 0.33 0.00 (9.77)+
============================================================================================
Total $0.00 $1.37 $0.36
============================================================================================
</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
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4 1998 Annual Report to Shareholders
<PAGE>
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Average Annual Total Returns
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Without Sales Charges(1)
------------------------------------------
Class A Class B Class L
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Year Ended 12/31/98 10.44% 9.63% 9.63%
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Five Years Ended 12/31/98 8.66 7.87 7.87
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Ten Years Ended 12/31/98 N/A 10.51 N/A
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Inception* through 12/31/98 13.73 9.36 5.45
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With Sales Charges(2)
------------------------------------------
Class A Class B Class L
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Year Ended 12/31/98 4.91% 4.63% 7.53%
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Five Years Ended 12/31/98 7.56 7.72 7.66
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Ten Years Ended 12/31/98 N/A 10.51 N/A
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Inception* through 12/31/98 12.79 9.36 5.24
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Cumulative Total Returns
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Without Sales Charges(1)
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Class A (Inception* through 12/31/98) 120.43%
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Class B (12/31/88 through 12/31/98) 171.77
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Class L (Inception* through 12/31/98) 31.79
================================================================================
(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 and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 5.00% and 1.00%,
respectively; Class B shares reflect the deduction of a 5.00% CDSC, which
applies if shares are redeemed within one year from purchase and declines
thereafter by 1.00% per year until no CDSC is incurred. Class L shares also
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 and L, shares are November 6, 1992, December
13, 1982 and October 18, 1993, respectively.
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Smith Barney Special Equities Fund 5
<PAGE>
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Smith Barney Special Equities Fund at a Glance (unaudited)
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Growth of $10,000 Invested in Class B Shares of the Smith Barney Special
Equities Fund vs. the Standard & Poor's 500 Index and the Russell 2000 Index+
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December 1988 -- December 1998
[GRAPHIC]
SB Special Equities Standard & Poor's 500 Index Russell 2000
------------------- --------------------------- ------------
Dec 1988 10,000 10,000 10,000
Dec 1989 11,361 13,163 11,627
Dec 1990 8,604 12,755 9,362
Dec 1991 12,627 16,633 13,673
Dec 1992 14,003 17,899 16,189
Dec 1993 18,606 19,698 19,245
Dec 1994 17,439 19,957 18,895
Dec 1995 28,302 27,448 24,272
Dec 1996 26,478 33,747 28,276
Dec 1997 24,789 45,004 34,600
Dec 1998 27,177 57,938 33,721
+ Hypothetical illustration of $10,000 invested in Class B shares on December
31, 1988, assuming reinvestment of dividends and capital gains, if any, at
net asset value through December 31, 1998. 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 Russell 2000 Index is
composed of the 2,000 smallest companies in the Russell 3000 Index. The
Russell 3000 Index is composed of 3,000 of the largest U.S. companies by
market capitalization. The indexes are unmanaged and are 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.
Industry Diversification of Common Stock*
[GRAPHIC]
Basic Industry 0.6%
Capital Goods 0.7%
Communications 6.5%
Computer Services 6.0%
Consumer 29.2%
Financial Services 13.8%
Health Care 12.4%
Technology 30.8%
* As a percentage of total common stock.
Top Ten Holdings*
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1. Legato Systems, Inc. 3.6%
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2. Metromedia Fiber Network, Inc. 3.4
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3. Abercrombie & Fitch Co., Class A Shares 3.4
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4. New Era of Networks, Inc. 3.4
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5. MedQuist, Inc. 3.2
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6. Reinsurance Group of America, Inc. 2.9
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7. DeVry, Inc. 2.7
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8. Protective Life Corp. 2.7
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9. Insight Enterprises, Inc. 2.6
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10. ResMed, Inc. 2.5
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6 1998 Annual Report to Shareholders
<PAGE>
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Schedule of Investments December 31, 1998
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SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 96.8%
Basic Industry -- 0.6%
85,000 Geon Co. $ 1,955,000
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Capital Goods -- 0.7%
72,500 Matthews International Corp., Class A Shares 2,283,750
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Communications -- 6.3%
317,500 Metromedia Fiber Network, Inc.+ 10,636,250
100,000 Univision Communications, Inc.+ 3,618,750
150,000 WinStar Communications, Inc.+ 5,850,000
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20,105,000
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Computer Services -- 5.9%
130,000 Affiliated Computer Services, Inc., Class A Shares+ 5,850,000
200,000 CIBER, Inc.+ 5,587,500
100,000 Keane, Inc.+ 3,993,750
120,000 Manhattan Associates, Inc.+ 3,270,000
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18,701,250
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Consumer -- 28.2%
65,000 Abacus Direct Corp.+ 2,957,500
150,000 Abercrombie & Fitch, Co., Class A Shares+ 10,612,500
102,000 Bebe Stores, Inc. 3,608,250
100,000 Beringer Wine Estates Holdings, Inc., Class B Shares+ 4,468,750
27,900 Cort Business Services Corp.+ 676,575
120,000 Cost Plus, Inc.+ 3,765,000
275,000 DeVry, Inc.+ 8,421,875
170,000 Dollar Tree Stores, Inc.+ 7,426,875
60,000 Dura Automotive Systems, Inc.+ 2,047,500
150,000 Earthgrains Co. 4,640,625
160,000 Fossil, Inc.+ 4,600,000
156,000 Insight Enterprises, Inc.+ 7,936,500
110,000 Lason, Inc.+ 6,400,625
100,000 O'Reilly Automotive, Inc.+ 4,725,000
70,000 ProBusiness Services, Inc.+ 3,185,000
200,000 Profit Recovery Group International, Inc.+ 7,487,500
180,000 Williams-Sonoma, Inc.+ 7,256,250
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90,216,325
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Financial Services -- 13.3%
130,000 American Heritage Life Investment Co. 3,176,875
120,000 Charter One Financial, Inc. 3,330,000
80,000 CMAC Investment Corp. 3,675,000
240,000 Dime Bancorp, Inc. 6,345,000
110,000 Legg Mason, Inc. 3,471,875
100,000 People's Heritage Financial Group, Inc. 2,000,000
210,000 Protective Life Corp. 8,360,625
135,000 Reinsurance Group of America, Inc. 8,941,250
70,000 ReliaStar Financial Corp. 3,228,750
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42,529,375
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See Notes to Financial Statements.
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Smith Barney Special Equities Fund 7
<PAGE>
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Schedule of Investments (continued) December 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Health Care -- 12.0%
120,000 IDEXX Laboratories, Inc.+ $ 3,228,750
250,000 MedQuist Inc.+ 9,875,000
170,000 ResMed, Inc.+ 7,713,750
190,000 Safeskin Corp.+ 4,583,750
60,000 Sepracor, Inc.+ 5,253,750
80,000 Serologicals Corp.+ 2,400,000
100,000 Universal Health Services, Inc., Class B Shares+ 5,187,500
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38,242,500
- --------------------------------------------------------------------------------
Technology -- 29.8%
120,000 AVT Corp.+ 3,480,000
130,000 Carrier Access Corp.+ 4,476,875
50,000 CMG Information Services, Inc.+ 5,325,000
135,000 Com21, Inc.+ 2,835,000
115,000 Concord Communications, Inc.+ 6,526,250
80,000 EarthLink Network, Inc.+ 4,560,000
110,000 Entrust Technologies, Inc.+ 2,626,250
20,000 Inktomi Corp.+ 2,587,500
170,000 Legato Systems, Inc.+ 11,209,375
125,000 Level One Communications, Inc.+ 4,437,500
90,000 Lycos, Inc.+ 5,000,625
100,000 MMC Networks, Inc.+ 1,325,000
120,000 Network Appliance, Inc.+ 5,400,000
35,000 Network Solutions, Inc., Class A Shares+ 4,580,625
240,000 New Era of Networks, Inc.+ 10,560,000
140,000 Siebel Systems, Inc.+ 4,751,250
125,000 Transaction Systems Architects, Inc., Class A Shares+ 6,250,000
100,000 Uniphase Corp.+ 6,937,500
110,000 World Access, Inc.+ 2,351,250
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95,220,000
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TOTAL COMMON STOCK
(Cost -- $218,608,142) 309,253,200
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT -- 3.2%
$10,299,000 Morgan Stanley Dean Witter & Co., Inc., 4.650% due
1/4/99; Proceeds at maturity -- $10,304,321; (Fully
collateralized by U.S. Treasury Notes, 6.000% to
6.500% due 7/15/99 to 8/15/27; Market value --
$10,552,988) (Cost -- $10,299,000) 10,299,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $228,907,142*) $319,552,200
================================================================================
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
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8 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $228,907,142) $319,552,200
Cash 89,873
Receivable for Fund shares sold 12,029,354
Receivable for securities sold 3,256,259
Dividends and interest receivable 18,426
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Total Assets 334,946,112
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased 22,142,537
Payable for securities purchased 1,379,938
Investment advisory fees payable 168,972
Administration fees payable 60,637
Distribution fees payable 38,159
Accrued expenses 524,388
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Total Liabilities 24,314,631
- --------------------------------------------------------------------------------
Total Net Assets $310,631,481
================================================================================
NET ASSETS:
Par value of capital shares $ 10,855
Capital paid in excess of par value 209,336,151
Accumulated net investment loss (1,584)
Accumulated net realized gain on security transactions and
futures contracts 10,641,001
Net unrealized appreciation of investments 90,645,058
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Total Net Assets $310,631,481
================================================================================
Shares Outstanding:
Class A 5,208,205
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Class B 5,291,647
-----------------------------------------------------------------------------
Class L 354,967
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $29.29
-----------------------------------------------------------------------------
Class B * $28.00
-----------------------------------------------------------------------------
Class L ** $28.00
-----------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset value per share) $30.83
-----------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $28.28
================================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
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Smith Barney Special Equities Fund 9
<PAGE>
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Statement of Operations For the Year Ended December 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 2,266,455
Dividends 756,282
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Total Investment Income 3,022,737
- --------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 2,510,436
Distribution fees (Note 2) 2,311,720
Administration fees (Note 2) 912,886
Shareholder and system servicing fees 424,972
Shareholder communications 207,889
Registration fees 71,865
Custody 47,953
Audit and legal 43,874
Directors' fees 35,378
Other 60,909
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Total Expenses 6,627,882
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Net Investment Loss (3,605,145)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED Gain (Loss) ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 3 AND 5):
Realized Gain From:
Security transactions (excluding short-term securities) 61,122,475
Futures contracts 85,272
- --------------------------------------------------------------------------------
Net Realized Gain 61,207,747
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 108,735,832
End of year 90,645,058
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (18,090,774)
- --------------------------------------------------------------------------------
Net Gain on Investments and Futures Contracts 43,116,973
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 39,511,828
================================================================================
See Notes to Financial Statements.
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10 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
==============================================================================================
<S> <C> <C>
OPERATIONS:
Net investment loss $ (3,605,145) $ (6,449,871)
Net realized gain (loss) 61,207,747 (40,421,604)
Increase (decrease) in net unrealized appreciation (18,090,774) 8,970,299
- ----------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 39,511,828 (37,901,176)
- ----------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- --
- ----------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders -- --
- ----------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 1,184,808,924 582,676,285
Cost of shares reacquired (1,474,248,055) (716,903,253)
- ----------------------------------------------------------------------------------------------
Decrease in Net Assets From Fund Share Transactions (289,439,131) (134,226,968)
- ----------------------------------------------------------------------------------------------
Decrease in Net Assets (249,927,303) (172,128,144)
NET ASSETS:
Beginning of year 560,558,784 732,686,928
- ----------------------------------------------------------------------------------------------
End of year* $ 310,631,481 $ 560,558,784
==============================================================================================
* Includes accumulated net investment loss of: $ (1,584) $ (14,881)
==============================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Special Equities Fund ("Portfolio"), a separate investment fund
of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund consists of the
Portfolio and six other separate investment portfolios: Smith Barney Government
Securities Fund, Smith Barney Contrarian Fund, Smith Barney Investment Grade
Bond Fund, Concert Peachtree Growth Fund, Smith Barney Hansberger Global Value
Fund and Smith Barney Hansberger Global Small Cap Value Fund. The financial
statements and financial highlights for the other portfolios are presented in
separate annual reports.
The significant accounting policies consistently followed by the Portfolio are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing price on such markets;
securities for which no sales price were reported are valued at bid price, or in
the absence of a recent bid price, at the bid equivalent obtained from one or
more of the major market makers; (c) securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, which
approximates 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, 1998, 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 $3,664,212 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
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as investment adviser to the Fund. The Portfolio pays MMC 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.
MMC 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.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to that
date Salomon Smith Barney
- --------------------------------------------------------------------------------
12 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Inc. ("SSB"), another subsidiary of SSBH, was the Fund's distributor. SSB, as
well as certain other broker-dealers, continues to sell Fund shares to the
public as members of the selling group. For the year ended December 31, 1998,
SSB received brokerage commissions of $97,090.
On June 12, 1998, the Portfolio's existing Class C shares were renamed as Class
L shares. Effective June 15, 1998, Class L shares are being sold at net asset
value plus a maximum initial sales charge of 1.00%. Class L shares also have a
1.00% contingent deferred sales charge ("CDSC"), which applies if redemption
occurs within the first year of purchase.
There is also a CDSC of 5.00% on Class B shares, which applies if redemption
occurs within one year from purchase and declines thereafter by 1.00% per year
until no CDSC is incurred. In addition, Class A shares also have a 1.00% CDSC,
which applies if redemption occurs within the first year of purchase. This CDSC
only applies to those purchases of Class A shares, which, when combined with
current holdings of Class A shares, equal or exceed $500,000 in the aggregate.
These purchases do not incur an initial sales charge.
For the year ended December 31, 1998, SSB received sales charges of
approximately $74,000 and $1,000 on sales of the Portfolio's Class A and Class L
shares, respectively. In addition, CDSCs paid to SSB were approximately:
Class A Class B Class L
================================================================================
CDSCs $1,000 $929,000 $11,000
================================================================================
Pursuant to a Distribution Plan, the Portfolio pays a service fee with respect
to its Class A, B and L 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 L shares calculated at the annual
rate of 0.75% of the average daily net assets of each class, respectively. For
the year ended December 31, 1998, total Distribution Plan fees incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $379,620 $1,803,038 $129,062
================================================================================
All officers and one Director of the Fund are employees of SSB.
3. Investments
During the year ended December 31, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $660,409,534
- --------------------------------------------------------------------------------
Sales 929,289,486
================================================================================
At December 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 93,143,258
Gross unrealized depreciation (2,498,200)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 90,645,058
================================================================================
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.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
5. Futures Contracts
The Portfolio may from time to time enter into futures contracts.
Initial margin deposits made upon entering into futures contracts are recognized
as assets. The initial margin is segregated by the custodian as 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 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 (and cost of) the closing transaction 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.
At December 31, 1998, the Portfolio had no open futures contracts.
6. 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 depending on the
type of securities loaned. The custodian establishes and maintains the
collateral in a segregated account. The Portfolio maintains exposure for the
risk of any losses in the investment of amounts received as collateral.
During the year ended December 31, 1998, the Portfolio earned income from
securities lending of $672,047. However, at December 31, 1998, the Portfolio did
not have any securities on loan.
7. Capital Shares
At December 31, 1998, 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. Effective June 12, 1998 the Portfolio adopted the renaming of existing
Class C shares as Class L shares.
At December 31, 1998, total paid-in capital amounted to the following for each
class:
Amount
================================================================================
Class A $ 75,789,210
- --------------------------------------------------------------------------------
Class B 122,114,131
- --------------------------------------------------------------------------------
Class L 11,443,665
================================================================================
- --------------------------------------------------------------------------------
14 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
-------------------------------- -------------------------------
Shares Amount Shares Amount
==============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 43,453,919 $ 1,139,338,291 16,896,856 $ 456,165,866
Shares redeemed (44,915,731) (1,184,419,881) (18,672,368) (507,105,631)
- ----------------------------------------------------------------------------------------------
Net Decrease (1,461,812) $ (45,081,590) (1,775,512) $ (50,939,765)
==============================================================================================
Class B
Shares sold 481,144 $ 12,097,414 1,840,814 $ 48,152,441
Shares redeemed (4,752,892) (121,948,302) (5,555,378) (145,731,101)
- ----------------------------------------------------------------------------------------------
Net Decrease (4,271,748) $ (109,850,888) (3,714,564) $ (97,578,660)
==============================================================================================
Class L*
Shares sold 69,754 $ 1,800,409 295,802 $ 7,645,773
Shares redeemed (448,046) (11,533,176) (533,187) (13,995,758)
- ----------------------------------------------------------------------------------------------
Net Decrease (378,292) $ (9,732,767) (237,385) $ (6,349,985)
==============================================================================================
Class Y+
Shares sold 1,159,135 $ 29,514,653 2,450,057 $ 65,702,742
Shares redeemed (5,138,794) (138,880,125) (1,800,027) (47,481,247)
- ----------------------------------------------------------------------------------------------
Net Increase (Decrease) (3,979,659) $ (109,365,472) 650,030 $ 18,221,495
==============================================================================================
Class Z++
Shares sold 76,384 $ 2,058,157 181,226 $ 5,009,463
Shares redeemed (612,326) (17,466,571) (93,713) (2,589,516)
- ----------------------------------------------------------------------------------------------
Net Increase (Decrease) (535,942) $ (15,408,414) 87,513 $ 2,419,947
==============================================================================================
</TABLE>
* On June 12, 1998, Class C shares were renamed as Class L shares.
+ On December 29, 1998, Class Y shares were fully redeemed.
++ On December 31, 1998, Class Z shares were fully redeemed.
8. Subsequent Event
On January 7, 1999, the Board of Directors of Smith Barney Special Equities Fund
approved a proposed merger of the Fund with the Salomon Brothers Small Cap
Growth Fund. If this proposed merger is approved by shareholders, on the merger
date each share of the Fund will be exchanged for an equivalent dollar amount of
shares of the Salomon Brothers Small Cap Growth Fund. A special meeting of the
Smith Barney Special Equities Fund shareholders is scheduled for May 14, 1999 to
consider the merger of the Smith Barney Special Equities Fund into the Salomon
Brothers Small Cap Growth Fund which is expected to occur in June.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1997 1996(1) 1995 1994(1)
======================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $26.52 $28.11 $30.44 $19.10 $20.23
- ------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.15) (0.21) (0.19) (0.27) (0.13)
Net realized and unrealized gain (loss) 2.92 (1.38) (1.50) 12.37 (1.00)
- ------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.77 (1.59) (1.69) 12.10 (1.13)
- ------------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains -- -- (0.28) (0.76) --
Capital -- -- (0.36) -- --
- ------------------------------------------------------------------------------------------------------
Total Distributions -- -- (0.64) (0.76) --
- ------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $29.29 $26.52 $28.11 $30.44 $19.10
- ------------------------------------------------------------------------------------------------------
Total Return 10.44% (5.66)% (5.81)% 63.48% (5.59)%
- ------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $152,546 $176,889 $237,435 $159,316 $101,052
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.24% 1.20% 1.17% 1.43% 1.49%
Net investment loss (0.58) (0.67) (0.61) (1.05) (0.94)
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 157% 145% 118% 113% 123%
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Class B Shares 1998(1) 1997 1996(1) 1995 1994(1)
======================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $25.54 $27.28 $29.76 $18.82 $20.08
- ------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.34) (0.45) (0.41) (0.37) (0.27)
Net realized and unrealized gain (loss) 2.80 (1.29) (1.43) 12.07 (0.99)
- ------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.46 (1.74) (1.84) 11.70 (1.26)
- ------------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains -- -- (0.28) (0.76) --
Capital -- -- (0.36) -- --
- ------------------------------------------------------------------------------------------------------
Total Distributions -- -- (0.64) (0.76) --
- ------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $28.00 $25.54 $27.28 $29.76 $18.82
- ------------------------------------------------------------------------------------------------------
Total Return 9.63% (6.38)% (6.44)% 62.30% (6.27)%
- ------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $148,147 $244,258 $362,163 $171,081 $93,920
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.99% 1.94% 1.91% 2.04% 2.21%
Net investment loss (1.33) (1.41) (1.36) (1.61) (1.66)
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 157% 145% 118% 113% 123%
======================================================================================================
</TABLE>
(1) 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.
- --------------------------------------------------------------------------------
16 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class L Shares(1) 1998(2) 1997 1996(2) 1995 1994(2)
===============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $25.54 $27.28 $29.77 $18.82 $20.08
- -----------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.34) (0.45) (0.41) (0.42) (0.25)
Net realized and unrealized gain (loss) 2.80 (1.29) (1.44) 12.13 (1.01)
- -----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.46 (1.74) (1.85) 11.71 (1.26)
- -----------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains -- -- (0.28) (0.76) --
Capital -- -- (0.36) -- --
- -----------------------------------------------------------------------------------------------
Total Distributions -- -- (0.64) (0.76) --
- -----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $28.00 $25.54 $27.28 $29.77 $18.82
- -----------------------------------------------------------------------------------------------
Total Return 9.63% (6.38)% (6.44)% 62.35% (6.27)%
- -----------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $9,938 $18,730 $26,480 $9,417 $1,528
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.99% 1.95% 1.90% 2.25% 2.15%
Net investment loss (1.33) (1.42) (1.34) (1.79) (1.60)
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 157% 145% 118% 113% 123%
===============================================================================================
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(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.
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Smith Barney Investment Funds Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Smith Barney Special Equities Fund of Smith
Barney Investment Funds Inc. as of December 31, 1998, and the related statement
of operations for the year then ended, the statements of changes in net assets
for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the four-year period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial
highlights for the year ended December 31, 1994, were audited by other auditors
whose report thereon, dated February 10, 1995 expressed an unqualified opinion
on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. As to securities
purchased and sold but not received or delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Smith Barney Special Equities Fund of Smith Barney Investment Funds Inc. as of
December 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the years in the two-year period then
ended, and the financial highlights for each of the years in the four-year
period then ended, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
February 8, 1999
- --------------------------------------------------------------------------------
18 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On March 9, 1998, a special meeting of shareholders of the Fund was held for the
purpose of voting on the following matters:
1. To elect Directors of the Fund which includes all Portfolios; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
Shares Voted Percentage Shares Voted Percentage
Name of Directors For Shares Voted Against Shares Voted
================================================================================
Paul R. Ades 110,457,871.145 96.547% 3,950,761.251 3.453%
Herbert Barg 110,299,351.998 96.408 4,109,280.398 3.592
Dwight B. Crane 110,443,765.891 96.534 3,964,866.505 3.466
Frank Hubbard 110,456,573.292 96.546 3,952,059.104 3.454
Jerome Miller 110,457,232.652 96.546 3,951,399.744 3.454
Ken Miller 110,449,857.597 96.540 3,958,774.799 3.460
Heath B. McLendon 110,401,492.247 96.498 4,007,140.149 3.502
================================================================================
Proposal 2 requested that shareholders approve certain changes to the
fundamental policies of the Portfolio in order to modernize them in view of
certain regulatory, business or industry developments that have occurred since
original adoption of these policies by the Portfolio. The following chart
demonstrates that all proposals were approved by shareholders.
Please note that "M" indicates a modification of the policy; "E" indicates the
elimination of the policy; and "R" indicates the reclassification of the policy
from fundamental (which would require shareholder approval to change) to
non-fundamental (which can be changed by a vote of the Board of Directors).
================================================================================
M Diversification Approved
M Industry Concentration Approved
M Borrowing Approved
M Lending Approved
R Margin and Short-Sales Approved
M Real Estate Approved
R Restricted and Illiquid Securities Approved
R Unseasoned Issuers Approved
E 5% Ownership of Certain Securities Approved
R Purchases of Securities of Other Investment Companies Approved
R Exercising Control or Management Approved
R Investments in Oil, Gas or Mineral Exploration Approved
E Limiting Participation in Joint Trading Accounts Approved
R Puts, Calls and Combinations Thereof Approved
================================================================================
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Portfolio on all proposals.
Percentage Percentage Percentage
Shares Voted of Shares Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Voted
================================================================================
10,320,464.470 89.762% 284,173.086 2.471% 893,277.293 7.769%
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Special Equities Fund 19
<PAGE>
[This page intentionally left blank]
<PAGE>
Smith Barney
Special Equities Fund
Directors
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank G. Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
John F. White, Emeritus
Officers
Heath B. McLendon
President and Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
Pamela P. Milunovich
Vice President and Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Manager
Mutual Management Corp.
Distributor
CFBDS, 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 shareholders of Smith
Barney Special Equities Fund. It is not for distribution to prospective
investors unless accompanied by a current Prospectus for the Fund, which
contains information concerning the Fund's investment policies and expenses as
well as other pertinent information.
SALOMON SMITH BARNEY
- ---------------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney Special Equities Fund
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD0313 2/99
[GRAPHIC OMITTED]
Smith Barney
Investment Grade
Bond Fund
ANNUAL REPORT
December 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day(R).
<PAGE>
Smith Barney Investment
Grade Bond Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Smith Barney Investment Grade Bond Fund ("Portfolio") seeks to provide high
current income consistent with prudent investment management and preservation of
capital primarily by investing in investment-grade corporate bonds and other
income producing securities.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A SIGAX
Class B HBDIX
Class L SBILX
Smith Barney Investment Grade Bond Fund
Average Annual Total Returns
December 31, 1998
Without Sales Charges(1)
------------------------------------------
Class A Class B Class L(2)
================================================================================
One-Year 8.30% 7.72% 7.83%
- --------------------------------------------------------------------------------
Five-Year 9.23 8.67 8.72
- --------------------------------------------------------------------------------
Ten-Year N/A 10.95 N/A
- --------------------------------------------------------------------------------
Since Inception+ 11.01 11.92 9.24
================================================================================
With Sales Charges(3)
------------------------------------------
Class A Class B Class L(2)
================================================================================
One-Year 3.43% 3.26% 5.80%
- --------------------------------------------------------------------------------
Five-Year 8.23 8.53 8.51
- --------------------------------------------------------------------------------
Ten-Year N/A 10.95 N/A
- --------------------------------------------------------------------------------
Since Inception+ 10.18 11.92 9.05
================================================================================
(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 and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 4.50% and 1.00%,
respectively; and Class B shares reflect the deduction of a 4.50% CDSC,
which applies if shares are redeemed within one year from 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 L shares also 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.
+ Inception dates for Class A, B and L shares are November 6, 1992, January
4, 1982 and February 26, 1993, respectively.
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
The investment strategy followed in the Portfolio has remained the same since
our last report: stay fully invested and maintain a long-term investment
horizon. As of December 31, 1998, the Portfolio's asset allocation was 97% in
investment-grade corporate bonds and 3% in U.S. Treasuries. Roughly one-third of
the Portfolio's corporate bonds was in the following three sectors:
o Leisure and entertainment
o Banks and savings and loans
o Automotive
- --------------------------------------------------------------------------------
WHAT'S INSIDE
- --------------------------------------------------------------------------------
Shareholder Letter............................................................ 1
Historical Performance........................................................ 4
Smith Barney Investment Grade Bond Fund
at a Glance................................................................... 6
Schedule of Investments....................................................... 7
Statement of Assets and Liabilities.......................................... 11
Statement of Operations...................................................... 12
Statements of Changes in Net Assets.......................................... 13
Notes to Financial Statements................................................ 14
Financial Highlights......................................................... 17
Tax Information.............................................................. 19
Independent Auditors' Report................................................. 20
Additional Shareholder Information........................................... 21
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO OMITTED] [PHOTO OMITTED]
HEATH B. JAMES E.
MCLENDON CONROY
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Investment
Grade Bond Fund ("Portfolio") for the year ended December 31, 1998. A detailed
summary of performance and current holdings can be found in the appropriate
sections that follow. We hope you find this report to be useful and informative.
Portfolio Manager Change
On November 6, 1998, James E. Conroy assumed responsibility as Portfolio Manager
of the Smith Barney Investment Grade Bond Fund. Mr. Conroy is a Managing
Director of Salomon Smith Barney Inc. In addition, Mr. Conroy also manages the
Government Securities Fund, the U.S. Government Securities Fund, the Managed
Governments Fund, the Short-Term High Grade Bond Fund and co-manages the
Diversified Strategic Income Fund. Mr. Conroy has more than 21 years of
investment experience and holds a BA in Economics from Muhlenberg College.
Performance Update
For the year ended December 31, 1998, the Portfolio generated a total return of
8.30% for Class A shares, significantly outperforming its Lipper, Inc.
("Lipper") peer group total return of 6.23% for the same period. (Lipper is a
major fund-tracking organization.)
A Style Pure Fund
The Smith Barney Investment Grade Bond Fund is a Style Pure Fund. Our Style Pure
Series funds are fully invested 100% of the time within designated asset classes
and a designated investment style. They may maintain minimal cash holdings or
under extraordinary market conditions increase the cash allocation. These funds
may be used as the basic building blocks of asset allocation.
Investment Strategy
The investment strategy followed in the Portfolio has remained the same since
our last report: stay fully invested and maintain a long-term investment
horizon. As of December 31, 1998, the Portfolio's asset allocation was 97% in
investment-grade corporate bonds and 3% in U.S. Treasuries. Roughly one-third of
the Portfolio's corporate bonds were in the following three sectors:
o Leisure and entertainment
o Banks and savings and loans
o Automotive
One of the key changes we made to the Portfolio during the reporting period was
to lower its average maturity to 47 years as of December 31, 1998 to help reduce
volatility somewhat. Because we think long-term interest rates will be lower, we
expect the Portfolio's returns to remain competitive and consistent with its
long-term track record.
Market Update and Outlook
The key events during 1998 were predominantly more mergers and acquisitions, the
ongoing overseas economic crisis and the resiliency of the U.S. economy and
financial markets. The broad range in interest rates and the associated higher
market volatility reflected those conditions. As can be seen from the chart
below, interest rates went down during the reporting period:
Yields from U.S. Treasury Securities
12/31/98 12/31/97
================================================================================
90-day Treasury Bill 4.45% 5.34%
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2-Year Treasury Note 4.53 5.64
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5-Year Treasury Note 4.54 5.71
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10-Year Treasury Bond 4.65 5.74
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30-Year Treasury Bond 5.09 5.92
================================================================================
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Smith Barney Investment Grade Bond Fund 1
<PAGE>
Interest rates reached historical lows in October 1998, precipitated by the
first Federal Reserve Board ("Fed") interest rate cut since 1996. While further
cuts ensued, concerns surrounding hedge fund losses took center stage, prompting
the spreads between corporate bonds and mortgage-backed securities to widen
versus U.S. Treasuries. Compounding the problem was considerable corporate
financing as we headed toward the end of the year. Corporate debt issuance for
1998 on a net basis was more than the prior two years combined.
We believe that the dominant issues in 1999 will be the advent of the Euro, the
prospects for economic recovery throughout Asia and other less developed
countries, the future sustainability of U.S. economic growth and the ongoing
resiliency of U.S. financial markets.
The Euro introduces a new variable to macroeconomic analysis that has not been
faced since the demise of the Soviet empire and the advent of true global
competition. Opportunities should abound in the financial markets as corporate
financing expands in creative new ways. However, the implications for the U.S.
dollar as the world's premier currency has now been brought into question by the
Euro's introduction.
The economic picture throughout Asia and Russia remains critically unclear.
Rising employment, the need to dump finished goods in the face of uncertain
currencies and fiscal policies that are slow to change and less than dramatic,
do not bode well for the financial markets of less developed countries.
In our view, the U.S. economy and the financial markets will continue to soul
search as to prospects for continued good fortune. The positives include such
variables as low unemployment, strong productivity and the dramatic increase in
defined contribution plans (e.g., 401(k) plans) and estate planning as key
market influences. However, historically low savings (the traditional standard)
being redefined as the "wealth effect" as measured by investment growth remains
an ever-present shadow that can change with the ups and downs of the financial
markets.
Technical trends that have supported a decline in interest rates since 1981
remain fully intact. Minor disruptions keep markets range bound between 4.90%
and 5.40% during the first quarter of 1999. However, we believe the more
dominant longer-term force should be for rates to head toward the 4.50% level.
We have positioned the Portfolio in the coming year to benefit from these
expected lower interest rates. On the next page, we have provided a list of the
key global events that occurred this past year.
In closing, thank you for investing in the Smith Barney Investment Grade Bond
Fund, Inc. We encourage you to visit our Web site at www.smithbarney.com. We
look forward to continuing to help you pursue your financial goals as the new
century dawns.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President and
Investment Officer
January 25, 1999
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Top Ten Holdings* As of December 31, 1998
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1. Walt Disney Corp. 4.1%
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2. Boeing Co. 4.0
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3. NationsBank Corp. 3.9
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4. IBM Corp. 3.9
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5. Coca-Cola Enterprises Inc. 3.8
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6. Amgen Inc. 3.8
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7. Chrysler Corp. 3.8
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8. Republic NY Corp. 3.8
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9. Time Warner Inc. 3.7
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10. Bank One Corp. 3.7
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* As a percentage of total investments.
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2 1998 Annual Report to Shareholders
<PAGE>
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Key Global Events in 1998
1/26 Royal Bank of Canada and Bank of Montreal announce plans for merger
1/27 Compaq acquires Digital Equipment
2/3 President Clinton proposes the first no deficit budget in 30 years
2/11 Dow Jones Industrial Average ("DJIA") sets new record (8285.61)
3/9 The International Monetary Fund ("IMF") postpones additional funds
to Indonesia
3/17 The Justice Department expands its investigation of Microsoft
4/7 Citicorp and Travelers Group merge
4/14 NationsBank announces merger with BankAmerica
5/8 The U.S. Senate announces major overhaul of the Internal Revenue
Service
5/14 The Dow Jones Industrial Average closes above 9200
6/16 Oil prices hit 11-year low ($11.40)
6/18 U.S. intervenes in exchange market to support Yen
7/14 Japanese Prime Minister resigns in face of economic turmoil
8/17 Hong Kong intervenes in its stock and futures market
8/27 Russian central bank says it will stop supporting ruble
9/1 The DJIA declines to 7539, wiping out 1998 gains
9/28 Helmut Kohl loses German national election
9/30 The Federal Reserve Board cuts rates for the first time since
January 1996. (Two cuts ensue.)
10/1 Bond rates fall below 5%
10/27 Global financier George Soros says he will close his emerging market
hedge fund
11/4 Democrats fare better than expected in mid-term elections
11/13 Brazil receives major financial bailout package
12/17 Joint military strike between U.S. and Britain begins against
defiant Iraq
12/19 President William Jefferson Clinton becomes only the second U.S.
President to be impeached by the House of Representatives
source: The Wall Street Journal
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Smith Barney Investment Grade Bond Fund 3
<PAGE>
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Historical Performance -- Class A Shares
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<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/98 $13.19 $13.12 $0.76 $0.37 $0.00 8.30%
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/97 12.27 13.19 0.80 0.28 0.00 17.10
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12/31/96 13.25 12.27 0.76 0.12 0.00 (0.47)
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12/31/95 10.67 13.25 0.89 0.16 0.00 35.29
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12/31/94 13.01 10.67 0.86 0.31 0.03 (8.95)
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12/31/93 11.89 13.01 0.89 0.14 0.00 18.45
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Inception* -- 12/31/92 11.67 11.89 0.14 0.00 0.01 3.25+
====================================================================================================================================
Total $5.10 $1.38 $0.04
====================================================================================================================================
</TABLE>
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Historical Performance -- Class B Shares
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<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/98 $13.19 $13.09 $0.72 $0.37 $0.00 7.72%
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12/31/97 12.29 13.19 0.75 0.28 0.00 16.44
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12/31/96 13.25 12.29 0.68 0.12 0.00 (0.89)
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12/31/95 10.67 13.25 0.83 0.16 0.00 34.63
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12/31/94 13.01 10.67 0.80 0.31 0.03 (9.41)
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12/31/93 11.89 13.01 0.83 0.14 0.00 18.06
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12/31/92 11.80 11.89 0.83 0.00 0.03 8.36
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12/31/91 10.43 11.80 0.87 0.00 0.00 22.50
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12/31/90 11.01 10.43 0.87 0.00 0.00 2.98
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12/31/89 10.33 11.01 0.87 0.00 0.00 15.57
====================================================================================================================================
Total $8.05 $1.38 $0.06
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</TABLE>
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Historical Performance -- Class L Shares
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<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/98 $13.18 $13.07 $0.74 $0.37 $0.00 7.83%
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12/31/97 12.30 13.18 0.77 0.28 0.00 16.41
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12/31/96 13.26 12.30 0.69 0.12 0.00 (0.83)
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12/31/95 10.67 13.26 0.83 0.16 0.00 34.74
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12/31/94 13.01 10.67 0.80 0.31 0.03 (9.41)
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Inception* -- 12/31/93 12.56 13.01 0.69 0.14 0.00 10.38+
====================================================================================================================================
Total $4.52 $1.38 $0.03
====================================================================================================================================
</TABLE>
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4 1998 Annual Report to Shareholders
<PAGE>
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Historical Performance -- Class Y Shares
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<TABLE>
<CAPTION>
Net Asset Value
-------------------------
Beginning End Income Capital Gain Return Total
Year Ended of Year of Year Dividends Distributions of Capital Returns(1)
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/98 $13.19 $13.11 $0.82 $0.37 $0.00 8.66%
- ------------------------------------------------------------------------------------------------------------------------------------
12/31/97 12.28 13.19 0.85 0.28 0.00 17.44
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Inception* -- 12/31/96 13.03 12.28 0.72 0.12 0.00 1.01+
====================================================================================================================================
Total $2.39 $0.77 $0.00
====================================================================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
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Average Annual Total Returns
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Without Sales Charges(1)
--------------------------------------
Class A Class B Class L Class Y
================================================================================
Year Ended 12/31/98 8.30% 7.72% 7.83% 8.66%
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Five Years Ended 12/31/98 9.23 8.67 8.72 N/A
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Ten Years Ended 12/31/98 N/A 10.95 N/A N/A
- --------------------------------------------------------------------------------
Inception* through 12/31/98 11.01 11.92 9.24 9.16
================================================================================
With Sales Charges(2)
--------------------------------------
Class A Class B Class L Class Y
================================================================================
Year Ended 12/31/98 3.43% 3.26% 5.80% 8.66%
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Five Years Ended 12/31/98 8.23 8.53 8.51 N/A
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Ten Years Ended 12/31/98 N/A 10.95 N/A N/A
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Inception* through 12/31/98 10.18 11.92 9.05 9.16
================================================================================
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Cumulative Total Returns
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Without Sales Charges(1)
================================================================================
Class A (Inception* through 12/31/98) 90.12%
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Class B (12/31/88 through 12/31/98) 182.69
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Class L (Inception* through 12/31/98) 67.68
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Class Y (Inception* through 12/31/98) 28.91
================================================================================
(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 and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum sales charge of 4.50% and 1.00%, respectively;
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 L shares also 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, L 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.
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Smith Barney Investment Grade Bond Fund 5
<PAGE>
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Smith Barney Investment Grade Bond Fund at a Glance (unaudited)
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Growth of $10,000 Invested in Class B Shares of the Smith Barney Investment
Grade Bond Fund vs. the Lehman Brothers Long-Term Corporate Bond Index & the
Lipper Corporate Debt A-Rated Average+
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December 1988 -- December 1998
[The following table was represented by a line chart in the printed material.]
<--- NEED PLOT POINTS
+ Hypothetical illustration of $10,000 invested in Class B shares on
December 31, 1988, assuming reinvestment of dividends and capital gains,
if any, at net asset value through December 31, 1998. 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 32
mutual funds as of December 31, 1998. 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.
Industry Diversification*
- --------------------------------------------------------------------------------
[The following table was represented by a line chart in the printed material.]
7.4% Aerospace & Defense
7.9% Airlines
10.8% Automotive
11.4% Banking
5.4% Beverages
3.8% Bio - Medical
5.5% Electronics/Computers
3.6% Insurance
19.9% Multimedia
3.6% Super National Entity
20.7% Other
* As a percentage of total corporate bonds and notes.
Summary of Investments by Combined Ratings
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Standard Percentage of
Moody's & Poor's Total Bonds & Notes
--------- ---------- ---------------------
Aaa AAA 3.8%
Aa AA 17.5
A A 46.9
Baa BBB 30.9
Ba BB 0.9
--------
100.0%
========
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6 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1998
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<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 93.7%
Aerospace & Defense -- 7.3%
$23,500,000 AA- Boeing Co., Debentures, 6.875% due 10/15/43 $24,351,875
2,000,000 A3* Lockheed Martin Corp., Debentures, 7.750% due 5/1/26 2,257,500
17,500,000 A3* Loral Corp., Debentures, 7.000% due 9/15/23 18,156,250
- ------------------------------------------------------------------------------------------------------------------------------------
44,765,625
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Airlines -- 7.8%
AMR Corp., Debentures:
12,500,000 BBB- 9.000% due 9/15/16 14,484,375
4,500,000 BBB- 9.880% due 6/15/20 5,675,625
Delta Air Lines, Inc., Debentures:
10,735,000 BBB- 9.000% due 5/15/16 12,170,806
5,000,000 BBB- 9.750% due 5/15/21 6,075,000
7,650,000 Baa3* United Airlines, Inc., Debentures, 9.750% due 8/15/21 9,581,625
- ------------------------------------------------------------------------------------------------------------------------------------
47,987,431
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Automotive -- 10.7%
20,000,000 A+ Chrysler Corp., Debentures, 7.450% due 2/1/97 23,050,000
19,400,000 A1* Ford Motor Co., Notes, 7.700% due 5/15/97 22,067,500
20,000,000 A General Motors Corp., Debentures, 6.750% due 5/1/28 20,750,000
- ------------------------------------------------------------------------------------------------------------------------------------
65,867,500
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Banking -- 11.3%
Bank One Corp., Debentures:
8,000,000 A1* 7.750% due 7/15/25 9,220,000
11,500,000 A1* 7.625% due 10/15/26 13,181,875
23,500,000 Aa3* NationsBank Corp., Debentures, 6.800% due 3/15/28 23,852,500
22,000,000 A Republic NY Corp., Debentures, 7.200% due 7/15/2097 23,017,500
- ------------------------------------------------------------------------------------------------------------------------------------
69,271,875
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Beverages -- 5.3%
8,500,000 A+ Anheuser Busch Cos. Inc., Debentures, 6.750% due 12/15/27 9,211,875
Coca Cola Enterprises Inc., Debentures:
3,000,000 A+ 6.750% due 1/15/38 3,120,000
19,000,000 A+ 7.000% due 5/15/2098 20,187,500
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32,519,375
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Bio-Medical -- 3.8%
19,000,000 A Amgen Inc., Debentures, 8.125% due 4/1/2097 23,132,500
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer Products -- 0.8%
6,000,000 BB+ Fruit of The Loom Corp., Debentures, 7.375% due 11/15/23 5,062,500
- ------------------------------------------------------------------------------------------------------------------------------------
Electronics/Computers -- 5.5%
21,000,000 A+ IBM Corp., Debentures, 7.125% due 12/1/2096 23,782,500
12,500,000 AA- Motorola Inc., Debentures, 5.220% due 10/1/2097 9,812,500
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33,595,000
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Finance -- 2.6%
16,000,000 AA- Merrill Lynch & Co., Debentures, 6.750% due 6/1/28 16,040,000
- ------------------------------------------------------------------------------------------------------------------------------------
Foods -- 3.1%
16,000,000 A- Ralston Purina Co., Debentures, 8.125% due 2/1/23 18,860,000
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</TABLE>
See Notes to Financial Statements.
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Smith Barney Investment Grade Bond Fund 7
<PAGE>
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Schedule of Investments (continued) December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING(a) SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C> <C>
Insurance -- 3.6%
$20,000,000 AA- American General Corp., Debentures, 7.500% due 7/15/25 $ 21,900,000
- ------------------------------------------------------------------------------------------------------------------------------------
Multimedia -- 19.7%
17,500,000 BBB- CBS Inc., Notes, 7.125% due 11/1/23 17,368,750
2,000,000 A- Cox Communications, Inc., Debentures, 6.800% due 8/1/28 2,050,000
20,000,000 BBB- News America Holdings Inc., Notes, 7.900% due 12/1/95 21,325,000
12,000,000 BBB- Paramount Communications, Inc., Sr. Debentures,
7.500% due 7/15/23 12,255,000
18,300,000 BBB- Seagrams Co., Ltd., Debentures, 6.875% due 9/1/23 16,721,625
2,500,000 BBB Time Warner Entertainment, Debentures, 8.375% due 7/15/33 3,112,500
Time Warner Inc., Debentures:
1,500,000 BBB 7.250% due 10/15/17 1,616,250
19,000,000 BBB 7.570% due 2/1/24 21,327,500
21,500,000 A1* Walt Disney Corp., Sr. Debentures, 7.550% due 7/15/93 25,047,500
- ------------------------------------------------------------------------------------------------------------------------------------
120,824,125
- ------------------------------------------------------------------------------------------------------------------------------------
Oil & Gas -- 1.6%
9,500,000 BBB+ Apache Corp., Debentures, 7.625% due 11/1/2096 9,690,000
- ------------------------------------------------------------------------------------------------------------------------------------
Publishing -- 2.4%
10,000,000 BBB Harcourt General Inc., Debentures, 7.300% due 8/1/2097 9,362,500
4,745,000 A+ Times Mirror Co., Debentures, 7.250% due 11/15/2096 5,166,120
- ------------------------------------------------------------------------------------------------------------------------------------
14,528,620
- ------------------------------------------------------------------------------------------------------------------------------------
Retail -- 0.9%
5,000,000 BBB+ Rite Aid Corp., Debentures, 7.700% due 2/15/27 5,437,500
- ------------------------------------------------------------------------------------------------------------------------------------
Super National Entity -- 3.5%
International Bank of Reconstruction and Development:
42,860,000 AAA Zero coupon bond to yield 7.845% due 7/15/29 7,393,350
90,000,000 AAA Zero coupon bond to yield 9.215% due 3/11/31 14,175,000
- ------------------------------------------------------------------------------------------------------------------------------------
21,568,350
- ------------------------------------------------------------------------------------------------------------------------------------
Telecommunications -- 1.8%
5,000,000 AA- GTE North Inc., Debentures, 5.650% due 11/15/08 5,037,500
6,000,000 A- Sprint Capital, Debentures, 6.875% due 11/15/28 6,270,000
- ------------------------------------------------------------------------------------------------------------------------------------
11,307,500
- ------------------------------------------------------------------------------------------------------------------------------------
Transportation -- 2.0%
10,500,000 BBB+ Norfolk Southern Corp., Debentures, 7.900% due 5/15/2097 12,193,125
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $525,161,802) 574,551,026
====================================================================================================================================
YANKEE BOND -- 0.3%
1,600,000 A+ Hydro-Quebec, Debentures, Series HE,
8.625% due 6/15/29 (Cost -- $1,436,445) 2,054,000
====================================================================================================================================
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 5.0%
10,000,000 U.S. Treasury Note, 4.750% due 11/15/08 10,077,800
17,500,000 U.S. Treasury Note, 5.500% due 8/15/28 18,342,100
2,000,000 U.S. Treasury Bond, 6.125% due 11/15/27 2,235,960
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES & OBLIGATIONS
(Cost -- $30,853,907) 30,655,860
====================================================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
====================================================================================================================================
<S> <C> <C> <C>
REPURCHASE AGREEMENT -- 1.0%
$6,106,000 Morgan Stanley Dean Witter & Co., 4.650% due 1/4/99;
Proceeds at maturity -- $6,109,155;
(Fully collateralized by U.S. Treasury Notes,
6.000% to 6.500% due 7/15/99 to 8/15/27;
Market value -- $6,256,583) (Cost -- $6,106,000) $ 6,106,000
====================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $563,558,154**) $613,366,886
====================================================================================================================================
</TABLE>
(a) All ratings are by Standard & Poor's Rating Services except those
identified by an asterisk (*) are rated by Moody's Investors Service, Inc.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 10 for definition of ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Investment Grade Bond Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited)
- --------------------------------------------------------------------------------
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Rating Services ("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 issues only in a
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 or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
Moody's Investors Service, Inc. ("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 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 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 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 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 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $563,558,154) $613,366,886
Cash 409
Interest receivable 10,618,156
Receivable for Fund shares sold 3,787,032
- -------------------------------------------------------------------------------------
Total Assets 627,772,483
- -------------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased 380,594
Advisory fees payable 238,924
Administration fees payable 103,183
Distribution fees payable 82,068
Accrued expenses 111,525
- -------------------------------------------------------------------------------------
Total Liabilities 916,294
- -------------------------------------------------------------------------------------
Total Net Assets $626,856,189
=====================================================================================
NET ASSETS:
Par value of capital shares $ 47,838
Capital paid in excess of par value 578,324,651
Overdistributed net investment income (2,060)
Accumulated net realized loss on investments (1,322,972)
Net unrealized appreciation of investments 49,808,732
- -------------------------------------------------------------------------------------
Total Net Assets $626,856,189
=====================================================================================
Shares Outstanding:
Class A 19,282,444
--------------------------------------------------------------------------------
Class B 19,826,536
--------------------------------------------------------------------------------
Class L 1,429,050
--------------------------------------------------------------------------------
Class Y 7,300,221
--------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $13.12
--------------------------------------------------------------------------------
Class B * $13.09
--------------------------------------------------------------------------------
Class L ** $13.07
--------------------------------------------------------------------------------
Class Y (and redemption price) $13.11
--------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) $13.74
--------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $13.20
=====================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if
shares are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Investment Grade Bond Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 39,790,644
- -------------------------------------------------------------------------------
EXPENSES:
Investment advisory fees (Note 2) 2,618,948
Distribution fees (Note 2) 2,574,925
Administration fees (Note 2) 1,158,123
Shareholder and system servicing fees 391,322
Shareholder communications 137,005
Registration fees 110,313
Directors' fees 54,998
Audit and legal 44,343
Custody 21,601
Pricing service fees 6,734
Other 17,835
- -------------------------------------------------------------------------------
Total Expenses 7,136,147
- -------------------------------------------------------------------------------
Net Investment Income 32,654,497
- -------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 182,418,531
Cost of securities sold 166,469,348
- -------------------------------------------------------------------------------
Net Realized Gain 15,949,183
- -------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 53,028,033
End of year 49,808,732
- -------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (3,219,301)
- -------------------------------------------------------------------------------
Net Gain on Investments 12,729,882
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 45,384,379
===============================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
====================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 32,654,497 $ 30,113,243
Net realized gain 15,949,183 490,877
Increase (decrease) in net unrealized appreciation (3,219,301) 46,515,710
- ----------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 45,384,379 77,119,830
- ----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (33,069,438) (30,120,161)
Net realized gains (17,337,072) (11,863,548)
- ----------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (50,406,510) (41,983,709)
- ----------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net proceeds from sale of shares 178,170,675 111,670,482
Net asset value of shares issued for reinvestment of dividends 30,877,496 26,895,416
Cost of shares reacquired (127,423,376) (112,679,564)
- ----------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 81,624,795 25,886,334
- ----------------------------------------------------------------------------------------------------
Increase in Net Assets 76,602,664 61,022,455
NET ASSETS:
Beginning of year 550,253,525 489,231,070
- ----------------------------------------------------------------------------------------------------
End of year* $626,856,189 $550,253,525
====================================================================================================
* Includes overdistributed net investment income of: $ (2,060) $ (14,263)
====================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Investment Grade Bond Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Investment Grade Bond Fund ("Portfolio"), a separate investment
fund of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland corporation,
is registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund consists of this
Portfolio and six other separate investment portfolios: Smith Barney Government
Securities Fund, Smith Barney Special Equities Fund, Smith Barney Contrarian
Fund (formerly known as Smith Barney Managed Growth Fund), Concert Peachtree
Growth Fund, Smith Barney Hansberger Global Value Fund and Smith Barney
Hansberger Global Small Cap Value Fund. The financial statements and financial
highlights for the other port folios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolio are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing price on such markets;
securities for which no sales price were reported are valued at bid price, or in
the absence of a recent bid price, at the bid equivalent obtained from one or
more of the major market makers; (c) securities that have a maturity of more
than 60 days are valued at prices based on market quotations for securities of
similar type, yield and maturity; (d) securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, which
approximates 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; (j) the character of income
and gains to be distributed are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles. At
December 31, 1998, reclassifications were made to the Portfolio's capital
accounts to reflect permanent book/tax differences and in come and gains
available for distributions under income tax regulations. In addition, a portion
of overdistributed net investment income and accumulated net realized loss
amounting to $427,144 and $2,575 was reclassified to paid-in capital. Net
investment income, net realized gains and net assets were not affected by this
change; and (k) estimates and assumptions are required to be made regarding
assets, liabilities and changes in net assets resulting from operations when
financial statements are prepared. Changes in the economic environment,
financial markets and any other parameters used in determining these estimates
could cause actual results to differ.
2. Investment Advisory Agreement, Administration Agreement and
Other Transactions
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as investment adviser to the Fund. The Portfolio pays MMC 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.
MMC 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.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to the
date, Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
- --------------------------------------------------------------------------------
14 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Fund's distributor. SSB, as well as certain other broker-dealers, continues to
sell Fund shares to the public as members of the selling group.
On June 12, 1998, the Portfolio's existing Class C shares were renamed as Class
L shares. Effective June 15, 1998, Class L shares are being sold at net asset
value plus a maximum initial sales charge of 1.00%. Class L shares also have a
1.00% contingent deferred sales charge ("CDSC"), which applies if redemption
occurs within the first year of purchase.
There is also a CDSC of 4.50% on Class B shares, which applies if redemption
occurs within one year from purchase. This CDSC declines by 0.50% the first year
after purchase and thereafter by 1.00% per year until no CDSC is incurred. In
addition, Class A shares also have a 1.00% CDSC, which applies if redemption
occurs within the first year of purchase. This CDSC only applies to those
purchases of Class A shares, which, when combined with current holdings of Class
A shares, equal or exceed $500,000 in the aggregate. These purchases do not
incur an initial sales charge.
For the year ended December 31, 1998, SSB received sales charges of
approximately $314,000 and $78,000 on sales of the Portfolio's Class A and L
shares, respectively. In addition, CDSCs paid to SSB were approximately:
Class A Class B Class L
================================================================================
CDSCs $20,000 $224,000 $5,000
================================================================================
Pursuant to a Distribution Plan, the Portfolio pays a service fee with respect
to Class A, B and L 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 L shares calculated at an annual
rate of 0.50% and 0.45% of the average daily net assets for each class,
respectively. For the year ended December 31, 1998, total Distribution Plan fees
incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $597,417 $1,886,202 $91,306
================================================================================
All officers and one Director of the Fund are employees of SSB.
3. Investments
During the year ended December 31, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $234,017,958
- --------------------------------------------------------------------------------
Sales 182,418,531
================================================================================
At December 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $51,537,799
Gross unrealized depreciation (1,729,067)
- --------------------------------------------------------------------------------
Net unrealized appreciation $49,808,732
================================================================================
4. Repurchase Agreements
The Portfolio purchases (and its custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Portfolio requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. Capital Shares
At December 31, 1998, 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. Effective June 12, 1998, the Portfolio adopted the renaming of existing
Class C shares as Class L shares.
- --------------------------------------------------------------------------------
Smith Barney Investment Grade Bond Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At December 31, 1998, total paid-in capital amounted to the following for each
class:
Class A Class B Class L Class Y
================================================================================
Total Paid-In Capital $221,565,742 $245,898,144 $18,329,377 $92,579,226
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
------------------------- -------------------------
Shares Amount Shares Amount
============================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 5,233,650 $ 69,950,340 2,018,307 $ 25,387,184
Shares issued on reinvestment 1,192,598 15,821,653 1,047,988 13,225,978
Shares redeemed (3,943,897) (52,610,416) (3,049,019) (37,795,554)
- --------------------------------------------------------------------------------------------
Net Increase 2,482,351 $ 33,161,577 17,276 $ 817,608
============================================================================================
Class B
Shares sold 4,929,844 $ 66,085,664 2,694,477 $ 33,815,305
Shares issued on reinvestment 1,063,022 14,079,056 1,037,967 13,118,499
Shares redeemed (5,064,349) (67,488,549) (5,862,166) (72,691,585)
- --------------------------------------------------------------------------------------------
Net Increase (Decrease) 928,517 $ 12,676,171 (2,129,722) $(25,757,781)
============================================================================================
Class L*
Shares sold 1,130,469 $ 15,179,652 356,734 $ 4,528,296
Shares issued on reinvestment 73,908 976,787 43,331 550,683
Shares redeemed (547,650) (7,324,411) (174,512) (2,188,857)
- --------------------------------------------------------------------------------------------
Net Increase 656,727 $ 8,832,028 225,553 $ 2,890,122
============================================================================================
Class Y
Shares sold 2,044,302 $ 26,955,019 3,776,693 $ 47,939,697
Shares issued on reinvestment -- -- 20 256
Shares redeemed -- -- (270) (3,568)
- --------------------------------------------------------------------------------------------
Net Increase 2,044,302 $ 26,955,019 3,776,443 $ 47,936,385
============================================================================================
</TABLE>
* On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
16 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1997 1996 1995(1) 1994(1)
============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.19 $12.27 $13.25 $10.67 $13.01
- ------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.77 0.80 0.80 0.83 0.74
Net realized and unrealized gain (loss) 0.29 1.20 (0.90) 2.80 (1.88)
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.06 2.00 (0.10) 3.63 (1.14)
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.76) (0.80) (0.76) (0.89) (0.86)
Net realized gains (0.37) (0.28) (0.12) (0.16) (0.31)
Capital -- -- -- -- (0.03)
- ------------------------------------------------------------------------------------------------------------
Total Distributions (1.13) (1.08) (0.88) (1.05) (1.20)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.12 $13.19 $12.27 $13.25 $10.67
- ------------------------------------------------------------------------------------------------------------
Total Return 8.30% 17.10% (0.47)% 35.29% (8.95)%
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $253 $222 $206 $226 $181
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.04% 1.02% 1.04% 1.11% 1.11%
Net investment income 5.73 6.43 6.63 7.02 7.35
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 32% 39% 48% 49% 18%
============================================================================================================
<CAPTION>
Class B Shares 1998(1) 1997 1996 1995(1) 1994(1)
============================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.19 $12.29 $13.25 $10.67 $13.01
- ------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.70 0.75 0.74 0.77 0.82
Net realized and unrealized gain (loss) 0.29 1.18 (0.90) 2.80 (2.02)
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.99 1.93 (0.16) 3.57 (1.20)
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.72) (0.75) (0.68) (0.83) (0.80)
Net realized gains (0.37) (0.28) (0.12) (0.16) (0.31)
Capital -- -- -- -- (0.03)
- ------------------------------------------------------------------------------------------------------------
Total Distributions (1.09) (1.03) (0.80) (0.99) (1.14)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.09 $13.19 $12.29 $13.25 $10.67
- ------------------------------------------------------------------------------------------------------------
Total Return 7.72% 16.44% (0.89)% 34.63% (9.41)%
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $260 $249 $258 $289 $221
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.53% 1.51% 1.54% 1.61% 1.57%
Net investment income 5.23 5.95 6.13 6.51 6.89
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 32% 39% 48% 49% 18%
============================================================================================================
</TABLE>
(1) 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.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Investment Grade Bond Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class L Shares(1) 1998(2) 1997 1996 1995(2) 1994(2)
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.18 $12.30 $13.26 $10.67 $13.01
- ----------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.70 0.72 0.75 0.78 0.75
Net realized and unrealized gain (loss) 0.30 1.21 (0.90) 2.80 (1.95)
- ----------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.00 1.93 (0.15) 3.58 (1.20)
- ----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.74) (0.77) (0.69) (0.83) (0.80)
Net realized gains (0.37) (0.28) (0.12) (0.16) (0.31)
Capital -- -- -- -- (0.03)
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions (1.11) (1.05) (0.81) (0.99) (1.14)
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.07 $13.18 $12.30 $13.26 $10.67
- ----------------------------------------------------------------------------------------------------------------------
Total Return 7.83% 16.41% (0.83)% 34.74% (9.41)%
- ----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $18,671 $10,182 $6,724 $3,769 $999
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.54% 1.49% 1.42% 1.56% 1.57%
Net investment income 5.22 5.93 6.28 6.55 6.89
- ----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 32% 39% 48% 49% 18%
======================================================================================================================
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(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.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
18 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class Y Shares 1998(1) 1997 1996(2)
======================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $13.19 $12.28 $13.03
- --------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.82 0.83 0.75
Net realized and unrealized gain (loss) 0.29 1.21 (0.66)
- --------------------------------------------------------------------------------------
Total Income From Operations 1.11 2.04 0.09
- --------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.82) (0.85) (0.72)
Net realized gains (0.37) (0.28) (0.12)
- --------------------------------------------------------------------------------------
Total Distributions (1.19) (1.13) (0.84)
- --------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.11 $13.19 $12.28
- --------------------------------------------------------------------------------------
Total Return 8.66% 17.44% 1.01%++
- --------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $95,708 $69,328 $18,174
- --------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.70% 0.69% 0.72%+
Net investment income 6.07 6.63 7.34+
- --------------------------------------------------------------------------------------
Portfolio Turnover Rate 32% 39% 48%
======================================================================================
</TABLE>
(1) 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.
(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.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes, the Fund hereby designates for the fiscal year ended
December 31, 1998:
o Total long-term capital gain distributions paid of $16,866,568.
A total of 4.80% of the ordinary dividends paid by the Fund from net investment
income are derived from Federal obligations and may be exempt from taxation at
the state level.
- --------------------------------------------------------------------------------
Smith Barney Investment Grade Bond Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Smith Barney Investment Funds Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Smith Barney Investment Grade Bond Fund of
Smith Barney Investment Funds Inc. as of December 31, 1998, the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended and financial
highlights for each of the years in the four-year period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial
highlights for the year ended December 31, 1994 were audited by other auditors
whose report thereon, dated February 10, 1995, expressed an unqualified opinion
on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Smith
Barney Investment Grade Bond Fund of Smith Barney Investment Funds Inc. as of
December 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the years in the two-year period then
ended and its financial highlights for each of the years in the four-year period
then ended, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
February 8, 1999
- --------------------------------------------------------------------------------
20 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On March 9, 1998, a special meeting of shareholders of the Fund was held for the
purpose of voting on the following matters:
1. To elect Directors of the Fund, which includes all Portfolios; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
<TABLE>
<CAPTION>
Percentage Percentage
Shares Voted of Shares Shares Voted of Shares
Name of Directors For Voted Against Voted
==========================================================================================
<S> <C> <C> <C> <C>
Paul R. Ades 110,457,871.145 96.547% 3,950,761.251 3.453%
Herbert Barg 110,299,351.998 96.408 4,109,280.398 3.592
Dwight B. Crane 110,443,765.891 96.534 3,964,866.505 3.466
Frank Hubbard 110,456,573.292 96.546 3,952,059.104 3.454
Jerome Miller 110,457,232.652 96.546 3,951,399.744 3.454
Ken Miller 110,449,857.597 96.540 3,958,774.799 3.460
Heath B. McLendon 110,401,492.247 96.498 4,007,140.149 3.502
==========================================================================================
</TABLE>
Proposal 2 requested that shareholders approve certain changes to the
fundamental policies of the Portfolio in order to modernize them in view of
certain regulatory, business or industry developments that have occurred since
original adoption of these policies by the Portfolio. The following chart
demonstrates that all proposals were approved by shareholders.
Please note that "M" indicates a modification of the policy; "E" indicates the
elimination of the policy; and "R" indicates the reclassification of the policy
from fundamental (which would require shareholder approval to change) to
non-fundamental (which can be changed by a vote of the Board of Directors).
================================================================================
M Diversification Approved
- --------------------------------------------------------------------------------
M Industry Concentration Approved
- --------------------------------------------------------------------------------
M Borrowing Approved
- --------------------------------------------------------------------------------
M Lending Approved
- --------------------------------------------------------------------------------
R Margin and Short-Sales Approved
- --------------------------------------------------------------------------------
M Real Estate Approved
- --------------------------------------------------------------------------------
R Restricted and Illiquid Securities Approved
- --------------------------------------------------------------------------------
R Unseasoned Issues Approved
- --------------------------------------------------------------------------------
E 5% Ownership of Certain Securities Approved
- --------------------------------------------------------------------------------
R Purchases of Securities of Other Investment Comapnies Approved
- --------------------------------------------------------------------------------
R Exercising Control or Management Approved
- --------------------------------------------------------------------------------
R Investment in Oil, Gas and Mineral Exploration Approved
- --------------------------------------------------------------------------------
E Limiting Participation in Joint Trading Accounts Approved
- --------------------------------------------------------------------------------
E Limiting Investments to Enumerated Instruments Approved
- --------------------------------------------------------------------------------
R Puts, Calls and Combinations Thereof Approved
================================================================================
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Portfolio on all proposals.
<TABLE>
<CAPTION>
Percentage Percentage Percentage
Shares Voted of Shares Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Abstained
======================================================================================
<S> <C> <C> <C> <C> <C>
19,913,197.889 90.046% 500,352.756 2.262% 1,700,974.037 7.692%
======================================================================================
</TABLE>
- --------------------------------------------------------------------------------
Smith Barney Investment Grade Bond Fund 21
<PAGE>
Smith Barney
Investment Grade
Bond Fund
Directors
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank G. Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
John F. White, Emeritus
Officers
Heath B. McLendon
President and Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
James E. Conroy
Vice President and Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Adviser
Mutual Management Corp.
Distributor
CFBDS, 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.
SALOMON SMITH BARNEY
- ---------------------------
A member of citigroup[LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney
Investment Grade Bond Fund
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD0317 2/99
<PAGE>
[PHOTO]
Concert
Peachtree
Growth Fund
[GRAPHIC] -------------
ANNUAL REPORT
-------------
December 31, 1998
Smith Barney Mutual Funds
[LOGO] Investing for your future
Every day. (R)
<PAGE>
Concert Peachtree
Growth Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Concert Peachtree Growth Fund seeks capital appreciation through investments
in securities believed to have above-average potential for capital appreciation.
Concert Peachtree Growth Fund
Average Annual Total Returns
December 31, 1998
Without Sales Charges(1)
-------------------------------------------------
Class A(2) Class B(2) Class L(3)
================================================================================
One-Year 33.13% 32.11% 32.17%
- --------------------------------------------------------------------------------
Since Inception++ 18.83 17.93 16.85
================================================================================
With Sales Charges(4)
-------------------------------------------------
Class A(2) Class B(2) Class L(3)
================================================================================
One-Year 26.43% 27.11% 29.89%
- --------------------------------------------------------------------------------
Since Inception++ 17.11 17.55 16.51
================================================================================
(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 and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) 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.
(3) On June 12, 1998, Class C shares were renamed Class L shares.
(4) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charge of 5.00% and 1.00%
respectively; and Class B shares reflect the deduction of a 5.00% CDSC,
which applies if shares are redeemed within one year from purchase.
Thereafter, the CDSC declines by 1.00% per year until no CDSC is incurred.
Class L 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.
++ Inception date for Class A and B shares is July 3, 1995. Inception date
for Class L shares is August 8, 1995.
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
Our strategy for managing the Concert Peachtree Growth Fund in 1999 will
continue to be the same as in 1998. Specifically, we will keep cash equivalents
at a minimum and invest in companies with above-average earnings potential and
reasonable valuations. Currently, we are positive on the earnings prospects for
companies in the portfolio. Valuations for some of our holdings bear watching,
as many of these stocks have appreciated considerably relative to growth in both
earnings and cash flow.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A CPGFA
Class B CPGFB
Class L CPGFL
- --------------------------------------------------------------------------------
WHAT'S INSIDE
- --------------------------------------------------------------------------------
Shareholder Letter ....................................................... 1
Historical Performance ................................................... 3
Concert Peachtree Growth Fund
at a Glance .............................................................. 5
Schedule of Investments .................................................. 6
Statement of Assets and Liabilities ...................................... 9
Statement of Operations .................................................. 10
Statements of Changes in Net Assets ...................................... 11
Notes to Financial Statements ............................................ 12
Financial Highlights ..................................................... 16
Independent Auditors' Report ............................................. 18
Additional Shareholder Information ....................................... 19
Tax Information .......................................................... 20
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO] [PHOTO]
Heath B. Dennis A.
McLendon Johnson, CFA
Chairman President and
Chief Investment Officer
Peachtree Asset
Management
Dear Shareholder:
We are pleased to present the annual report for Concert Peachtree Growth Fund
("Fund") for the year ended December 31, 1998. In this report, we summarize the
period's prevailing economic and market conditions and outline our portfolio
strategy. A detailed summary of performance and current holdings can be found in
the appropriate sections that follow. We hope you find this report to be
informative and useful.
A Classic Investor Series Fund
The Concert Peachtree Growth Fund is part of the Classic Investor Series of
Smith Barney Mutual Funds. The Classic Investor Series funds are mutual funds
whose investment decisions are determined by experienced portfolio managers,
based on each fund's investment objectives and guidelines. Funds in the Smith
Barney Classic Investor Series invest across asset classes and sectors,
utilizing a range of strategies in order to achieve their objectives.
Performance Update
For the year ended December 31, 1998, the Fund's Class A, B and L shares,
without sales charges, were 33.13%, 32.11% and 32.17%, respectively. In
comparison, the return for the same time period for the Russell 1000 Growth
Index was 38.71%. (The Russell 1000 Growth Index contains 1,000 of the largest
companies in the Russell 3000 Index with higher forecasted growth values and
higher price-to-book ratios. Price-to-book ratios show the price of a stock
compared to the difference between a company's assets and liabilities.) Strict
adherence to our investment discipline combined with strong fundamental analysis
by our research team contributed to the Fund's favorable results. It should be
noted that these results were produced during a year filled with financial
market volatility both here and abroad, economic problems in several overseas
markets, military confrontations and political instability.
Investment Strategy
Our investing approach centers on active management strategies to give our
shareholders the earning power of a wide range of stocks. Our main goal is to
deliver superior long-term performance and our best investment results are
usually achieved over a full market cycle.
In our 1997 shareholder letter, we noted that our active management investment
approach and philosophy involves remaining fully invested. During 1998, minimal
cash positions in the Fund's portfolio allowed higher returns from our stock
holdings and that had a positive effect on the Fund's performance during the
reporting period.
We maintained an above-market weighted position in technology stocks that
include Microsoft, Netscape, Sun Microsystems, and Apple Computer. While
technology stocks in general were volatile during the Fund's fiscal year, our
stance had a favorable impact on performance. We increased our weighting in
telephone and related stocks, which also contributed to your Fund's favorable
results. Stock holdings in this area like AT&T, MCI-WorldCom and Lucent
Technologies performed very well. A diverse group of stocks such as
Harley-Davidson, Tyco International, General Electric and HBO &
- --------------------------------------------------------------------------------
Concert Peachtree Growth Fund 1
<PAGE>
Company also contributed to your Fund's favorable performance.
Conversely, we maintained a favorable stance towards financial stocks during
1998 and did not receive all of the benefits we expected. However, we think the
prospects for financial services stocks continues to be positive.
Market Outlook
Our strategy for managing the Concert Peachtree Growth Fund in 1999 will
continue to be the same as in 1998. Specifically, we will keep cash equivalents
at a minimum and invest in companies with above-average earnings potential and
reasonable valuations. Currently, we are positive on the earnings prospects for
companies in the portfolio. Valuations for some of our holdings bear watching,
as many of these stocks have appreciated considerably relative to growth in both
earnings and cash flow. We will therefore continue to seek out new investment
opportunities. We expect new investment ideas will be uncovered in segments of
the market that should experience a rebound in business in 1999 or be related to
a turnaround in a particular business or a specific company.
We anticipate more market volatility in 1999, given questions surrounding the
outlook for corporate profits as well as uncertainty surrounding many economic
and political conditions around the world. Near-term, volatility could be
exaggerated by the surge in stock prices and valuations during the last four
months of 1998. Under such conditions, stock selection should continue to be a
key determinant of performance as was the case in 1998. We believe that our
disciplined investment approach and active management of the Fund's portfolio
should allow us to continue to produce the competitive performance results that
you expect from your investment.
On a more somber note, we report with much sadness the passing of Emeritus
Director Allan R. Johnson on November 26, 1998. Allan made many valuable
contributions to the Board and the Fund during his tenure and he will be missed.
Thank you for your continuing vote of confidence in the Concert Peachtree Growth
Fund. We encourage you to visit our Web site at www.smithbarney.com. We look
forward to continuing to help you pursue your financial goals.
Respectfully submitted,
/s/ Heath B. McLendon /s/ Dennis A. Johnson
Heath B. McLendon Dennis A. Johnson, CFA
Chairman President and
Chief Investment Officer,
Peachtree Asset Management
January 19, 1999
- --------------------------------------------------------------------------------
2 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/98 $ 13.41 $ 17.71 $ 0.00 $ 0.13 33.13%
- --------------------------------------------------------------------------------
12/31/97 13.80 13.41 0.00 1.07 5.18
- --------------------------------------------------------------------------------
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 $ 4.39
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/98 $ 13.24 $ 17.35 $ 0.00 $ 0.13 32.11%
- --------------------------------------------------------------------------------
12/31/97 13.74 13.24 0.00 1.07 4.40
- --------------------------------------------------------------------------------
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 $ 4.39
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/98 $ 13.28 $ 17.41 $ 0.00 $ 0.13 32.17%
- --------------------------------------------------------------------------------
12/31/97 13.78 13.28 0.00 1.07 4.38
- --------------------------------------------------------------------------------
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 $ 4.39
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
Net Asset Value
---------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/98 $ 13.42 $ 17.79 $ 0.00 $ 0.13 33.62%
- --------------------------------------------------------------------------------
Inception*-- 12/31/97 14.86 13.42 0.00 1.07 (2.25)+
================================================================================
Total $ 0.00 $ 1.20
================================================================================
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
Concert Peachtree Growth Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Average Annual Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
------------------------------------------
Class A(2) Class B(2) Class L Class Y
================================================================================
Year Ended 12/31/98 33.13% 32.11% 32.17% 33.62%
- --------------------------------------------------------------------------------
Inception* through 12/31/98 18.83 17.93 16.85 24.68
================================================================================
With Sales Charges(3)
------------------------------------------
Class A(2) Class B(2) Class L Class Y
================================================================================
Year Ended 12/31/98 26.43% 27.11% 29.89% 33.62%
- --------------------------------------------------------------------------------
Inception* through 12/31/98 17.11 17.55 16.51 24.68
- --------------------------------------------------------------------------------
Cumulative Total Returns
- --------------------------------------------------------------------------------
Without Sales Charges(1)
================================================================================
Class A (May 3, 1994 through 12/31/98)(2) 82.88%
- --------------------------------------------------------------------------------
Class B (May 3, 1994 through 12/31/98)(2) 78.09
- --------------------------------------------------------------------------------
Class L (Inception* through 12/31/98) 69.79
- --------------------------------------------------------------------------------
Class Y (Inception* through 12/31/98) 30.62
================================================================================
(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 and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Performance calculations for Class A and B shares 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.
(3) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and Class L shares reflect
the deduction of the maximum initial sales charge of 5.00% and 1.00%,
respectively; Class B shares reflect the deduction of a 5.00% CDSC, which
applies if shares are redeemed within one year from purchase. Thereafter,
the CDSC declines by 1.00% per year until no CDSC is incurred. Class L
shares also 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, L and Y shares are July 3, 1995, July 3,
1995, August 8, 1995 and October 15, 1997, respectively.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
4 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Concert Peachtree Growth Fund at a Glance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A Shares and Class B Shares of the Concert
Peachtree Growth Fund vs. Russell 1000 Growth Index and Russell 2000 Index+
- --------------------------------------------------------------------------------
May 1994--December 1998
[GRAPHIC]
Concert Peachtree
Growth Fund Growth Fund\r-- Class A Shares Concert Peachtree
Class B Shares Russell 1000 Growth Index Russell 2000 Index
May 2\r94 9,501 10,000 10,000 10000
Dec.\r94 9606 9619 10688 10027
Dec.\r95 12576 12744 14663 12880
Dec.\r96 14331 14568 18053 15005
Dec.\r97 15074 15322 23557 18361
Dec.\r98 17378 17809 32674 17893
+ Hypothetical illustration of $10,000 invested in Class A and 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 deduction of the maximum 5.00% sales charge at the time of
investment for Class A shares and reinvestment of dividends and capital
gain, if any, at net asset value through December 31, 1998. (Performance
calculations include the historical return information related to Common
Sense for the period from May 3, 1994 through June 30, 1995). The Russell
2000 Index is composed of the 2000 smallest companies in the Russell 3000
Index. The Russell 3000 Index is composed of 3,000 of the largest U.S.
companies by market capitalization. The Russell 1000 Growth Index is a
capitalization weighted total return index which is comprised of 1,000 of
the largest capitalized U.S. domiciled companies with a
greater-than-average growth orientation whose common stock is traded in
the United States on either the New York Stock Exchange, American Stock
Exchange or Nasdaq. The indexes are unmanaged and are 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 and 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 values may be more or less than the original cost. No
adjustment has been made for shareholder tax liability on dividends or
capital gains.
Industry Diversification of Common Stock*
- --------------------------------------------------------------------------------
Banking 11.6%
Computer Software & Hardware 21.3%
Consumer Products 3.2%
Diversified Manufacturing 7.6%
Drugs/Healthcare 3.8%
Electronics/Semi-conductor 2.9%
Healthcare 5.5%
Insurance 4.2%
Retail 4.2%
Telecommunications 6.3%
Other 29.4%
- --------------------------------------------------------------------------------
Top Ten Holdings*
- --------------------------------------------------------------------------------
1.Microsoft Corp. 3.3%
- --------------------------------------------------------------------------------
2.Tyco International Ltd. 3.0
- --------------------------------------------------------------------------------
3.Compuware Corp. 3.0
- --------------------------------------------------------------------------------
4.Intel Corp. 2.9
- --------------------------------------------------------------------------------
5.Qwest Communications International Inc. 2.9
- --------------------------------------------------------------------------------
6.Sun Microsystems Inc. 2.8
- --------------------------------------------------------------------------------
7.Bristol-Myers Squibb Co. 2.8
- --------------------------------------------------------------------------------
8.General Electric Co. 2.8
- --------------------------------------------------------------------------------
9.Netscape Communications Corp. 2.7
- --------------------------------------------------------------------------------
10. 3com Corp. 2.7
- --------------------------------------------------------------------------------
* As a percentage of total common stock.
- --------------------------------------------------------------------------------
Concert Peachtree Growth Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 99.5%
Advertising -- 2.1%
120,000 Omnicom Group, Inc.*+ $ 6,960,000
- --------------------------------------------------------------------------------
Automotive-- 2.5%
178,000 Harley Davidson, Inc.*+ 8,432,750
- --------------------------------------------------------------------------------
Banking -- 11.6%
147,500 AmSouth Bancorporation*+ 6,729,688
68,000 Chase Manhattan Corp.+ 4,628,250
80,000 Comerica, Inc.+ 5,455,000
118,125 Commerce Bancshares Inc.+ 5,020,313
119,500 First American Bank of Tennessee Corp.+ 5,302,812
115,000 Fleet Financial Group, Inc.+ 5,139,062
40,950 MBNA Corp.*+ 1,021,191
71,000 Suntrust Banks, Inc.+ 5,431,500
- --------------------------------------------------------------------------------
38,727,816
- --------------------------------------------------------------------------------
Biotechnology -- 1.5%
161,000 Mylan Laboratories Inc.*+ 5,071,500
- --------------------------------------------------------------------------------
Beverages -- 1.8%
150,000 Pepsico, Inc.+ 6,140,625
- --------------------------------------------------------------------------------
Brewers -- 2.0%
100,000 Anheuser-Busch Cos., Inc.+ 6,562,500
- --------------------------------------------------------------------------------
Broadcast/TV/Cable/Radio -- 1.8%
125,000 Chancellor Media Corp., Class A Shares 5,984,375
- --------------------------------------------------------------------------------
Computer Software & Hardware -- 21.3%
200,000 Apple Computer, Inc.* 8,187,500
185,000 Compaq Computer Corp.+ 7,758,437
125,500 Compuware Corp. 9,804,688
79,000 Microsoft Corp. 10,956,312
150,000 Netscape Communications Corp.* 9,112,500
160,000 Oracle Systems Corp. 6,900,000
110,000 Sun Microsystems Inc. 9,418,750
200,000 3com Corp. 8,962,500
- --------------------------------------------------------------------------------
71,100,687
- --------------------------------------------------------------------------------
Consumer Products -- 3.2%
57,000 Colgate Palmolive Co.+ 5,293,875
57,000 Procter & Gamble Co.+ 5,204,813
- --------------------------------------------------------------------------------
10,498,688
- --------------------------------------------------------------------------------
Diversified Manufacturing -- 7.6%
199,500 Crane Co.+ 6,022,406
90,500 General Electric Co.+ 9,236,656
133,000 Tyco International Ltd.*+ 10,033,187
- --------------------------------------------------------------------------------
25,292,249
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
6 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Drugs/Healthcare -- 3.8%
75,000 Eli Lilly & Co.+ $ 6,665,625
80,000 Warner-Lambert Co.+ 6,015,000
- --------------------------------------------------------------------------------
12,680,625
- --------------------------------------------------------------------------------
Electronics/Semi-conductor -- 2.9%
81,000 Intel Corp.+ 9,603,563
- --------------------------------------------------------------------------------
Foods -- 1.5%
66,000 General Mills, Inc.+ 5,131,500
- --------------------------------------------------------------------------------
Healthcare -- 5.5%
70,300 Bristol-Myers Squibb Co.+ 9,407,019
160,000 Schering-Plough Corp.+ 8,840,000
- --------------------------------------------------------------------------------
18,247,019
- --------------------------------------------------------------------------------
Healthcare Diversified -- 1.8%
140,000 Becton, Dickinson & Co.+ 5,976,250
- --------------------------------------------------------------------------------
Hospitals Supplies/Services -- 2.2%
150,000 Abbott Laboratories+ 7,350,000
- --------------------------------------------------------------------------------
Insurance -- 4.2%
158,000 AFLAC Inc.+ 6,952,000
94,500 Providian Financial Corp.+ 7,087,500
- --------------------------------------------------------------------------------
14,039,500
- --------------------------------------------------------------------------------
Medical Equipment -- 1.6%
72,000 Medtronic Inc.+ 5,346,000
- --------------------------------------------------------------------------------
Medical Products/Supplies -- 1.9%
100,000 Baxter International Inc.+ 6,431,250
- --------------------------------------------------------------------------------
Recreation -- 2.0%
142,000 Carnival Corp.+ 6,816,000
- --------------------------------------------------------------------------------
Retail -- 4.2%
200,000 Bed Bath & Beyond Inc. 6,825,000
116,000 Home Depot, Inc.+ 7,097,750
- --------------------------------------------------------------------------------
13,922,750
- --------------------------------------------------------------------------------
Telecommunications -- 6.3%
90,000 American Telephone and Telegraph Corp.+ 6,772,500
94,650 Century Telephone Enterprises Inc.+ 6,388,875
72,000 Lucent Technologies, Inc.+ 7,920,000
- --------------------------------------------------------------------------------
21,081,375
- --------------------------------------------------------------------------------
Telephone -- 2.6%
121,000 MCI Worldcom, Inc. 8,681,750
- --------------------------------------------------------------------------------
Television -- 2.9%
191,000 Qwest Communications International Inc. 9,550,000
- --------------------------------------------------------------------------------
Wireless Equipment -- 0.7%
522,000 Paging Network, Inc. 2,446,875
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost-- $251,049,393) 332,075,647
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Concert Peachtree Growth Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1998
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT-- 0.5%
$1,616,000 Morgan Stanley Dean Witter & Co., 4.650% due
1/4/99; Proceeds at maturity -- $1,616,835;
(Fully collateralized by U.S. Treasury Notes
and Bonds, 6.000% to 6.500% due 7/15/99 to
8/15/27; Market value -- $1,655,695) (Cost --
$1,616,000) $ 1,616,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $252,665,393**) $333,691,647
- --------------------------------------------------------------------------------
+ Non-income producing security.
* A portion of this security is on loan (See Note 6 )
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $252,665,393) $333,691,647
Cash 177
Collateral for securities loaned (Note 6) 43,530,216
Receivable for Fund shares sold 392,222
Dividends and interest receivable 261,989
- --------------------------------------------------------------------------------
Total Assets 377,876,251
- --------------------------------------------------------------------------------
LIABILITIES:
Payable for securities loaned (Note 6) 43,530,216
Payable for fund shares purchased 474,680
Management fees payable 257,946
Accrued expenses 71,074
- --------------------------------------------------------------------------------
Total Liabilities 44,333,916
- --------------------------------------------------------------------------------
Total Net Assets $333,542,335
================================================================================
NET ASSETS:
Par value of capital shares $ 18,854
Capital paid in excess of par value 249,476,508
Accumulated net investment loss (920)
Accumulated net realized gain from security transactions 3,021,639
Net unrealized appreciation of investments 81,026,254
- --------------------------------------------------------------------------------
Total Net Assets $333,542,335
================================================================================
Shares Outstanding:
Class A 4,895,280
-----------------------------------------------------------------------------
Class B 3,404,171
-----------------------------------------------------------------------------
Class L 12,759
-----------------------------------------------------------------------------
Class Y 10,541,684
-----------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $17.71
-----------------------------------------------------------------------------
Class B * $17.35
-----------------------------------------------------------------------------
Class L ** $17.41
-----------------------------------------------------------------------------
Class Y (and redemption price) $17.79
-----------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset value
per share) $18.64
-----------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value
per share) $17.59
================================================================================
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if
shares are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Concert Peachtree Growth Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 2,253,239
Interest 221,377
- --------------------------------------------------------------------------------
Total Investment Income 2,474,616
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 2,644,062
Distribution fees (Note 2) 651,358
Shareholder and system servicing fees 101,677
Registration fees 91,250
Shareholder communications 72,754
Custody 29,992
Directors' fees 21,195
Audit and legal 20,418
Other 2,500
- --------------------------------------------------------------------------------
Total Expenses 3,635,206
- --------------------------------------------------------------------------------
Net Investment Loss (1,160,590)
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 243,557,359
Cost of securities sold 235,858,734
- --------------------------------------------------------------------------------
Net Realized Gain 7,698,625
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 5,740,372
End of year 81,026,254
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 75,285,882
- --------------------------------------------------------------------------------
Net Gain on Investments 82,984,507
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 81,823,917
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
===================================================================================================
OPERATIONS:
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income (loss) $ (1,160,590) $ 17,007
Net realized gain 7,698,625 7,329,771
Increase in net unrealized appreciation 75,285,882 583,993
- ---------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 81,823,917 7,930,771
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- --
Net realized gains (2,434,019) (11,559,383)
- ---------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (2,434,019) (11,559,383)
- ---------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 55,639,704 133,291,179
Net asset value of shares issued for reinvestment of dividends 1,067,774 8,286,604
Cost of shares reacquired (27,622,553) (28,383,356)
- ---------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 29,084,925 113,194,427
- ---------------------------------------------------------------------------------------------------
Increase in Net Assets 108,474,823 109,565,815
NET ASSETS:
Beginning of year 225,067,512 115,501,697
- ---------------------------------------------------------------------------------------------------
End of year* $ 333,542,335 $ 225,067,512
===================================================================================================
* Includes accumulated net investment loss of: $ (920) $ (4,734)
===================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Concert Peachtree Growth Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Concert Peachtree Growth Fund ("Portfolio"), a separate investment fund of
the Smith Barney Investment Funds Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund consists of this
Portfolio and six other separate investment portfolios: Smith Barney Investment
Grade Bond Fund, Smith Barney Special Equities Fund, Smith Barney Contrarian
Fund, Smith Barney Government Securities Fund, Smith Barney Hansberger Global
Value Fund, Smith Barney Hansberger Global Small Cap Value Fund and Smith Barney
Small Cap Value Fund. The financial statements and financial highlights for the
other portfolios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolio are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing price on such markets;
securities traded in the over-the-counter market and listed securities for which
no sales price were reported are valued at bid price, or in the absence of a
recent bid price, at the bid equivalent obtained from one or more of the major
market makers; (c) securities for which market quotations are not available will
be valued in good faith at fair value by or under the direction of the Board of
Trustees; (d) 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; (e) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates value; (f)
dividend income is recorded on ex-dividend date and interest income is recorded
on an accrual basis; (g) dividends and distributions to shareholders are
recorded on the ex-dividend date; (h) gains or losses on the sale of securities
are calculated using the specific identification method; (i) 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; (j) direct expenses
are charged to each class; management fees and general portfolio expenses are
allocated on the basis of relative net assets; (k) 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; (l) 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, 1998,
reclassifications were made to the Portfolio's capital accounts to reflect
permanent book/tax differences and income and gains available for distributions
under income tax regulations. Net investment income, net realized gains and net
assets were not affected by this change; and (m) 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
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as investment manager of the Fund. Effective May 1, 1998,
the Portfolio pays MMC a management fee calculated at an annual rate of 1.00% of
the average
- --------------------------------------------------------------------------------
12 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
daily net assets up to $250 million and 0.85% of the average daily net assets in
excess of $250 million. Prior to May 1, 1998, the Portfolio paid a management
fee of 1.00% on average daily net assets. This fee is calculated daily and paid
monthly.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to that
date Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well as certain other broker-dealers, continues to
sell Fund shares to the public as a member of the selling group.
On June 12, 1998, the Fund's existing Class C shares were renamed as Class L
shares. Effective June 15, 1998, Class L shares are being sold at net asset
value plus a maximum initial sales charge of 1.00%. Class L shares also have a
1.00% contingent deferred sales charge ("CDSC"), which applies if redemption
occurs within the first year of purchase.
There is also a 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 CSDC is incurred. In addition, Class A shares also have a
1.00% CDSC, which applies if redemption occurs within the first year of
purchase. This CDSC only applies to those purchases of Class A shares, which,
when combined with current holdings of Class A shares, equal or exceed $500,000
in the aggregate. These purchases do not incur an initial sales charge.
For the year ended December 31, 1998, SSB received sales charges of
approximately $4,000 on Class A shares. In addition, CDSCs paid to SSB were
approximately $6,000 on Class B shares.
Pursuant to a Distribution Plan, the Portfolio pays a service fee with respect
to Class A, B and L 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 L shares calculated at an annual
rate of 0.75% of the average daily net assets of each class.
For the year ended December 31, 1998, total Distribution Plan fees incurred by
the Portfolio were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $179,750 $469,725 $1,883
================================================================================
All officers and one Director of the Fund are employees of SSB.
3. Investments
During the year ended December 31, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $275,146,924
- --------------------------------------------------------------------------------
Sales 243,557,359
================================================================================
At December 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 85,435,708
Gross unrealized depreciation (4,409,454)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 81,026,254
================================================================================
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. Option 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
- --------------------------------------------------------------------------------
Concert Peachtree Growth Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 underlying security and the proceeds
from such sale will be decreased by the premium originally paid. When the
Portfolio exercises a call option, the cost of the security which the Portfolio
purchases upon exercise will be increased by the premium originally paid.
At December 31, 1998, the Portfolio had no purchased call or put 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
depending upon whether the cost of the closing transaction is greater or less
than the premium originally received, 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.
During the year ended December 31, 1998, the Portfolio did not write any call or
put options.
6. 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 depending on the
type of securities loaned. The custodian establishes and maintains the
collateral in a segregated account. The Portfolio maintains exposure for the
risk of any losses in the investment of amounts received as collateral.
At December 31, 1998, the Portfolio loaned common stocks having a value of
approximately $42,975,846 and holds the following collateral for loaned
securities:
Security Description Value
================================================================================
Time Deposits:
Bank Brussels Lambert, 5.500% due 1/4/99 $25,028,045
Rabobank Nederland, 7.750% due 1/4/99 4,213,431
Skandinaviska Enskilda Banken,
8.000% due 1/4/99 3,964,839
Societe Generale, 5.125% due 1/4/99 6,488,097
Suntrust Bank, 5.000% due 1/4/99 955,549
Repurchase Agreements:
J.P. Morgan Securities, 5.000% due 1/4/99 2,880,255
- --------------------------------------------------------------------------------
Total $43,530,216
================================================================================
For the year ended December 31, 1998, securities lending income earned was
$37,824.
- --------------------------------------------------------------------------------
14 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
7. Capital Shares
At December 31, 1998, 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. Effective June 12, 1998, the Portfolio adopted the renaming of existing
Class C shares as Class L shares.
At December 31, 1998, total paid-in capital amounted to the following for each
class:
Class A Class B Class L Class Y
- --------------------------------------------------------------------------------
Total Paid-in Capital $61,248,034 $44,339,507 $180,917 $143,726,904
- --------------------------------------------------------------------------------
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997*
---------------------- ----------------------
Shares Amount Shares Amount
=================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 1,041,557 $ 15,731,753 823,568 $ 11,212,798
Shares issued on reinvestment 38,891 629,547 392,203 5,090,795
Shares redeemed (1,209,054) (18,044,902) (1,422,997) (19,747,407)
- -------------------------------------------------------------------------------------------------
Net Decrease (128,606) $ (1,683,602) (207,226) $ (3,443,814)
=================================================================================================
Class B
Shares sold 840,003 $ 12,333,600 412,466 $ 5,613,217
Shares issued on reinvestment 27,496 436,622 248,022 3,182,124
Shares redeemed (648,885) (9,491,411) (615,046) (8,397,187)
- -------------------------------------------------------------------------------------------------
Net Increase 218,614 $ 3,278,811 45,442 $ 398,154
=================================================================================================
Class L+
Shares sold 3,297 $ 50,922 6,939 $ 94,859
Shares issued on reinvestment 101 1,605 1,063 13,685
Shares redeemed (5,954) (86,240) (5,306) (71,932)
- -------------------------------------------------------------------------------------------------
Net Increase (Decrease) (2,556) $ (33,713) 2,696 $ 36,612
=================================================================================================
Class Y
Shares sold 1,943,719 $ 27,523,429 8,609,967 $ 116,370,305
Shares issued on reinvestment -- -- -- --
Shares redeemed -- -- (12,002) (166,830)
- -------------------------------------------------------------------------------------------------
Net Increase 1,943,719 $ 27,523,429 8,597,965 $ 116,203,475
=================================================================================================
</TABLE>
* Transactions for Class Y shares are for the period from October 15, 1997
(inception date) to December 31, 1997.
+ On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
Concert Peachtree Growth Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1997 1996 1995(2)
================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.41 $ 13.80 $ 14.31 $ 13.36
- ------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) (0.07) 0.03 0.01 0.03
Net realized and unrealized gain 4.50 0.65 1.85 1.87
- ------------------------------------------------------------------------------------------------
Total Income From Operations 4.43 0.68 1.86 1.90
- ------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- (0.11) (0.02)
Net realized gains (0.13) (1.07) (2.26) (0.93)
- ------------------------------------------------------------------------------------------------
Total Distributions (0.13) (1.07) (2.37) (0.95)
- ------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 17.71 $ 13.41 $ 13.80 $ 14.31
- ------------------------------------------------------------------------------------------------
Total Return 33.13% 5.18% 13.96% 14.61%++
- ------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 86,712 $ 67,349 $ 72,180 $ 57,693
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.40% 1.67% 1.78% 1.72%+
Net investment income (loss) (0.48) 0.22 0.13 0.46+
- ------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 93% 227% 183% 51%
================================================================================================
Class B Shares 1998(1) 1997 1996 1995(2)
================================================================================================
Net Asset Value, Beginning of Year $ 13.24 $ 13.74 $ 14.27 $ 13.36
- ------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment loss (0.19) (0.07) (0.09) (0.02)
Net realized and unrealized gain 4.43 0.64 1.84 1.86
- ------------------------------------------------------------------------------------------------
Total Income From Operations 4.24 0.57 1.75 1.84
- ------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- (0.02) --
Net realized gains (0.13) (1.07) (2.26) (0.93)
- ------------------------------------------------------------------------------------------------
Total Distributions (0.13) (1.07) (2.28) (0.93)
- ------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 17.35 $ 13.24 $ 13.74 $ 14.27
- ------------------------------------------------------------------------------------------------
Total Return 32.11% 4.40% 13.12% 14.15%++
- ------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 59,062 $ 42,172 $ 43,148 $ 32,685
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.21% 2.42% 2.53% 2.46%+
Net investment loss (1.29) (0.53) (0.63) (0.27)+
- ------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 93% 227% 183% 51%
================================================================================================
</TABLE>
(1) 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 year.
(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.
- --------------------------------------------------------------------------------
16 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class L Shares(1) 1998(2) 1997 1996 1995(3)
==============================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 13.28 $ 13.78 $ 14.29 $ 14.05
- --------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) (0.18) (0.05) (0.08) 0.01
Net realized and unrealized gain 4.44 0.62 1.85 1.16
- --------------------------------------------------------------------------------------------------------------
Total Income From Operations 4.26 0.57 1.77 1.17
- --------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- (0.02) --
Net realized gains (0.13) (1.07) (2.26) (0.93)
- --------------------------------------------------------------------------------------------------------------
Total Distributions (0.13) (1.07) (2.28) (0.93)
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 17.41 $ 13.28 $ 13.78 $ 14.29
- --------------------------------------------------------------------------------------------------------------
Total Return 32.17% 4.38% 13.24% 8.69%++
- --------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 222 $ 203 $ 174 $ 88
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.16% 2.41% 2.40% 2.29%+
Net investment income (loss) (1.23) (0.53) (0.48) 0.13+
- --------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 93% 227% 183% 51%
==============================================================================================================
Class Y Shares 1998(2) 1997(4)
==============================================================================================================
Net Asset Value, Beginning of Year $ 13.42 $ 14.86
- --------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) (0.02) 0.01
Net realized and unrealized gain (loss) 4.52 (0.38)
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 4.50 (0.37)
- --------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net realized gains (0.13) (1.07)
- --------------------------------------------------------------------------------------------------------------
Total Distributions (0.13) (1.07)
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 17.79 $ 13.42
- --------------------------------------------------------------------------------------------------------------
Total Return 33.62% (2.25)%++
- --------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 187,546 $ 115,343
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.07% 1.10%+
Net investment income (loss) (0.14) 0.62+
- --------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 93% 227%
==============================================================================================================
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(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 year.
(3) For the period from August 8, 1995 (inception date) to December 31, 1995.
(4) For the period from October 15, 1997 (inception date) to December 31,
1997.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Concert Peachtree Growth Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Smith Barney Investment Funds Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Concert Peachtree Growth Fund of Smith
Barney Investment Funds Inc. as of December 31, 1998, the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended and financial highlights for
each of the years in the three-year period then ended and the period from July
3, 1995 (commencement of operations) to December 31, 1995. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. As to securities
purchased but not yet received, we performed other appropriate auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Concert Peachtree Growth Fund of Smith Barney Investment Funds Inc. as of
December 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the years in the two-year period then
ended and the financial highlights for each of the years in the three-year
period then ended and the period from July 3, 1995 to December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
February 8, 1999
- --------------------------------------------------------------------------------
18 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On March 9, 1998, a special meeting of shareholders of the Fund was held for the
purpose of voting on the following matters:
1. To elect Directors of the Fund which includes all the Portfolios; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
Shares Voted Percentage Shares Voted Percentage
Name of Directors For Shares Voted Against Shares Voted
================================================================================
Paul R. Ades 110,457,871.145 96.547% 3,950,761.251 3.453%
Herbert Barg 110,299,351.998 96.408 4,109,280.398 3.592
Dwight B. Crane 110,443,765.891 96.534 3,964,866.505 3.466
Frank G. Hubbard 110,456,573.292 96.546 3,952,059.104 3.454
Jerome Miller 110,457,232.652 96.546 3,951,399.744 3.454
Ken Miller 110,449,857.597 96.540 3,958,774.799 3.460
Heath B. McLendon 110,401,492.247 96.498 4,007,140.149 3.502
================================================================================
Proposal 2 requested that shareholders approve certain changes to the
fundamental policies of the Portfolio in order to modernize them in view of
certain regulatory, business or industry developments that have occurred since
original adoption of these policies by the Portfolio. The following chart
demonstrates that all proposals were approved by shareholders.
Please note that "M" indicates a modification of the policy; "E" indicates the
elimination of the policy; and "R" indicates the reclassification of the policy
from fundamental (which would require shareholder approval to change) to
non-fundamental (which can be changed by a vote of the Board of Directors).
================================================================================
M Diversification Approved
M Industry Concentration Approved
M Borrowing Approved
M Lending by the Portfolio Approved
R Purchase of Securities on Margin Approved
M Purchase or Sale of Real Estate Approved
R Investment in Restricted and Illiquid Securities Approved
R Investments in Unseasoned Issuers Approved
E Restricting the Purchase of Securities of an Issuer Approved
R Purchase of Securities of Other Investment Companies Approved
R Exercising Control or Management Approved
R Investments in Oil, Gas or Other Mineral Exploration Approved
E Participation in Joint Trading Accounts Approved
R Purchase or Sale of Puts, Calls and Combinations Thereof Approved
================================================================================
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Portfolio on all proposals.
Percentage Percentage Percentage
Shares Voted of Shares Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Voted
================================================================================
11,840,303.286 89.243% 515,518.524 3.886% 991,668.917 6.871%
================================================================================
- --------------------------------------------------------------------------------
Concert Peachtree Growth Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
December 31, 1998:
o A corporate dividends received deduction of 72.63%.
o Total long-term capital gain distributions paid of $2,053,354.
- --------------------------------------------------------------------------------
20 1998 Annual Report to Shareholders
<PAGE>
Concert Peachtree
Growth Fund
Directors
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank G. Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
John F. White, Emeritus
Officers
Heath B. McLendon
President and Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
Dennis A. Johnson
President and Chief Investment Officer
Peachtree Asset Management
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Manager
Mutual Management Corp.
Distributor
CFBDS, 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 shareholders of Concert
Peachtree Growth Fund. It is not for distribution to prospective investors
unless accompanied by a current Prospectus for the Fund, which contains
information concerning the Fund's investment policies and expenses as well as
other pertinent information.
SALOMON SMITH BARNEY
- --------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Concert Peachtree
Growth Fund
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD01071 2/99
<PAGE>
[GRAPHIC]
Smith Barney
Contrarian Fund
-----------------
[GRAPHIC] ANNUAL REPORT
-----------------
December 31, 1998
Smith Barney Mutual Funds
[LOGO] Investing for your future
Every day(R).
<PAGE>
Smith Barney
Contrarian Fund
- --------------------------------------------------------------------------------
The Smith Barney Contrarian Fund ("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.
Smith Barney Contrarian Fund
Average Annual Total Returns Ended
December 31, 1998
Without Sales Charges(1)
-------------------------------------------------
Class A Class B Class L(2)
================================================================================
One-Year (1.12)% (1.84)% (1.91)%
- --------------------------------------------------------------------------------
Since Inception++ 8.42 7.61 7.61
================================================================================
With Sales Charges(3)
-------------------------------------------------
Class A Class B Class L(2)
================================================================================
One-Year (6.07)% (6.59)% (3.81)%
- --------------------------------------------------------------------------------
Since Inception++ 6.85 7.14 7.31
================================================================================
(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 and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) On June 12, 1998, the Class C shares were renamed Class L shares.
(3) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charges of 5.00% and 1.00%,
respectively; Class B shares reflect the deduction of a 5.00% CDSC, which
applies if shares are redeemed within one year from purchase and declines
thereafter by 1.00% per year until no CDSC is incurred. Class L shares
also 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.
++ The inception date for Class A, B and L shares is June 30, 1995.
- --------------------------------------------------------------------------------
FUND HIGHLIGHT
- --------------------------------------------------------------------------------
There are no major changes currently anticipated regarding the Fund's current
sector weightings and capitalization size mix. Instead, our focus will be on
purchasing the stocks of quality companies that trade near their 52-week low
prices, or substantially below their 52-week high price levels, as a result of
temporary circumstances that can be resolved over our investment horizon. This
should give us the opportunity to buy stocks at low price levels, and we intend
to wait patiently over our longer than average time horizon for an opportunity
to sell at higher prices if and when the stock comes back into favor with the
investment community.
- --------------------------------------------------------------------------------
NASDAQ SYMBOL
- --------------------------------------------------------------------------------
Class A SBMGX
Class B SBMBX
Class L SBMCX
- --------------------------------------------------------------------------------
WHAT'S INSIDE
- --------------------------------------------------------------------------------
Shareholder Letter ........................................................ 1
Historical Performance..................................................... 4
Smith Barney Contrarian 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
Independent Auditors' Report.............................................. 21
Tax Information........................................................... 22
Additional Shareholder Information........................................ 23
<PAGE>
- --------------------------------------------------------------------------------
Shareholder Letter
- --------------------------------------------------------------------------------
[PHOTO] [PHOTO]
HEATH B. JOHN F.
MCLENDON STOESER, CFA
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Contrarian Fund
("Fund") for the year ended December 31, 1998. 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
During 1998, the fear of difficulties in several international economies that
might have a possible negative impact on U.S. economic growth caused investors
to favor stocks representing large, growth-oriented companies. This caused a
wide discrepancy in individual stock returns during the year. For the year ended
December 31, 1998, the Fund posted a total return of a negative 1.12% for Class
A shares, without sales charges.
In comparison, the Russell 2000 Index (an index representing small-sized
companies) returned a negative 2.5%. The Russell 3000 Index (an index dominated
by large-sized companies) rose about 23%. These comparative indices illustrate
that a major factor influencing investment performance in 1998 was returns by
company size. Our portfolio emphasized smaller-sized companies for a significant
portion of the year. Investment style (i.e., growth or value) also played a
large role in determining investment returns in 1998. The S&P/Barra Growth Index
outperformed the S&P/Barra Value Index by a very large margin of 27.43% during
the year. Clearly, our value-oriented style put the Fund at a disadvantage
during the year. Yet, in the year's final quarter, the Fund's return of 18.36%
compared favorably with the S&P Barra Mid-Cap Value Index return of 15.24%. In
our view, this index best reflects the Fund's size and style characteristics at
this time and is consistent with Morningstar's mid-cap value classification for
the Fund.
Investment Objective and Style
The Contrarian Fund seeks long term growth of capital. Our "contrarian" style
can be described as a discipline to purchase stocks when they are price
depressed or "out-of-favor" with other investors. Our style allows us to
purchase value and growth stocks of any capitalization size.
Portfolio Changes
During the year, we implemented several new strategies intended to improve
investment performance. These strategies involved a commitment toward:
. Staying fully invested;
. More focused selection of stocks representing dominant industry leaders; and
. Greater diversification across economic sectors and company sizes.
We believe the improved performance of the Fund in recent months indicates that
these strategies are beginning to have a positive impact on performance.
- --------------------------------------------------------------------------------
Smith Barney Contrarian Fund 1
<PAGE>
Review of Portfolio Transactions
We are pleased with the performance of stocks added to the Fund's portfolio over
the past year. In addition, we were able to sell stocks in a timely manner and
at favorable prices. The following examples of the Fund's purchase and sales
should be viewed in the context of their consistency with the Fund's investment
strategy discussed previously.
We reduced our exposure to the basic materials sector by selling positions in
Crown Vantage, LTV, and Wellman. These smaller-sized companies each faced a
deteriorating outlook for commodity prices of paper, steel and polyester fibers,
respectively. In hindsight, the sale of each of these stocks proved to be
timely. Moreover, our sell discipline proved to be effective.
In the capital goods sector, we purchased AMP, the leading electronic connector
company in the world. After our purchase, Allied Signal made a cash tender offer
for the company at a significant premium to our purchase price. However, Tyco
International has recently offered to acquire AMP at an even higher premium to
our purchase price.
Within the consumer cyclical sector, we sold our position in Haggar, the maker
of men's slacks and sport coats, due to below-average growth prospects
attributed in part to competitive pricing in the apparel industry.
Concerns by investors regarding near-term prospects allowed us to purchase one
of the strongest branded companies in the consumer staples sector -- Pepsico.
This company has the number one brand in salty snack foods (Frito-Lay) as well
as the number two brand in soft drink beverages. The stock has performed very
well since our purchase.
In the technology sector, Infinium (a small computer software company
specializing in business applications) was sold to make room for Hewlett Packard
- -- a more dominant and better diversified technology company. Both sides of this
transaction added to the portfolio's performance returns during the period under
review.
When there was concern about a possible global economic recession, we were able
to purchase a leading money center bank, Chase Manhattan Bank, at a very
attractive price. The stock has performed very well for us since our
acquisition.
Due to a poor outlook for oil prices in the energy sector, we sold our position
in Wiser Oil. This small oil and gas producer had a high cost-of-production
profile and has performed poorly since its sale.
We are very pleased with the quality of the companies that comprise the Fund's
portfolio today, and we are comfortable with the broad sector diversification
within the portfolio. Our company capitalization size mix is 46% large-cap,
38.5% mid-cap and 15.5% small-cap. Therefore, we would expect company size to be
less of an influence on the Fund's performance returns relative to the broad
stock market in 1999.
Market Outlook
In our view, economic weakness in Asia, financial difficulties in Brazil and the
liquidity paralysis caused by Russia's default on its debt obligations will
continue to have a lingering effect on the financial markets in 1999. However,
due to the Federal Reserve Board's favorable monetary policies and strong
consumer spending, we are cautiously optimistic about the market's prospects for
continued gains in 1999, albeit at a more normalized single-digit rate. We
believe that our value bias may prove to be beneficial as anticipated stock
market gains broaden out to the value-oriented stocks of the mid-sized companies
held in the Fund. In our view, the Fund's discount valuation and dividend yield
should serve as stabilizing factors in 1999 if additional unforeseen
difficulties disrupt the market.
There are no major changes currently anticipated regarding the Fund's current
sector weightings and capitalization size mix. Instead, our focus will be on
purchasing the stocks of quality companies that trade near their 52-week low
prices, or substantially below
- --------------------------------------------------------------------------------
2 1998 Annual Report to Shareholders
<PAGE>
their 52-week high price levels, as a result of temporary circumstances that can
be resolved over our investment horizon. This should give us the opportunity to
buy stocks at low price levels. We intend to wait patiently over our longer than
average time horizon for an opportunity to sell at higher prices when the stock
comes back into favor with the investment community.
On a more somber note, we report with much sadness the passing of Emeritus
Director Allan R. Johnson on November 26, 1998. Allan made many valuable
contributions to the Board and the Fund during his tenure and he will be missed.
Thank you for your confidence and support in our investment approach. We
encourage you to visit our Web site at www.smithbarney.com. In closing, we look
forward to continuing to serve your investment needs in the future.
Sincerely,
/s/ Heath B. McLendon /s/ John F. Stoeser
Heath B. McClendon John F. Stoeser, CFA
Chairman Vice President and
Investment Officer
January 19, 1999
- --------------------------------------------------------------------------------
Smith Barney Contrarian Fund 3
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance -- Class A Shares
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/98 $14.21 $13.62 $0.00 $0.44 (1.12)%
- --------------------------------------------------------------------------------
12/31/97 13.42 14.21 0.02 1.04 13.70
- --------------------------------------------------------------------------------
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 $0.26 $1.94
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class B Shares
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/98 $14.11 $13.42 $0.00 $0.44 (1.84)%
- --------------------------------------------------------------------------------
12/31/97 13.41 14.11 0.00 1.04 12.84
- --------------------------------------------------------------------------------
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 $1.94
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class L Shares
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/98 $14.12 $13.42 $0.00 $0.44 (1.91)%
- --------------------------------------------------------------------------------
12/31/97 13.41 14.12 0.00 1.04 12.91
- --------------------------------------------------------------------------------
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 $1.94
================================================================================
- --------------------------------------------------------------------------------
Historical Performance -- Class Y Shares
- --------------------------------------------------------------------------------
Net Asset Value
------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns(1)
================================================================================
12/31/98 $14.24 $13.70 $0.00 $0.44 (0.76)%
- --------------------------------------------------------------------------------
12/31/97 13.43 14.24 0.08 1.04 14.23
- --------------------------------------------------------------------------------
Inception* -- 12/31/96 12.21 13.43 0.13 0.46 14.97+
- --------------------------------------------------------------------------------
Total $0.21 $1.94
================================================================================
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
- --------------------------------------------------------------------------------
4 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Average Annual Total Return
- --------------------------------------------------------------------------------
Without Sales Charges(1)
--------------------------------------------
Class A Class B Class L Class Y
================================================================================
Year Ended 12/31/98 (1.12)% (1.84)% (1.91)% (0.76)%
- --------------------------------------------------------------------------------
Inception* through 12/31/98 8.42 7.61 7.61 9.50
================================================================================
With Sales Charge(2)
--------------------------------------------
Class A Class B Class L Class Y
================================================================================
Year Ended 12/31/98 (6.07)% (6.59)% (3.81)% (0.76)%
- --------------------------------------------------------------------------------
Inception* through 12/31/98 6.85 7.14 7.31 9.50
================================================================================
- --------------------------------------------------------------------------------
Cumulative Total Return
- --------------------------------------------------------------------------------
Without Sales Charge(1)
================================================================================
Class A (Inception* through 12/31/98) 32.80%
- --------------------------------------------------------------------------------
Class B (Inception* through 12/31/98) 29.37
- --------------------------------------------------------------------------------
Class L (Inception* through 12/31/98) 29.36
- --------------------------------------------------------------------------------
Class Y (Inception* through 12/31/98) 30.34
================================================================================
(1) Assumes reinvestment of all dividend 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 and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividend and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charges of 5.00% and 1.00%,
respectively; Class B shares reflect the deduction of a 5.00% CDSC, which
applies if shares are redeemed within one year from purchase and declines
thereafter by 1.00% per year until no CDSC is incurred. Class L 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 L shares is June 30, 1995. The inception
date for Class Y shares is January 31, 1996.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
Smith Barney Contrarian Fund 5
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney Contrarian Fund at a Glance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class A, B and L Shares of the
Smith Barney Contrarian Fund vs. the Standard & Poor's 500 Index+
- --------------------------------------------------------------------------------
June 1995 -- December 1998
[LINE GRAPH]
<TABLE>
<CAPTION>
Smith Barney Contrarian Smith Barney Contrarian Smith Barney Contrarian Standard & Poor's
Fund -- Class A Fund -- Class B Fund -- Class L 500 Index
<S> <C> <C> <C> <C>
June 1995 9,501 10,000 10,000 10,000
Dec 1995 9,647 9,608 10,016 11,443
June 1996 10,505 10,574 10,865 12,598
Dec 1996 11,222 11,279 11,563 14,069
June 1997 12,343 12,394 12,676 16,967
Dec 1997 12,760 12,879 13,057 18,762
June 1998 13,189 13,369 13,434 22,087
Dec 1998 12,618 12,737 12,808 24,154
</TABLE>
+ The above chart represents a hypothetical illustration of $10,000 invested
in Class A, B and L 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 L shares at the time of
investment and reinvestment of dividends and capital gains, if any,
through December 31, 1998. The Standard & Poor's 500 Index is composed of
widely held common stocks listed on the New York Stock Exchange, American
Stock Exchange and over-the-counter market. Figures for the index include
reinvestment of dividends. The Index is unmanaged and is not subject to
the same management and trading expenses as a mutual fund. The performance
of the Fund's other classes may be greater or less than the Class A
shares' performance indicated on this chart, depending on whether greater
or lesser sales charges and fees were incurred by shareholders investing
in other classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and the
redemption value may be more or less than the original cost. No adjustment
has been made for shareholders tax liability on dividends or capital
gains.
Industry Diversification of Common Stock*
- -----------------------------------------
[BAR CHART]
Financial Services 11.9%
Healthcare 11.2%
Insurance 9.6%
Food and Beverage 8.1%
Tobacco 6.2%
Consumer Products 5.8%
Electronics 5.8%
Energy 5.6%
Manufacturing 5.2%
Machinery -- Diversified 4.2%
Other 26.4%
- -----------------------------------------
* As a percentage of total common stock.
Investment Breakdown
- --------------------------------------------------------------------------------
[PIE CHART]
Cash Equivalent 4.5%
Common Stock 95.5%
- --------------------------------------------------------------------------------
6 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments December 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
COMMON STOCK -- 95.5%
Aerospace/Defense -- 3.2%
50,000 B.F. Goodrich Co. $ 1,793,750
300,000 Coltec Industries Inc.+ 5,850,000
75,000 Lockheed Martin Corp. 6,356,250
100,000 Pittston Brink's Group 3,187,500
- --------------------------------------------------------------------------------
17,187,500
- --------------------------------------------------------------------------------
Computer Software and Services -- 3.6%
225,000 Cambridge Technology Partners, Inc.+ ++ 4,978,125
300,000 Learning Co., Inc.+ 7,781,250
800,000 Mentor Graphics Corp.+ 6,800,000
- --------------------------------------------------------------------------------
19,559,375
- --------------------------------------------------------------------------------
Computer Systems -- 1.9%
150,000 Hewlett-Packard Co. 10,246,875
- --------------------------------------------------------------------------------
Consumer Products -- 5.5%
200,000 Callaway Golf Co. 2,050,000
275,000 Kimberly-Clark Corp. 14,987,500
300,000 RJR Nabisco Holdings Corp. 8,906,250
125,000 Ralston-Ralston Purina Group++ 4,046,875
- --------------------------------------------------------------------------------
29,990,625
- --------------------------------------------------------------------------------
Electronics -- 5.5%
261,675 AMP Inc. 13,623,454
510,000 Actel Corp.+ 10,200,000
100,000 Motorola, Inc. 6,106,250
- --------------------------------------------------------------------------------
29,929,704
- --------------------------------------------------------------------------------
Energy -- 5.4%
100,000 Halliburton Co. 2,962,500
350,000 MCN Energy Group Inc.++ 6,671,875
115,000 Schlumberger Limited 5,304,375
200,000 Sonat Inc. 5,412,500
300,000 Unocal Corp. 8,756,250
- --------------------------------------------------------------------------------
29,107,500
- --------------------------------------------------------------------------------
Financial Services -- 11.3%
160,792 BankAmerica Corp. 9,667,619
125,000 Bank One Corp. 6,382,812
330,000 First Data Corp.++ 10,456,875
75,000 Morgan Stanley Dean Witter & Co. 5,325,000
850,000 Phoenix Investment Partners, Ltd. 7,171,875
150,000 The Chase Manhattan Corp. 10,209,375
325,000 Washington Mutual, Inc. 12,410,938
- --------------------------------------------------------------------------------
61,624,494
- --------------------------------------------------------------------------------
Food and Beverage -- 7.8%
437,432 ConAgra, Inc. 13,779,108
225,000 Dole Food Co., Inc. 6,750,000
200,000 Interstate Bakeries Corp.++ 5,287,500
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Contrarian Fund 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Food and Beverage -- 7.8% (continued)
75,000 PepsiCo Inc. $ 3,070,313
350,000 Seagram Co., Ltd. 13,300,000
- --------------------------------------------------------------------------------
42,186,921
- --------------------------------------------------------------------------------
Healthcare -- 10.7%
200,000 Arterial Vascular Engineering, Inc.+ 10,500,000
500,000 HEALTHSOUTH Corp.+ 7,718,750
245,000 Mallinckrodt Inc. 7,549,063
425,000 Mylan Laboratories Inc.++ 13,387,500
656,500 Perrigo Co.+ 5,785,406
600,000 Quorum Health Group, Inc.+ 7,762,500
125,000 United HealthCare Corp.++ 5,382,812
- --------------------------------------------------------------------------------
58,086,031
- --------------------------------------------------------------------------------
Insurance -- 9.2%
175,000 Aetna, Inc. 13,759,375
125,000 Allstate Corp. 4,828,125
171,000 Amerin Corp.+ 4,039,875
275,000 Capital Re Corp. 5,517,187
225,000 Conseco, Inc.++ 6,876,563
50,000 MGIC Investment Corp. 1,990,625
300,000 SAFECO Corp.++ 12,881,250
- --------------------------------------------------------------------------------
49,893,000
- --------------------------------------------------------------------------------
Machinery - Diversified -- 4.0%
150,000 Flowserve Corp. 2,484,375
50,000 Honeywell Inc. 3,765,625
475,000 Lincoln Electric Holdings, Inc. 10,568,750
200,000 Pall Corp.++ 5,062,500
- --------------------------------------------------------------------------------
21,881,250
- --------------------------------------------------------------------------------
Manufacturing -- 5.0%
200,000 Crown Cork & Seal Co., Inc. 6,162,500
175,000 Minnesota Mining and Manufacturing Co. 12,446,875
250,000 Safeskin Corp.+ ++ 6,031,250
150,000 Watts Industries, Inc., Class A Shares 2,493,750
- --------------------------------------------------------------------------------
27,134,375
- --------------------------------------------------------------------------------
Publishing and Printing -- 3.8%
152,000 Houghton Mifflin Co. 7,182,000
250,000 Scholastic Corp.+ ++ 13,406,250
- --------------------------------------------------------------------------------
20,588,250
- --------------------------------------------------------------------------------
Real Estate -- 3.5%
129,100 Camden Property Trust 3,356,600
175,000 Equity Office Properties Trust 4,200,000
250,000 FelCor Lodging Trust Inc. 5,765,625
550,000 IndyMac Mortgage Holdings, Inc. 5,809,375
- --------------------------------------------------------------------------------
19,131,600
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
8 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
Retail -- 3.3%
275,000 Gucci Group NV++ $ 13,371,875
100,000 J.C. Penney Co., Inc. 4,687,500
- --------------------------------------------------------------------------------
18,059,375
- --------------------------------------------------------------------------------
Telephone -- 1.7%
210,900 Telephone and Data Systems, Inc. 9,477,319
- --------------------------------------------------------------------------------
Tobacco -- 6.0%
240,000 Philip Morris Cos., Inc. 12,840,000
600,000 Swisher International Group Inc.+ 5,400,000
405,000 UST, Inc. 14,124,375
- --------------------------------------------------------------------------------
32,364,375
- --------------------------------------------------------------------------------
Transportation -- 1.3%
110,000 Teekay Shipping Corp. 2,069,375
115,000 Union Pacific Corp. 5,182,188
- --------------------------------------------------------------------------------
7,251,563
- --------------------------------------------------------------------------------
Utilities -- 0.3%
50,000 Western Resources, Inc. 1,662,500
- --------------------------------------------------------------------------------
Waste Management -- 2.5%
125,000 United States Filter Corp.+ 2,859,375
224,200 Waste Management, Inc. 10,453,325
- --------------------------------------------------------------------------------
13,312,700
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $448,217,294) 518,675,332
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT -- 4.5%
$24,495,000 Morgan Stanley Dean Witter & Co., 4.650%
due 1/4/99; Proceeds at maturity --
$24,507,656; (Fully collateralized by
U.S. Treasury Notes, 6.500% due 8/15/05;
U.S. Treasury Notes, 6.000% due 8/15/99;
U.S. Treasury Notes, 6.375% due 7/15/99;
U.S. Treasury Bonds, 6.375% due 8/15/27;
Total market value-- $25,099,082)
(Cost -- $24,495,000) 24,495,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $472,712,294*) $543,170,332
================================================================================
+ Non-income producing security.
++ All or a portion of this security is on loan (See Note 6).
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Contrarian Fund 9
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $472,712,294) $543,170,332
Cash 772
Collateral for securities loaned (Note 6) 59,216,034
Receivable for Fund shares sold 1,228,126
Dividends and interest receivable 893,840
- ----------------------------------------------------------------------------------------
Total Assets 604,509,104
- ----------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities on loan (Note 6) 59,216,034
Payable for Fund shares purchased 17,199,734
Payable for securities purchased 2,778,825
Management fees payable 409,868
Distribution fees payable 113,324
Accrued expenses 162,032
- ----------------------------------------------------------------------------------------
Total Liabilities 79,879,817
- ----------------------------------------------------------------------------------------
Total Net Assets $524,629,287
========================================================================================
NET ASSETS:
Par value of capital shares $ 38,841
Capital paid in excess of par value 439,199,692
Undistributed net investment income 105,339
Accumulated net realized gain from security transactions and options 14,827,377
Net unrealized appreciation of investments 70,458,038
- ----------------------------------------------------------------------------------------
Total Net Assets $524,629,287
========================================================================================
Shares Outstanding:
Class A 8,477,978
-----------------------------------------------------------------------------------
Class B 21,693,149
-----------------------------------------------------------------------------------
Class L 2,476,781
-----------------------------------------------------------------------------------
Class Y 6,192,821
-----------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $13.62
-----------------------------------------------------------------------------------
Class B * $13.42
-----------------------------------------------------------------------------------
Class L ** $13.42
-----------------------------------------------------------------------------------
Class Y (and redemption price) $13.70
-----------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 5.26% of net asset value per share) $14.34
-----------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $13.56
========================================================================================
</TABLE>
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if
shares are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if
shares are redeemed within the first year of purchase.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended December 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $ 10,532,601
Interest 2,998,753
Less: Foreign withholding tax (126,095)
- --------------------------------------------------------------------------------
Total Investment Income 13,405,259
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 6,552,382
Distribution fees (Note 2) 5,402,046
Shareholder and system servicing fees 837,288
Shareholder communications 248,858
Registration fees 180,000
Directors' fees 58,999
Custody 43,201
Audit and legal 35,000
Other 15,936
- --------------------------------------------------------------------------------
Total Expenses 13,373,710
- --------------------------------------------------------------------------------
Net Investment Income 31,549
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND OPTIONS (NOTES 3 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 24,658,433
Options written (947,341)
- --------------------------------------------------------------------------------
Net Realized Gain 23,711,092
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 111,088,201
End of year 70,458,038
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (40,630,163)
- --------------------------------------------------------------------------------
Net Loss on Investments and Options (16,919,071)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (16,887,522)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
Smith Barney Contrarian Fund 11
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
=====================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 31,549 $ 427,368
Net realized gain 23,711,092 84,815,377
Increase (decrease) in net unrealized appreciation (40,630,163) 31,194,186
- -----------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (16,887,522) 116,436,931
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- (693,882)
Net realized gains (21,580,436) (68,311,344)
- -----------------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (21,580,436) (69,005,226)
- -----------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 56,276,485 156,608,116
Net asset value of shares issued for
reinvestment of dividends 18,459,523 59,714,842
Cost of shares reacquired (472,270,586) (162,857,832)
- -----------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (397,534,578) 53,465,126
- -----------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (436,002,536) 100,896,831
NET ASSETS:
Beginning of year 960,631,823 859,734,992
- -----------------------------------------------------------------------------------------------------
End of year* $ 524,629,287 $ 960,631,823
=====================================================================================================
* Includes undistributed (overdistributed) net investment income of: $ 105,339 $ (33,246)
=====================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The Smith Barney Contrarian Fund ("Portfolio"), formerly known as the Smith
Barney Managed Growth Fund, 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 seven
other separate investment portfolios: Smith Barney Government Securities Fund,
Smith Barney Special Equities Fund, Smith Barney Investment Grade Bond Fund,
Concert Peachtree Growth Fund, Smith Barney Hansberger Global Value Fund, Smith
Barney Hansberger Global Small Cap Value Fund and Smith Barney Small Cap Value
Fund. The financial statements and financial highlights for the other portfolios
are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolio are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing price on such markets;
securities for which no sales price were reported are valued at bid price, or in
the absence of a recent bid price, at the bid equivalent obtained from one or
more of the major market makers; (c) securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, which
approximates 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 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, 1998,
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. Net investment income, net realized gains and net assets
were not affected by this change; (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; and (k) estimates and assumptions are required to be made
regarding assets, liabilities and changes in net assets resulting from
operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
2. Management Agreement and Other Transactions
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as investment manager to the Fund. The Portfolio pays MMC 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.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to that
date Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well as certain other broker-dealers, continues to
sell Fund shares to the public as members of the selling group.
On June 12, 1998, the Portfolio's existing Class C shares were renamed as Class
L shares. Effective June 15, 1998, Class L shares are being sold at net
- --------------------------------------------------------------------------------
Smith Barney Contrarian Fund 13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
asset value plus a maximum initial sales charge of 1.00%. Class L shares also
have a 1.00% contingent deferred sales charge ("CDSC"), which applies if
redemption occurs within the first year of purchase.
There is also a CDSC of 5.00% on Class B shares, which applies if redemption
occurs within one year from purchase and declines thereafter by 1.00% per year
until no CDSC is incurred. In addition, Class A shares have a 1.00% CDSC, which
applies if redemption occurs within the first year of purchase. This CDSC only
applies to those purchases of Class A shares which, when combined with current
holdings of Class A shares, equal or exceed $500,000 in the aggregate. These
purchases do not incur an initial sales charge.
For the year ended December 31, 1998, SSB received brokerage commissions of
$72,150 and sales charges of $48,000 and $2,000 on sales of the Funds' Class A
and Class L shares, respectively. In addition, CDSCs paid to SSB were
approximately:
Class A Class B Class L
================================================================================
CDSCs $5,000 $1,214,000 $3,000
================================================================================
Pursuant to a Distribution Plan, the Portfolio pays a service fee with respect
to Class A, B and L 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 L shares calculated at the annual
rate of 0.75% of the average daily net assets of each class, respectively. For
the year ended December 31, 1998, total Distribution Plan fees incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $445,269 $4,387,199 $569,578
================================================================================
All officers and one Director of the Fund are employees of SSB.
3. Investments
During the year ended December 31, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $548,499,945
- --------------------------------------------------------------------------------
Sales 869,369,748
================================================================================
At December 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 83,846,591
Gross unrealized depreciation (13,388,553)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 70,458,038
================================================================================
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.
At December 31, 1998, 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
- --------------------------------------------------------------------------------
14 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 depending upon whether the cost of the
closing transaction is greater or less than the premium originally received,
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.
The following covered call option transactions occurred during the year ended
December 31, 1998:
Number of
Contracts Premiums
===============================================================================
Options written, outstanding at December 31, 1997 1,168 $ 887,084
Options written during the year ended December 31, 1998 2,450 1,958,635
Options cancelled in closing purchase transactions (2,450) (1,958,635)
Options exercised (1,168) (887,084)
- -------------------------------------------------------------------------------
Options written, outstanding at December 31, 1998 -- --
===============================================================================
6. 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 depending on the type of securities loaned. The custodian establishes
and maintains the collateral in a segregated account. The Fund maintains
exposure for the risk of any losses in the investment of amounts received as
collateral.
At December 31, 1998, the Portfolio had loaned common stocks having a value of
approximately $58,017,073 and holds the following collateral for loaned
securities:
Security Description Value
================================================================================
Time Deposit:
Bank of Brussels Lambert, 5.500% due 1/4/99 $34,046,731
Rabobank Nederland, 7.750% due 1/4/99 5,731,712
Skandinaviska Enskilda Banken, 8.000% due 1/4/99 5,393,542
Societe General, 5.125% due 1/4/99 8,826,039
Suntrust Bank, 4.000% due 1/4/99 1,299,874
Repurchase Agreements:
J.P. Morgan Securities, 5.000% due 1/4/99 3,918,136
- --------------------------------------------------------------------------------
Total $59,216,034
================================================================================
Interest income earned by the Fund from securities loaned for the year ended
December 31, 1998 was $306,333.
- --------------------------------------------------------------------------------
Smith Barney Contrarian Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
7. Capital Shares
At December 31, 1998, 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. Effective June 12, 1998, the Fund adopted the renaming of existing Class
C shares as Class L shares.
At December 31, 1998, total paid-in capital amounted to the following for each
class:
Class A Class B Class L Class Y
================================================================================
Total Paid-in Capital $87,474,279 $244,357,867 $26,583,937 $80,822,450
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
------------------------------- -------------------------------
Shares Amount Shares Amount
============================================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 841,540 $ 12,059,326 2,094,216 $ 29,816,336
Shares issued on reinvestment 324,842 4,561,829 1,078,575 15,973,192
Shares redeemed (9,232,541) (130,041,484) (2,945,836) (42,357,215)
- ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (8,066,159) $ (113,420,329) 226,955 $ 3,432,313
============================================================================================================
Class B
Shares sold 859,389 $ 12,355,161 5,258,228 $ 75,511,911
Shares issued on reinvestment 846,593 11,744,374 2,549,007 36,450,796
Shares redeemed (18,802,208) (255,580,291) (5,169,369) (74,524,282)
- ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (17,096,226) $ (231,480,756) 2,637,866 $ 37,438,425
============================================================================================================
Class L+
Shares sold 218,764 $ 3,126,633 908,680 $ 12,998,817
Shares issued on reinvestment 106,857 1,486,477 362,748 5,190,919
Shares redeemed (3,289,378) (44,989,284) (926,969) (13,287,096)
- ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (2,963,757) $ (40,376,174) 344,459 $ 4,902,640
============================================================================================================
Class Y
Shares sold 1,790,595 $ 25,024,375 2,271,061 $ 32,334,023
Shares redeemed (626,132) (8,800,000) (2,118,791) (30,538,243)
- ------------------------------------------------------------------------------------------------------------
Net Increase 1,164,463 $ 16,224,375 152,270 $ 1,795,780
============================================================================================================
Class Z++
Shares sold 265,807 $ 3,710,990 420,890 $ 5,947,029
Shares issued on reinvestment 47,351 666,843 145,110 2,099,935
Shares redeemed (2,389,658) (32,859,527) (149,503) (2,150,996)
- ------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (2,076,500) $ (28,481,694) 416,497 $ 5,895,968
============================================================================================================
</TABLE>
+ On June 12, 1998, Class C shares were renamed Class L shares.
++ At December 31, 1998, all Class Z shares were fully redeemed.
- --------------------------------------------------------------------------------
16 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1997 1996(1) 1995(1)(2)
=======================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 14.21 $ 13.42 $ 12.03 $ 12.00
- -------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.06 0.08 0.10 0.16
Net realized and unrealized gain (loss) (0.21) 1.77 1.84 0.02
- -------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.15) 1.85 1.94 0.18
- -------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.02) (0.09) (0.15)
Net realized gains (0.44) (1.04) (0.46) --
- -------------------------------------------------------------------------------------------------------
Total Distributions (0.44) (1.06) (0.55) (0.15)
- -------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.62 $ 14.21 $ 13.42 $ 12.03
- -------------------------------------------------------------------------------------------------------
Total Return (1.12)% 13.70% 16.33% 1.53%++
- -------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $115,480 $235,172 $218,927 $160,487
- -------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.29% 1.28% 1.27% 1.19%+
Net investment income 0.43 0.55 0.84 2.74+
- -------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 77% 35% 34% 6%
=======================================================================================================
</TABLE>
(1) 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.
(2) For the period from June 30, 1995 (inception date) to December 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Contrarian Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class B Shares 1998(1) 1997 1996(1) 1995(1)(2)
===============================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 14.11 $ 13.41 $ 12.02 $ 12.00
- -----------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) (0.05) (0.03) 0.01 0.11
Net realized and unrealized gain (loss) (0.20) 1.77 1.84 0.02
- -----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.25) 1.74 1.85 0.13
- -----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- (0.11)
Net realized gains (0.44) (1.04) (0.46) --
- -----------------------------------------------------------------------------------------------
Total Distributions (0.44) (1.04) (0.46) (0.11)
- -----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.42 $ 14.11 $ 13.41 $ 12.02
- -----------------------------------------------------------------------------------------------
Total Return (1.84)% 12.84% 15.55% 1.16%++
- -----------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $291,038 $547,481 $484,673 $300,000
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.06% 2.05% 2.03% 1.94%+
Net investment income (loss) (0.33) (0.22) 0.08 1.99+
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 77% 35% 34% 6%
===============================================================================================
</TABLE>
(1) 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.
(2) For the period from June 30, 1995 (inception date) to December 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
18 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class L Shares(1) 1998(2) 1997 1996(2) 1995(2)(3)
===============================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year: $ 14.12 $ 13.41 $ 12.03 $ 12.00
- -----------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss) (0.05) (0.03) 0.00* 0.11
Net realized and unrealized gain (loss) (0.21) 1.78 1.84 0.03
- -----------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.26) 1.75 1.84 0.14
- -----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- -- -- (0.11)
Net realized gains (0.44) (1.04) (0.46) --
- -----------------------------------------------------------------------------------------------
Total Distributions (0.44) (1.04) (0.46) (0.11)
- -----------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.42 $ 14.12 $ 13.41 $ 12.03
- -----------------------------------------------------------------------------------------------
Total Return (1.91)% 12.91% 15.45% 1.16%++
- -----------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $33,249 $76,819 $68,340 $42,530
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 2.04% 2.04% 2.03% 1.91%+
Net investment income (loss) (0.33) (0.21) 0.08 2.02+
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 77% 35% 34% 6%
===============================================================================================
</TABLE>
(1) On June 12, 1998, Class C shares were renamed Class L shares.
(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.
* 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 Contrarian Fund 19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
Class Y Shares 1998(1) 1997 1996(1)(2)
================================================================================
Net Asset Value, Beginning of Year $ 14.24 $ 13.43 $ 12.21
- --------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.13 0.16 0.12
Net realized and unrealized gain (loss) (0.23) 1.77 1.69
- --------------------------------------------------------------------------------
Total Income (Loss) From Operations (0.10) 1.93 1.81
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income -- (0.08) (0.13)
Net realized gains (0.44) (1.04) (0.46)
- --------------------------------------------------------------------------------
Total Distributions (0.44) (1.12) (0.59)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $ 13.70 $ 14.24 $ 13.43
- --------------------------------------------------------------------------------
Total Return (0.76)% 14.23% 14.97%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $84,862 $71,599 $65,499
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.90% 0.90% 0.92%+
Net investment income 0.95 0.92 1.12+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 77% 35% 34%
================================================================================
(1) 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.
(2) For the period from January 31, 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.
- --------------------------------------------------------------------------------
20 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Smith Barney Investment Funds Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Smith Barney Contrarian Fund of Smith Barney
Investment Funds Inc. as of December 31, 1998, the related statement of
operations for the year then ended, and the statements of changes in net assets
for each of the years in the two-year period then ended and financial highlights
for each of the years in the three-year period then ended and for the period
from June 30, 1995 (commencement of operations) to December 31, 1995. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities owned
as of December 31, 1998, by correspondence with the custodian. As to securities
purchased but not yet received, we performed other appropriate auditing
procedures. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Smith Barney Contrarian Fund of Smith Barney Investment Funds Inc. as of
December 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the years in the two-year period then
ended and the financial highlights for each of the years in the three-year
period then ended and for the period from June 30, 1995 to December 31, 1995, in
conformity with generally accepted accounting principles.
KPMG LLP
New York, New York
February 8, 1999
- --------------------------------------------------------------------------------
Smith Barney Contrarian Fund 21
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year
ended December 31, 1998:
. Total long-term capital gain distributions paid of
$21,580,436.
- --------------------------------------------------------------------------------
22 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On February 20, 1998, the Annual Meeting of shareholders of the Fund was held
for the purpose of voting on the following matters:
1. To elect Directors of the Fund which includes all Portfolios; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
Shares Voted Percentage Shares Voted Percentage
Name of Director For Shares Voted Against Shares Voted
================================================================================
Paul R. Ades 110,457,871.145 96.547% 3,950,761.251 3.453%
Herbert Barg 110,299,351.998 96.408 4,109,280.398 3.592
Dwight B. Crane 110,443,765.891 96.534 3,964,866.505 3.466
Frank Hubbard 110,456,573.292 96.546 3,952,059.104 3.454
Jerome Miller 110,457,232.652 96.546 3,951,399.744 3.454
Ken Miller 110,449,857.597 96.540 3,958,774.799 3.460
Heath B. McLendon 110,401,492.247 96.498 4,007,140.149 3.502
================================================================================
Proposal 2 requested that shareholders approve certain changes to the
fundamental policies of the Portfolio in order to modernize them in view of
certain regulatory, business or industry developments that have occurred since
original adoption of these policies by the Portfolio. The following chart
demonstrates that all proposals were approved by shareholders.
Please note that "M" indicates a modification of the policy; "E" indicates the
elimination of the policy; and "R" indicates the reclassification of the policy
from fundamental (which would require shareholder approval to change) to
non-fundamental (which can be changed by a vote of the Board of Directors).
================================================================================
M Diversification Approved
- --------------------------------------------------------------------------------
M Industry Concentration Approved
- --------------------------------------------------------------------------------
M Borrowing Approved
- --------------------------------------------------------------------------------
M Lending Approved
- --------------------------------------------------------------------------------
R Margin and Short-Sales Approved
- --------------------------------------------------------------------------------
M Real Estate Approved
- --------------------------------------------------------------------------------
R Restricted and Illiquid Securities Approved
- --------------------------------------------------------------------------------
R Unseasoned Securities Approved
- --------------------------------------------------------------------------------
E 5% Ownership of Certain Securities Approved
- --------------------------------------------------------------------------------
R Purchases of Securities of Other Investment Companies Approved
- --------------------------------------------------------------------------------
R Exercising Control or Management Approved
- --------------------------------------------------------------------------------
R Investments in Oil, Gas or Mineral Exploration Approved
- --------------------------------------------------------------------------------
E Limiting Participation in Joint Trading Accounts Approved
- --------------------------------------------------------------------------------
R Puts, Calls and Combinations Thereof Approved
- --------------------------------------------------------------------------------
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Portfolio on all of the items in Proposal 2.
Percentage Percentage Percentage
Shares Voted of Shares Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Voted
================================================================================
31,907,897.745 90.980% 736,353.551 2.100% 2,427,088.379 6.920%
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Contrarian Fund 23
<PAGE>
[This page intentionally left blank]
<PAGE>
Smith Barney
Contrarian Fund
Directors
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank G. Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
John F. White, Emeritus
Officers
Heath B. McLendon
President and
Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
John F. Stoeser
Vice President and Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
Investment Manager
Mutual Management Corp.
Distributor
CFBDS, 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 Funds --Smith Barney Contrarian 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.
SalomonSmithBarney
----------------------------
A member of citigroup [LOGO]
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
Smith Barney Contrarian Fund
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD01070 2/99
<PAGE>
[GRAPHIC]
Smith Barney
Government
Securities Fund
- ------------------
ANNUAL REPORT
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December 31, 1998
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day(R).
<PAGE>
Smith Barney
Government [PHOTO] [PHOTO]
Securities Fund
HEATH B. JAMES E.
MCLENDON CONROY
Chairman Vice President and
Investment Officer
Dear Shareholder:
We are pleased to provide the annual report for the Smith Barney Government
Securities Fund ("Fund") for the year ended December 31, 1998. 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. We hope you find this report to be useful
and informative.
Performance Update
For the year ended December 31, 1998, the Fund posted a total return of 8.12%
for Class A shares, without sales charges. In comparison, the Fund's performance
compared favorably with the 8.07% average return for general U.S. government
funds for the same period according to Lipper, Inc. (Lipper is an independent
fund-tracking organization.) In addition, during the past year, the Fund
distributed income dividends totaling $0.55 per Class A share. For performance
information on the Fund's other share classes, please turn to page five.
Investment Strategy
The Fund seeks high current return by investing primarily in obligations of, or
guaranteed by, the U.S. government, its agencies or instrumentalities. Our
investment style emphasizes total return. We are concerned about income from the
standpoint of paying dividends to shareholders, but our overriding concern is
doing what's right for shareholders in the context of current market conditions.
The Fund continues to emphasize income generation by investing primarily in
mortgage-backed securities ("MBS"). To the extent that current market conditions
suggest lowering interest rates, we have also invested in intermediate-term U.S.
Treasuries during the reporting period as a way to increase the appreciation
potential of the Fund. As of December 31, 1998, MBS represented approximately
71% of the Fund's holdings (with U.S. Treasury securities making up the
remaining roughly 29%) versus 61% MBS as of June 30, 1998. Moreover, the Fund
currently has an average maturity of 7.5 years. In the months ahead, we plan to
closely monitor prepayment trends and make needed portfolio adjustments if and
when interest rates decline further.
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Smith Barney Government Securities Fund 1
<PAGE>
Market Update and Outlook
The key events during 1998 were predominantly mergers and acquisitions, the
ongoing overseas economic crisis and the resiliency of the U.S. economy and
financial markets. The broad range in interest rates and the associated higher
market volatility reflected those conditions. As can be seen from the chart
below, interest rates went down during the reporting period:
Yields from U.S. Treasury Securities
12/31/98 12/31/97
-------- --------
90-Day Treasury Bill 4.45% 5.34%
2-Year Treasury Note 4.53 5.64
5-Year Treasury Note 4.54 5.71
10-Year Treasury Bond 4.65 5.74
30-Year Treasury Bond 5.09 5.92
The historically low level of interest rates in October 1998 was precipitated by
the first Federal Reserve Board ("Fed") interest rate cut since 1996. While
further cuts ensued, concerns surrounding hedge fund losses took center stage,
prompting spreads between corporate bonds and mortgage-backed securities to
widen versus U.S. Treasuries. Compounding the problem was considerable corporate
financing as we headed toward the end of the year. Corporate debt issuance for
1998 on a net basis was more than the prior two years combined.
We believe that the dominant issues in 1999 will be the advent of the Euro, the
prospects for economic recovery throughout Asia and other less developed
countries, the future sustainability of U.S. economic growth and the ongoing
resiliency of U.S. financial markets.
The Euro introduces a new variable to macroeconomic analysis that has not been
faced since the demise of the Soviet empire and the advent of true global
competition. Opportunities should abound in the financial markets as corporate
financing expands in creative new ways. However, the status of the U.S. dollar
as the world's premier currency has now been brought into question by the Euro's
introduction.
The economic picture throughout Asia and Russia remains critically unclear.
Rising unemployment, the need to dump finished goods in the face of uncertain
currencies and fiscal policies that are slow to change and less than dramatic,
do not bode well for the financial markets of less developed countries.
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2 1998 Annual Report to Shareholders
<PAGE>
In our view, the U.S. economy and the financial markets will continue to soul
search with respect to prospects for continued good fortune. The positives
include such variables as low domestic unemployment, strong productivity, the
dramatic increase in defined contribution plans (e.g., 401(k) plans) and estate
planning as key market influences.
However, personal savings in the U.S. are at historical lows, as measured by
traditional standards. While this trend is being measured as the "wealth
effect," it casts an ever present shadow on investment growth that can affect
the ups and downs of the investment markets.
Technical trends that have supported a decline in interest rates since 1981
remain fully intact. However, we believe the more dominant longer-term force
should be for rates to head toward the 4.50% level. We have positioned the Fund
in the coming year to benefit from these expected lower interest rates. On the
next page, we have provided a list of the key global events that occurred this
past year.
On a more somber note, we report with much sadness the passing of Emeritus
Director Allan R. Johnson on November 26, 1998. Allan made many valuable
contributions to the Board and the Fund during his tenure and he will be missed.
Thank you for investing in the Smith Barney Government Securities Fund. We
encourage you to visit our Web site at www.smithbarney.com. In closing, we look
forward to continuing to help you pursue your financial goals as the new century
dawns.
Sincerely,
/s/ Heath B. McLendon /s/ James E. Conroy
Heath B. McLendon James E. Conroy
Chairman Vice President and
Investment Officer
January 26, 1999
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Smith Barney Government Securities Fund 3
<PAGE>
Key Global Events in 1998
1/26 Royal Bank of Canada and Bank of Montreal announce plans
for merger
1/27 Compaq acquires Digital Equipment
2/03 President Clinton proposes the first no deficit budget in 30 years
2/11 Dow Jones Industrial Average ("DJIA") sets new record at 8285.61
3/09 The International Monetary Fund ("IMF") postpones additional funds to
Indonesia
3/17 The Justice Department expands its investigation of Microsoft
4/07 Citicorp and Travelers Group merge
4/14 NationsBank announces merger with BankAmerica
5/08 The U.S. Senate announces major overhaul of the Internal Revenue Service
5/14 The DJIA closes above 9200
6/16 Oil prices hit 11-year low ($11.40)
6/18 U.S. intervenes in exchange market to support Yen
7/14 Japanese Prime Minister resigns in face of economic turmoil
8/17 Hong Kong intervenes in its stock and futures market
8/27 Russian central bank says it will stop supporting ruble
9/01 The DJIA declines to 7539, wiping out 1998 gains
9/28 Helmut Kohl loses German national election
9/30 The Federal Reserve Board cuts rates for first time since January 1996.
(Two cuts ensue.)
10/01 Bond rates fall below 5%
10/27 Global financier George Soros says he will close his emerging market
hedge fund
11/04 Democrats fare better than expected in mid-term elections
11/13 Brazil receives major financial bailout package
12/17 Joint military strike between U.S. and Britain begins against defiant
Iraq
12/19 President William Jefferson Clinton becomes only the second U.S.
President to be impeached by the House of Representatives
(source: The Wall Street Journal)
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4 1998 Annual Report to Shareholders
<PAGE>
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Historical Performance -- Class A Shares
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<TABLE>
<CAPTION>
Net Asset Value
-------------------
Year Beginning End Income Capital Gain Return Total
Ended of Year of Year Dividends Distributions of Capital Returns(1)
===========================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/98 $ 9.75 $ 9.97 $0.55 $0.00 $0.00 8.12%
- -------------------------------------------------------------------------------------------
12/31/97 9.34 9.75 0.60 0.00 0.00 11.23
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12/31/96 9.77 9.34 0.59 0.00 0.01 1.96
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12/31/95 9.17 9.77 0.69 0.00 0.00 14.50
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12/31/94 10.01 9.17 0.49 0.00 0.07 (2.76)
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12/31/93 9.69 10.01 0.72 0.00 0.00 10.87
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Inception(*) - 12/31/92 9.56 9.69 0.08 0.00 0.02 2.41+
===========================================================================================
Total $3.72 $0.00 $0.10
===========================================================================================
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Historical Performance -- Class B Shares
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<CAPTION>
Net Asset Value
-------------------
Year Beginning End Income Capital Gain Return Total
Ended of Year of Year Dividends Distributions of Capital Returns(1)
===========================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/98 $ 9.79 $ 9.97 $0.53 $0.00 $0.00 7.44%
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12/31/97 9.38 9.79 0.57 0.00 0.00 10.82
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12/31/96 9.81 9.38 0.54 0.00 0.01 1.42
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12/31/95 9.17 9.81 0.60 0.00 0.00 13.87
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12/31/94 10.01 9.17 0.45 0.00 0.07 (3.25)
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12/31/93 9.68 10.01 0.67 0.00 0.00 10.45
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12/31/92 9.81 9.68 0.53 0.00 0.11 5.45
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12/31/91 9.11 9.81 0.63 0.00 0.08 16.28
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12/31/90 9.25 9.11 0.68 0.00 0.06 6.99
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12/31/89 8.75 9.25 0.70 0.00 0.03 14.58
===========================================================================================
Total $5.90 $0.00 $0.36
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Historical Performance -- Class L Shares (2)
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<CAPTION>
Net Asset Value
-------------------
Year Beginning End Income Capital Gain Return Total
Ended of Year of Year Dividends Distributions of Capital Returns(1)
===========================================================================================
<S> <C> <C> <C> <C> <C> <C>
12/31/98 $ 9.78 $ 9.97 $0.53 $0.00 $0.00 7.56%
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12/31/97 9.38 9.78 0.57 0.00 0.00 10.75
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12/31/96 9.81 9.38 0.55 0.00 0.01 1.47
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12/31/95 9.17 9.81 0.61 0.00 0.00 13.93
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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+
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Total $3.32 $0.00 $0.08
===========================================================================================
</TABLE>
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Smith Barney Government Securities Fund 5
<PAGE>
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Historical Performance -- Class Y Shares
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<TABLE>
<CAPTION>
Net Asset Value
-----------------
Year Beginning End Income Capital Gain Return Total
Ended of Year of Year Dividends Distributions of Capital Returns(1)
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
12/31/98 $9.76 $9.97 $0.59 $0.00 $0.00 8.42%
- ------------------------------------------------------------------------------------------
12/31/97 9.34 9.76 0.63 0.00 0.00 11.73
- ------------------------------------------------------------------------------------------
Inception(*) - 12/31/96 9.71 9.34 0.56 0.00 0.01 2.30+
==========================================================================================
Total $1.78 $0.00 $0.01
==========================================================================================
</TABLE>
It is the Fund's policy to distribute dividends monthly and capital gains, if
any, annually.
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Average Annual Total Return
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Without Sales Charge(1)
----------------------------------------------
Class A Class B Class L(2) Class Y
================================================================================
Year Ended 12/31/98 8.12% 7.44% 7.56% 8.42%
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Five Years Ended 12/31/98 6.44 5.89 5.96 N/A
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Ten Years Ended 12/31/98 N/A 8.25 N/A N/A
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Inception(*) through 12/31/98 7.40 8.18 6.30 7.68
================================================================================
With Sales Charge(3)
----------------------------------------------
Class A Class B Class L(2) Class Y
================================================================================
Year Ended 12/31/98 3.25% 2.94% 5.47% 8.42%
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Five Years Ended 12/31/98 5.47 5.73 5.75 N/A
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Ten Years Ended 12/31/98 N/A 8.25 N/A N/A
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Inception(*) through 12/31/98 6.60 8.18 6.12 7.68
================================================================================
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6 1998 Annual Report to Shareholders
<PAGE>
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Cumulative Total Return
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Without Sales Charge(1)
================================================================================
Class A (Inception(*) through 12/31/98) 55.14%
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Class B (12/31/88 through 12/31/98) 121.03
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Class L (Inception(*) through 12/31/98)(2) 43.43
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Class Y (Inception(*) through 12/31/98) 23.92
================================================================================
(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 and L shares or the applicable
contingent deferred sales charges ("CDSC") with respect to Class B and L
shares.
(2) Effective June 12, 1998, Class C shares were renamed Class L shares.
(3) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charges of 4.50% and 1.00%,
respectively; Class B shares reflect the deduction of a 4.50% CDSC, which
applies if shares are redeemed within one year from 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 L shares also 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, L 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.
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Smith Barney Government Securities Fund 7
<PAGE>
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Historical Performance (unaudited)
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Growth of $10,000 Invested in Class B Shares of
the Smith Barney Government Securities Fund
vs. Lehman Brothers Government Bond Index
and Lipper U.S. Government Peer Group Average+
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December 1988 -- December 1998
[GRAPH]
Lehman Brothers Lipper U.S.
Smith Barney Government Government Peer
Government Securities Fund Bond Index Group Average
12/88 10,000 10,000 10,000
12/89 11,009 11,422 11,239
12/90 11,859 12,417 12,144
12/91 13,995 14,319 13,913
12/92 14,932 15,353 14,796
12/93 16,604 16,990 16,169
12/94 16,075 16,415 15,455
12/95 18,305 19,426 18,207
12/96 18,564 19,965 18,517
12/97 20,573 21,880 20,174
12/98 22,103 24,034 21,797
+ Hypothetical illustration of $10,000 invested in Class B shares on December
31, 1988, assuming reinvestment of dividends and capital gains, if any, at
net asset value through December 31, 1998. 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 U.S. Government Peer Group Average is
composed of the Fund's peer group of 193 mutual funds investing in U.S.
Government securities as of December 31, 1998. 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.
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8 1998 Annual Report to Shareholders
<PAGE>
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Portfolio Highlights (unaudited) December 31, 1998
- --------------------------------------------------------------------------------
Portfolio Breakdown
[PIE CHART]
Mortgage-Backed Securities 70.8%
Cash Equivalent 1.3%
U.S. Government and
Agency Obligations 27.9%
U.S. Government and Agency Obligations are obligations of, or guaranteed by, the
United States Government, its agencies or instrumentalities 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.
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Smith Barney Government Securities Fund 9
<PAGE>
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Schedule of Investments December 31, 1998
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<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS -- 27.9%
$218,000,000 U.S. Treasury Strips, zero coupon due 11/15/09 $ 124,809,360
110,500,000 FNMA P-Strips, zero coupon due 7/5/14 46,233,200
5,000,000 FNMA Global Bond, 6.350%, due 11/23/01++ 5,057,000
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TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(Cost-- $175,689,284) 176,099,560
=========================================================================================
MORTGAGE-BACKED SECURITIES -- 70.8%
712 FNMA 30 Year, 8.000% due 6/1/07 735
60,672,579 FNMA 30 Year, 6.000% due 4/1/28 59,951,789
154,303,501 FNMA 30 Year, 6.500% due 12/1/28+ 155,411,401
9,085 FNMA Balloon 7 Year, 6.000% due 3/1/05 9,148
52,457,920 FNMA Dwarf 15 Year, 6.000% due 6/1/13+ 52,636,802
58,268,293 FNMA Dwarf 15 Year, 6.500% due 11/1/13+ 59,142,318
91,263 GNMA 30 Year, 11.000% due 10/15/10+ 101,445
60,039 GNMA 30 Year, 10.500% due 3/15/16 65,780
17,443 GNMA 30 Year, 10.000% due 3/15/16 19,068
206,941 GNMA 30 Year, 9.500% due 5/15/20+ 223,497
764,778 GNMA 30 Year, 8.000% due 9/15/26+ 794,888
116,355,638 GNMA 30 Year, 6.500% due 8/15/28+ 117,627,405
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TOTAL MORTGAGE-BACKED SECURITIES
(Cost-- $443,418,480) 445,984,276
=========================================================================================
REPURCHASE AGREEMENT -- 1.3%
7,978,000 Morgan Stanley Dean Witter & Co., 4.650% due 1/4/99;
Proceeds at maturity-- $7,982,122 (Fully collateralized by
U.S. Treasury Notes, 6.500% due 8/15/05; U.S. Treasury Notes,
6.000% due 8/15/99; U.S. Treasury Notes, 6.375% due 7/15/99;
U.S. Treasury Bonds, 6.375% due 8/15/27; Total market value--
$8,174,748) (Cost-- $7,978,000) 7,978,000
=========================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $627,085,764*) $630,061,836
=========================================================================================
</TABLE>
++ Security is segregated by the Custodian for open futures contract
commitments.
+ Date shown represents the last in range of maturity dates of mortgage
certificates owned.
(*) Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
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10 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost-- $627,085,764) $630,061,836
Cash 513
Receivable for Fund shares sold 3,518,673
Interest receivable 2,396,801
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Total Assets 635,977,823
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LIABILITIES:
Investment advisory fees payable 188,687
Payable for Fund shares purchased 142,707
Administration fees payable 111,373
Distribution fees payable 58,100
Accrued expenses 108,935
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Total Liabilities 609,802
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Total Net Assets $635,368,021
============================================================================================
NET ASSETS:
Par value of capital shares $ 63,711
Capital paid in excess of par value 665,245,322
Overdistributed net investment income (2,303)
Accumulated net realized loss from
security transactions and futures contracts (32,914,781)
Net unrealized appreciation of investments 2,976,072
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Total Net Assets $635,368,021
============================================================================================
Shares Outstanding:
Class A 34,863,415
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Class B 9,231,706
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Class L 442,458
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Class Y 19,173,820
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Net Asset Value:
Class A (and redemption price) $9.97
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Class B(*) $9.97
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Class L(**) $9.97
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Class Y (and redemption price) $9.97
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Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) $10.44
- --------------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $10.07
============================================================================================
</TABLE>
(*) Redemption price is NAV of Class B shares reduced by a 4.50% CDSC if shares
are redeemed within one year from purchase (See Note 2).
(**) Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
See Notes to Financial Statements.
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Smith Barney Government Securities Fund 11
<PAGE>
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Statement of Operations For the Year Ended December 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $36,954,687
Less: Interest expense (Note 6) (494,939)
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Total Investment Income 36,459,748
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EXPENSES:
Investment advisory fees (Note 2) 2,107,128
Distribution fees (Note 2) 1,593,796
Administration fees (Note 2) 1,204,073
Shareholder and system servicing fees 367,638
Registration fees 81,493
Directors' fees 45,290
Audit and legal 36,579
Custody 30,000
Shareholder communications 25,947
Other 16,157
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Total Expenses 5,508,101
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Net Investment Income 30,951,647
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REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 3 AND 7):
Realized Gain From:
Security transactions (excluding short-term securities) 21,128,573
Futures contracts 1,754,811
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Net Realized Gain 22,883,384
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Change in Net Unrealized Appreciation of Investments:
Beginning of year 9,817,165
End of year 2,976,072
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Decrease in Net Unrealized Appreciation (6,841,093)
- -------------------------------------------------------------------------------
Net Gain on Investments and Futures Contracts 16,042,291
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations $46,993,938
===============================================================================
See Notes to Financial Statements.
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12 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 30,951,647 $ 33,459,221
Net realized gain 22,883,384 13,136,258
Increase (decrease) in net unrealized appreciation (6,841,093) 11,264,896
- ----------------------------------------------------------------------------------------
Increase in Net Assets From Operations 46,993,938 57,860,375
- ----------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (33,878,439) (34,333,513)
- ----------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (33,878,439) (34,333,513)
- ----------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares 163,735,064 90,813,629
Net asset value of shares issued for
reinvestment of dividends 16,427,262 19,911,054
Cost of shares reacquired (132,526,357) (111,201,650)
- ----------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Fund Share Transactions 47,635,969 (476,967)
- ----------------------------------------------------------------------------------------
Increase in Net Assets 60,751,468 23,049,895
NET ASSETS:
Beginning of year 574,616,553 551,566,658
- ----------------------------------------------------------------------------------------
End of year(*) $635,368,021 $574,616,553
========================================================================================
(*) Includes overdistributed net investment income of: $(2,303) $(15,649)
========================================================================================
</TABLE>
See Notes to Financial Statements.
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Smith Barney Government Securities Fund 13
<PAGE>
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Notes to Financial Statements
- --------------------------------------------------------------------------------
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 this
Portfolio and seven other separate investment portfolios: Smith Barney
Investment Grade Bond, Smith Barney Special Equities, Smith Barney Contrarian
(formerly known as Smith Barney Managed Growth Fund), Concert Peachtree Growth,
Smith Barney Hansberger Global Value, Smith Barney Hansberger Global Small Cap
Value and Smith Barney Small Cap Value Funds. The financial statements and
financial highlights for the other portfolios are presented in separate annual
reports.
The significant accounting policies consistently followed by the Portfolio are:
(a) security transactions are accounted for on trade date; (b) securities traded
on national securities markets are valued at the closing price on such markets;
securities traded in the over-the-counter market and listed securities for which
no sales price was reported and U.S. government and government agency
obligations are valued at bid price, or in the absence of a recent bid price, at
the bid equivalent obtained from one or more of the major market makers; (c)
securities maturing within 60 days are valued at cost plus accreted discount, or
minus amortized premium, which approximates value; (d) 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, 1998,
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 overdistributed net
investment income amounting to $2,956,220 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.
- --------------------------------------------------------------------------------
14 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
2. Investment Advisory Agreement, Administration Agreement and
Other Transactions
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney Holdings
Inc. ("SSBH"), acts as investment adviser to the Portfolio. The Portfolio pays
MMC 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.
MMC 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.
On October 8, 1998, CFBDS, Inc. became the Fund's distributor. Prior to that
date Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH, was the
Fund's distributor. SSB, as well as certain other broker-dealers, continues to
sell Fund shares to the public as members of the selling group.
On June 12, 1998, the Portfolio's existing Class C shares were renamed as Class
L shares. Effective June 15, 1998, Class L shares are being sold at net asset
value plus a maximum initial sales charge of 1.00%. Class L shares also have a
1.00% contingent deferred sales charge ("CDSC"), which applies if redemption
occurs within the first year of purchase.
There is also a CDSC of 4.50% on Class B shares, which applies if redemption
occurs within one year from purchase. This CDSC declines by 0.50% the first year
after purchase and thereafter by 1.00% per year until no CDSC is incurred. In
addition, Class A shares have a 1.00% CDSC, which applies if redemption occurs
within the first year of purchase. This CDSC only applies to those purchases of
Class A shares which, when combined with current holdings of Class A shares,
equal or exceed $500,000 in the aggregate. These purchases do not incur an
initial sales charge.
For the year ended December 31, 1998, SSB received sales charges of $140,000 and
$17,000 on sales of the Fund's Class A and L shares, respectively. In addition,
CDSCs paid to SSB were approximately:
Class A Class B Class L
================================================================================
CDSCs $6,000 $87,000 $1,000
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Government Securities Fund 15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Pursuant to a Distribution Plan, the Portfolio pays a service fee with respect
to Class A, B and L 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 L shares calculated at the annual
rate of 0.50% and 0.45% of the average daily net assets for each class,
respectively. For the year ended December 31, 1998, total Distribution Plan fees
incurred were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $883,941 $690,191 $19,664
================================================================================
All officers and one Director of the Fund are employees of SSB.
3. Investments
During the year ended December 31, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding short-
term securities) were as follows:
================================================================================
Purchases $1,959,187,379
- --------------------------------------------------------------------------------
Sales 1,970,599,451
================================================================================
At December 31, 1998, aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $4,864,939
- --------------------------------------------------------------------------------
Gross unrealized depreciation (1,888,867)
- --------------------------------------------------------------------------------
Net unrealized appreciation $2,976,072
================================================================================
4. Capital Loss Carryforward
At December 31, 1998, the Portfolio had, for Federal tax purposes, approximately
$31,871,000 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 $31,676,000 $195,000
================================================================================
- --------------------------------------------------------------------------------
16 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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.
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.
During the year ended December 31, 1998, the maximum and average amount of
reverse repurchase agreements outstanding were as follows:
================================================================================
Maximum amount outstanding $149,940,000
- --------------------------------------------------------------------------------
Average amount outstanding $ 91,556,875
================================================================================
Interest rates on reverse repurchase agreements ranged from 3.98% to 5.02%
during the period. Interest expense on reverse repurchase agreements totalled
$494,939. The Portfolio had no open reverse repurchase agreements at December
31, 1998.
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
- --------------------------------------------------------------------------------
Smith Barney Government Securities Fund 17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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).
At December 31, 1998, the Portfolio had no open futures contracts.
8. Options Contracts
Premiums paid when put or call options are purchased by the Portfolio represent
investments, which are marked-to-market daily and are included in the schedule
of investments. When a purchased option expires, the Portfolio will realize a
loss in the amount of the premium paid. When the Portfolio enters into a closing
sales transaction, the Portfolio will realize a gain or loss depending on
whether the proceeds from the closing sales transaction are greater or less than
the premium paid for the option. When the Portfolio exercises a put option, it
will realize a gain or loss from the sale of the underlying security and the
proceeds from such sale will be decreased by the premium originally paid. When
the Portfolio exercises a call option, the cost of the security which the
Portfolio purchases upon exercise will be increased by the premium originally
paid.
At December 31, 1998, 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
depending upon whether the cost of the closing transaction is greater or less
than the premium originally received, 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.
- --------------------------------------------------------------------------------
18 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (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 year ended December 31, 1998, the Portfolio did not write any
options.
9. Securities Traded on a When-Issued or
To-Be-Announced Basis
The Portfolio may trade securities on a "to-be-announced" ("TBA") basis. In a
TBA transaction, the Portfolio commits to purchasing or selling securities for
which specific information is not yet known at the time of the trade,
particularly the face amount and maturity date. Securities purchased on a TBA
basis are not settled until they are delivered to the Portfolio, normally 15 to
45 days later. These transactions are subject to market fluctuations and their
current value is determined in the same manner as for other portfolio
securities.
At December 31, 1998, the Portfolio held no TBA securities.
10. 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 depending on the type of securities loaned. The custodian establishes
and maintains the collateral in a segregated account. The Fund maintains
exposure for the risk of any losses in the investment of amounts received as
collateral.
At December 31, 1998, the Portfolio had no securities on loan.
- --------------------------------------------------------------------------------
Smith Barney Government Securities Fund 19
<PAGE>
Notes to Financial Statements (continued)
11. Capital Shares
At December 31, 1998, 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. Effective June 12, 1998, the Portfolio adopted the renaming of existing
Class C shares as Class L shares.
At December 31, 1998, total paid-in capital amounted to the following for each
class:
Class A Class B Class L Class Y
================================================================================
Total Paid-in Capital $313,795,394 $164,464,468 $4,295,219 $182,753,952
================================================================================
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
-------------------- ----------------------
Shares Amount Shares Amount
===========================================================================================
<S> <C> <C> <C> <C>
Class A
Shares sold 5,977,934 $ 59,386,468 1,119,519 $ 9,991,176
Shares issued on reinvestment 1,327,067 13,040,346 1,638,302 15,427,205
Shares redeemed (9,463,412) (93,606,842) (7,351,627) (69,285,225)
- -------------------------------------------------------------------------------------------
Net Decrease (2,158,411) $(21,180,028) (4,593,806) $(43,866,844)
==========================================================================================
Class B
Shares sold 2,353,261 $ 23,496,336 1,269,883 $12,706,909
Shares issued on reinvestment 334,301 3,291,162 467,262 4,418,693
Shares redeemed (3,804,979) (37,524,683) (4,379,419) (41,471,631)
- -------------------------------------------------------------------------------------------
Net Decrease (1,117,417) $(10,737,185) (2,642,274) $(24,346,029)
==========================================================================================
Class L+
Shares sold 337,917 $ 3,359,379 122,793 $ 1,172,773
Shares issued on reinvestment 9,720 95,754 6,863 65,156
Shares redeemed (141,467) (1,394,832) (47,246) (444,794)
- -------------------------------------------------------------------------------------------
Net Increase 206,170 $ 2,060,301 82,410 $ 793,135
==========================================================================================
Class Y
Shares sold 7,915,587 $ 77,492,881 7,012,847 $66,942,771
- -------------------------------------------------------------------------------------------
Net Increase 7,915,587 $ 77,492,881 7,012,847 $66,942,771
==========================================================================================
</TABLE>
+ On June 12, 1998, Class C shares were renamed Class L shares.
- --------------------------------------------------------------------------------
20 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class A Shares 1998(1) 1997 1996 1995(1) 1994
===========================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $9.75 $9.34 $9.77 $9.17 $10.01
- -------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.51 0.59 0.61 0.67 0.52
Net realized and unrealized gain (loss) 0.26 0.42 (0.44) 0.62 (0.80)
- -------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.77 1.01 0.17 1.29 (0.28)
- -------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.55) (0.60) (0.59) (0.69) (0.49)
Capital -- -- (0.01) -- (0.07)
- -------------------------------------------------------------------------------------------
Total Distributions (0.55) (0.60) (0.60) (0.69) (0.56)
- -------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.97 $9.75 $9.34 $9.77 $9.17
- -------------------------------------------------------------------------------------------
Total Return 8.12% 11.23% 1.96% 14.50% (2.76)%
- -------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $347,622 $361,124 $388,563 $453,378 $482,404
- -------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Other expenses 0.92% 0.92% 0.93% 0.94% 1.00%
Interest expense 0.08 0.85 0.84 0.43 0.26
Net investment income 5.15 6.24 6.16 6.70 6.18
- -------------------------------------------------------------------------------------------
Portfolio Turnover Rate 334% 274% 420% 294% 276%
===========================================================================================
</TABLE>
(1) 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.
- --------------------------------------------------------------------------------
Smith Barney Government Securities Fund 21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class B Shares 1998(1) 1997 1996 1995(1) 1994
============================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $9.79 $9.38 $9.81 $9.17 $10.01
- --------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.45 0.54 0.56 0.59 0.46
Net realized and unrealized gain (loss) 0.26 0.44 (0.44) 0.65 (0.78)
- --------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.71 0.98 0.12 1.24 (0.32)
- --------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.53) (0.57) (0.54) (0.60) (0.45)
Capital -- -- (0.01) -- (0.07)
- --------------------------------------------------------------------------------------------
Total Distributions (0.53) (0.57) (0.55) (0.60) (0.52)
- --------------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.97 $9.79 $9.38 $9.81 $9.17
- --------------------------------------------------------------------------------------------
Total Return 7.44% 10.82% 1.42% 13.87% (3.25)%
- --------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $92,082 $101,273 $121,894 $158,459 $172,705
- --------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Other expenses 1.43% 1.44% 1.45% 1.45% 1.48%
Interest expense 0.08 0.85 0.84 0.43 0.26
Net investment income 4.64 5.73 5.64 6.19 5.69
- --------------------------------------------------------------------------------------------
Portfolio Turnover Rate 334% 274% 420% 294% 276%
============================================================================================
</TABLE>
(1) 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.
- --------------------------------------------------------------------------------
22 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
<TABLE>
<CAPTION>
Class L Shares(1) 1998(2) 1997 1996 1995(2) 1994
====================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $9.78 $9.38 $9.81 $9.17 $10.01
- ------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.45 0.54 0.57 0.60 0.49
Net realized and unrealized gain (loss) 0.27 0.43 (0.44) 0.65 (0.81)
- ------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.72 0.97 0.13 1.25 (0.32)
- ------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.53) (0.57) (0.55) (0.61) (0.45)
Capital -- -- (0.01) -- (0.07)
- ------------------------------------------------------------------------------------
Total Distributions (0.53) (0.57) (0.56) (0.61) (0.52)
- ------------------------------------------------------------------------------------
Net Asset Value, End of Year $9.97 $9.78 $9.38 $9.81 $9.17
- ------------------------------------------------------------------------------------
Total Return 7.56% 10.75% 1.47% 13.93% (3.25)%
- ------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $4,411 $2,311 $1,443 $1,039 $646
- ------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Other expenses 1.40% 1.39% 1.38% 1.37% 1.47%
Interest expense 0.08 0.85 0.84 0.43 0.26
Net investment income 4.63 5.70 5.71 6.27 5.71
- ------------------------------------------------------------------------------------
Portfolio Turnover Rate 334% 274% 420% 294% 276%
==================================================================================
</TABLE>
(1)On June 12, 1998, Class C shares were renamed Class L shares.
(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.
- --------------------------------------------------------------------------------
Smith Barney Government Securities Fund 23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding throughout each year
ended December 31:
Class Y Shares 1998(1) 1997 1996(2)
===============================================================================
Net Asset Value, Beginning of Year $9.76 $9.34 $9.71
- -------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.54 0.61 0.57
Net realized and unrealized gain (loss) 0.26 0.44 (0.37)
- -------------------------------------------------------------------------------
Total Income From Operations 0.80 1.05 0.20
- -------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.59) (0.63) (0.56)
Capital -- -- (0.01)
- -------------------------------------------------------------------------------
Total Distributions (0.59) (0.63) (0.57)
- -------------------------------------------------------------------------------
Net Asset Value, End of Year $9.97 $9.76 $9.34
- -------------------------------------------------------------------------------
Total Return 8.42% 11.73% 2.30%++
- -------------------------------------------------------------------------------
Net Assets, End of Year (000s) $191,253 $109,909 $39,667
- -------------------------------------------------------------------------------
Ratios to Average Net Assets:
Other expenses 0.59% 0.58% 0.44%+
Interest expense 0.08 0.85 0.84+
Net investment income 5.43 6.46 6.49+
- -------------------------------------------------------------------------------
Portfolio Turnover Rate 334% 274% 420%
===============================================================================
(1) 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.
(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.
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
A total of 30.69% of the ordinary dividends paid by the Fund from net investment
income are derived from Federal obligations and may be exempt from taxation at
the state level.
- --------------------------------------------------------------------------------
24 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Smith Barney Investment Funds Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Smith Barney Government Securities Fund of
Smith Barney Investment Funds Inc. as of December 31, 1998, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended and financial
highlights for each of the years in the four-year period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The financial
highlights for the year ended December 31, 1994, were audited by other auditors
whose report thereon, dated February 10, 1995, expressed an unqualified opinion
on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1998, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Smith Barney Government Securities Fund of Smith Barney Investment Funds Inc. as
of December 31, 1998, the results of its operations for the year then ended, the
changes in its net assets for each of the years in the two-year period then
ended and its financial highlights for each of the years in the four-year period
then ended, in conformity with generally accepted accounting principles.
KPMG LLP
New York, New York
February 8, 1999
- --------------------------------------------------------------------------------
Smith Barney Government Securities Fund 25
<PAGE>
On February 6, 1998, a special meeting of shareholders of the Fund was held for
the purpose of voting on the following matters:
1. To elect Directors of the Fund which includes all Portfolios; and
2. To approve or disapprove the reclassification, modification and/or
elimination of certain fundamental investment policies.
The results of the vote on Proposal 1 were as follows:
Shares Voted Percentage Shares Voted Percentage
Name of Directors For Shares Voted Against Shares Voted
================================================================================
Paul R. Ades 110,457,871.145 96.547% 3,950,761.251 3.453%
Herbert Barg 110,299,351.998 96.408 4,109,280.398 3.592
Dwight B. Crane 110,443,765.891 96.534 3,964,866.505 3.466
Frank Hubbard 110,456,573.292 96.546 3,952,059.104 3.454
Jerome Miller 110,457,232.652 96.546 3,951,399.744 3.454
Ken Miller 110,449,857.597 96.540 3,958,774.799 3.460
Heath B. McLendon 110,401,492.247 96.498 4,007,140.149 3.502
================================================================================
Proposal 2 requested that shareholders approve certain changes to the
fundamental investment policies of the Portfolio in order to modernize them in
view of certain regulatory, business or industry developments that have occurred
since original adoption of these policies by the Portfolio. The following chart
demonstrates that all proposals were approved by the shareholders.
Please note that "M" indicates a modification of the policy; "E" indicates the
elimination of the policy; and "R" indicates the reclassification of the policy
from fundamental (which would require shareholder approval to change) to
non-fundamental (which can be changed by a vote of the Board of Directors).
================================================================================
M Diversification Approved
- --------------------------------------------------------------------------------
M Industry Concentration Approved
- --------------------------------------------------------------------------------
R Restricted and Illiquid Securities Approved
- --------------------------------------------------------------------------------
R Unseasoned Issues Approved
- --------------------------------------------------------------------------------
M Lending Approved
- --------------------------------------------------------------------------------
R Margin and Short Sales Approved
- --------------------------------------------------------------------------------
M Real Estate Approved
- --------------------------------------------------------------------------------
R Purchases of Securities of Other Investment Companies Approved
- --------------------------------------------------------------------------------
R Investments in Oil, Gas and Mineral Exploration Approved
- --------------------------------------------------------------------------------
R Exercising Control or Management Approved
- --------------------------------------------------------------------------------
E 5% Ownership of Certain Securities Approved
- --------------------------------------------------------------------------------
E Limiting Participation in Joint Trading Accounts Approved
================================================================================
- --------------------------------------------------------------------------------
26 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited) (continued)
- --------------------------------------------------------------------------------
The information below reports the lowest percentage of shares voting for the
proposals, the highest percentage of shares voting against and abstaining by
shareholders of the Portfolio on all proposals.
Percentage Percentage Percentage
Shares Voted of Shares Shares Voted of Shares Shares of Shares
For Voted Against Voted Abstaining Abstained
================================================================================
28,832,744.562 89.734% 762,972.958 2.374% 2,535,744.436 7.892%
================================================================================
- --------------------------------------------------------------------------------
Smith Barney Government Securities Fund 27
<PAGE>
[This page intentionally left blank]
<PAGE>
SalomonSmithBarney
---------------------------
A member of citigroup[LOGO]
Directors Investment Adviser
Paul R. Ades Mutual Management Corp.
Herbert Barg
Dwight B. Crane Distributor
Frank J. Hubbard CFBDS, Inc.
Heath B. McLendon, Chairman
Jerome Miller Custodian
Ken Miller PNC Bank, N.A.
John F. White, Emeritus
Shareholder
Servicing Agent
Officers First Data Investor Services Group, Inc.
Heath B. McLendon P.O. Box 9134
President and Boston, MA 02205-9134
Chief Executive Officer
This report is submitted for the general
Lewis E. Daidone information of the shareholders of Smith
Senior Vice President Barney Investment Funds -- Smith
and Treasurer Barney Government Securities Fund. It is
not authorized for distribution to
James E. Conroy prospective investors unless accompanied
Vice President and or preceded by a current Prospectus for
Investment Officer the Fund, which contains information
concerning the Fund's investment
Paul A. Brook policies and expenses as well as other
Controller pertinent information.
Christina T. Sydor Salomon Smith Barney is a service mark
Secretary of Salomon Smith Barney Inc.
Smith Barney
Government Securities Fund
388 Greenwich Street, MF-2
New York, New York 10013
www.smithbarney.com
FD0316 2/99
