Notes to Financial Statements (unaudited)
1. Organization and Significant Accounting PoliciesThe Smith Barney Small Cap Growth Fund (“Fund”), a separate diversified investment fund of the Smith Barney Investment Funds Inc. (“Company”), a Maryland corporation, is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). 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.
(a) Investment Valuation. Securities traded on national securities markets are valued at the closing sales price on such markets. Securities listed on the NASDAQ National Market System for which market quotations are available are valued at the official closing price or, if there is no official closing price on that day, at the last sales price. Securities traded in over-the-counter markets, securities for which no sales price was reported and fixed-income securities are valued at the mean between the closing bid and asked prices. Securities, which are listed or traded on more than one exchange or market, are valued at the quotations on the exchange or market determined to be the pricing market for such securities.When market quotations or official closing prices are not readily available, or are determined not to reflect accurately fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund may value these investments at fair value as determined in accordance with the procedures approved by the Fund’s Board of Directors. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates value.
(b) Repurchase Agreements. When entering into repurchase agreements, it is the Fund’s policy that a custodian take possession of the underlying collateral securities, the value of which at least equals the principal amount of the repurchase transaction, including accrued interest.To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market to ensure the adequacy of the collateral. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.
(c) Security Transactions and Investment Income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Foreign dividend income is recorded on the ex-dividend date or as soon as practical after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence.The cost of investments sold is determined by use of the specific identification method.
(d) Distributions to Shareholders. Distributions from net investment income and distributions of net realized gains, if any, are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(e) Class Accounting. Investment income, common expenses and realized/unrealized gain (loss) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Distribution, transfer agency services and shareholder communications fees relating to a specific class are charged directly to that class.
17 Smith Barney Small Cap Growth Fund | 2005 Semi-Annual Report
Notes to Financial Statements (unaudited) (continued)
(f) Federal and Other Taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute substantially all of its taxable income and net realized gains on investments, if any, to shareholders each year. Therefore, no federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends and capital gains at various rates.
(g) Reclassifications. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting.These reclassifications have no effect on net assets or net asset values per share.
2. Management Agreement and Other Transactions with Affiliates
Smith Barney Fund Management LLC (“SBFM”), an indirect wholly-owned subsidiary of Citigroup Inc. (“Citigroup”), acts as investment manager to the Fund.The Fund pays SBFM a management fee calculated at an annual rate of 0.75% of the Fund’s average daily net assets.This fee is calculated daily and paid monthly.
Citicorp Trust Bank, fsb. (“CTB”), another subsidiary of Citigroup, acts as the Fund’s transfer agent. PFPC Inc. (“PFPC”) and Primerica Shareholder Services (“PSS”), another subsidiary of Citigroup, act as the Fund’s sub-transfer agents. CTB receives account fees and asset-based fees that vary according to the size and type of account. PFPC and PSS are responsible for shareholder recordkeeping and financial processing for all shareholder accounts and are paid by CTB. For the six months ended March 31, 2005, the Fund paid transfer agent fees of $177,248 to CTB.
Citigroup Global Markets Inc. (“CGM”) and PFS Distributors, Inc., both of which are subsidiaries of Citigroup, act as the Fund’s distributors.
There are maximum sales charges of 8.50% and 5.00% for Class 1 and A shares, respectively.There is a contingent deferred sales charge (“CDSC”) of 5.00% on Class B shares, which applies if redemption occurs within one year from purchase payment. This CDSC declines thereafter by 1.00% per year until no CDSC is incurred. Class C shares have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. In certain cases, Class A shares have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment.This CDSC only applies to those purchases of Class A shares, which, when combined with current holdings of Class A shares, equal or exceed $1,000,000 in the aggregate.These purchases do not incur an initial sales charge.
For the six months ended March 31, 2005, CGM and its affiliates received sales charges of approximately $9,000 and $240,000 on sales of the Fund’s Class 1 and A shares, respectively. In addition, for the six months ended March 31, 2005, CDSCs paid to CGM and its affiliates were approximately:
| | | Class A | | Class B | | Class C |
|
| CDSCs | | $0* | | $111,000 | | $1,000 |
|
| * | Amount represents less than $1,000. |
18 Smith Barney Small Cap Growth Fund | 2005 Semi-Annual Report
Notes to Financial Statements (unaudited) (continued)
For the six months ended March 31, 2005, CGM and its affiliates received brokerage commissions of $5,236.
All officers and one Director of the Company are employees of Citigroup or its affiliates and do not receive compensation from the Company.
3. Investments
During the six months ended March 31, 2005, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
|
| Purchases | | $ | | 139,533,061 |
|
| Sales | | | | 182,701,178 |
|
At March 31, 2005, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:
|
| Gross unrealized appreciation | $ | | 80,002,284 | |
| Gross unrealized depreciation | | | (4,071,378 | ) |
|
| Net unrealized appreciation | $ | | 75,930,906 | |
|
4. Class Specific Expenses
Pursuant to a Rule 12b-1 Distribution Plan, the Fund pays a service fee with respect to its Class A, B and C shares calculated at the annual rate of 0.25% of the average daily net assets of each respective class.The Fund also pays a distribution fee with respect to its Class B and C shares calculated at the annual rate of 0.75% of the average daily net assets of each class, respectively. For the six months ended March 31, 2005, total Rule 12b-1 Distribution Plan fees, which are accrued daily and paid monthly, were as follows:
| | | Class A | | Class B | | Class C |
|
| Rule 12b-1 Distribution Plan Fees | | $177,074 | | $501,773 | | $95,240 |
|
For the six months ended March 31, 2005, total Transfer Agency Service fees were as follows:
| | | Class 1 | | Class A | | Class B | | Class C | | Class Y |
|
| Transfer Agency Service Fees | | $20,543 | | $266,051 | | $157,478 | | $12,653 | | $82 |
|
For the six months ended March 31, 2005, total Shareholder Communication expenses were as follows:
| | | Class 1 | | Class A | | Class B | | Class C | | Class Y |
|
| Shareholder Communication Expenses | | $1,293 | | $38,899 | | $27,585 | | $3,548 | | $573 |
|
19 Smith Barney Small Cap Growth Fund | 2005 Semi-Annual Report
Notes to Financial Statements (unaudited) (continued)
5. Capital Shares
At March 31, 2005, the Company had ten billion shares of capital stock authorized with a par value of $0.001 per share.The Fund 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.
Transactions in shares of each class were as follows:
| Six Months Ended
March 31, 2005 | | Year Ended
September 30, 2004 | |
|
| |
| |
| Shares | | | Amount | | Shares | | | Amount | |
|
| Class 1 | | | | | | | | | | |
| Shares sold | 29,012 | | $ | 278,443 | | 67,859 | | $ | 643,883 | |
| Shares reacquired | (66,844 | ) | | (656,693 | ) | (107,228 | ) | | (1,002,247 | ) |
|
|
| Net Decrease | (37,832 | ) | $ | (378,250 | ) | (39,369 | ) | $ | (358,364 | ) |
|
| Class A | | | | | | | | | | |
| Shares sold | 682,899 | | $ | 6,716,565 | | 2,200,595 | | $ | 20,937,514 | |
| Shares reacquired | (1,526,302 | ) | (15,034,105 | ) | (2,733,959 | ) | | (25,798,132 | ) |
|
| Net Decrease | (843,403 | ) | $ | (8,317,540 | ) | (533,364 | ) | $ | (4,860,618 | ) |
|
| Class B | | | | | | | | | | |
| Shares sold | 523,157 | | $ | 4,956,103 | | 1,447,969 | | $ | 13,385,714 | |
| Shares reacquired | (1,118,934 | ) | (10,603,880 | ) | (2,148,926 | ) | | (19,726,132 | ) |
|
| Net Decrease | (595,777 | ) | $ | (5,647,777 | ) | (700,957 | ) | $ | (6,340,418 | ) |
|
| Class C† | | | | | | | | | | |
| Shares sold | 50,647 | | $ | 481,820 | | 369,847 | | $ | 3,443,665 | |
| Shares reacquired | (358,581 | ) | | (3,442,724 | ) | (734,967 | ) | | (6,777,910 | ) |
|
| Net Decrease | (307,934 | ) | $ | (2,960,904 | ) | (365,120 | ) | $ | (3,334,245 | ) |
|
| Class Y | | | | | | | | | | |
| Shares sold | 7 | | $ | 75 | | — | | | — | |
| Shares reacquired | (2,383,273 | ) | (23,989,317 | ) | (223,960 | ) | $ | (2,133,477 | ) |
|
| Net Decrease | (2,383,266 | ) | $ | (23,989,242 | ) | (223,960 | ) | $ | ( 2,133,477 | ) |
|
| † | | Effective April 29, 2004, Class L shares were renamed as Class C shares. |
6. Capital Loss Carryforward
On September 30, 2004, the Fund had, for federal income tax purposes, a net capital loss carryforward of $360,142,533, of which $81,453,115 expires in 2009, $184,437,252 expires in 2010 and $94,252,166 expires in 2011. This amount will be available to offset any future taxable capital gains.
7. Additional Information
Smith Barney Fund Management LLC (“SBFM”) and Citigroup Global Markets Inc. (“CGMI”) have submitted an Offer of Settlement of an administrative proceeding to the U.S. Securities and Exchange Commission (“SEC”) in connection with an investigation into the 1999 appointment of an affiliated transfer agent for the Smith Barney family of mutual funds (the “Funds”). SBFM and CGMI understand that the SEC has accepted the Offer of Settlement, but has not yet issued the administrative order.
The SEC order will find that SBFM and CGMI willfully violated Section 206(1) of the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the order will find that SBFM and CGMI knowingly or recklessly failed to disclose to the boards of the Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First
20 Smith Barney Small Cap Growth Fund | 2005 Semi-Annual Report
Notes to Financial Statements (unaudited) (continued)
Data Investors Services Group (“First Data”), the Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (“CAM”) had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange, among other things, for a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGMI.The order also will find that SBFM and CGMI willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Funds’ best interests and that no viable alternatives existed. SBFM and CGMI do not admit or deny any wrongdoing or liability. The settlement will not establish wrongdoing or liability for purposes of any other proceeding.
The SEC will censure SBFM and CGMI and order them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act.The order will require Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million.Approximately $24.4 million has already been paid to the Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, will be paid to the U.S. Treasury and then distributed pursuant to a plan to be prepared by Citigroup and submitted within 90 days of the entry of the order for approval by the SEC.The distribution plan may also include a portion of certain escrowed transfer agency fees, in accordance with the terms of the order.
The order will require SBFM to recommend a new transfer agent contract to the Fund boards within 180 days of the entry of the order; if a Citigroup affiliate submits a proposal to serve as transfer agent or sub-transfer agent, an independent monitor must be engaged at the expense of SBFM and CGMI to oversee a competitive bidding process. Under the order, Citigroup also will be required to comply with an amended version of a vendor policy that Citigroup instituted in August 2004. That policy, as amended, among other things, requires that when requested by a Fund board, CAM will retain at its own expense an independent consulting expert to advise and assist the board on the selection of certain service providers affiliated with Citigroup.
At this time, there is no certainty as to how the proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made.Although there can be no assurance, Citigroup does not believe that this matter will have a material adverse effect on the Funds.
8. Legal Matters
Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against Citigroup Global Markets Inc. (the “Distributor”) and a number of the affiliates, including Smith Barney Fund Management LLC and Salomon Brothers Asset Management Inc (the “Advisers”), substantially all of the mutual funds managed by the Advisers, including the Fund (the “Funds”), and directors or trustees of the Funds (collectively, the “Defendants”). The complaints alleged, among other things, that the Distributor created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Advisers caused the Funds to pay excessive brokerage commissions to the Distributor for steering clients towards proprietary funds. The complaints also alleged that the defendants breached their fiduciary duty to the Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions.The complaints also alleged that the Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and comepen-satory and punitive damages, rescission of the Funds’ contracts with the Advisers, pursuant to such contracts and an award of attorneys’ fees and litigation expenses.
On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. While the lawsuit is in its earliest stages, to the extent that the Complaint purports to state causes of action against
21 Smith Barney Small Cap Growth Fund | 2005 Semi-Annual Report
Notes to Financial Statements (unaudited) (continued)
the Funds, Citigroup Asset Management believes the Funds have significant defenses to such allegations, which the Funds intend to vigorously assert in responding to the Complaint.
Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filed against the Defendants in the future.
As of the date of this report, Citigroup Asset Management and the Funds believe that the resolution of the pending lawsuit will not have a material effect on the financial position or results of operations of the Funds or the ability of the Advisers and their affiliates to continue to render services to the Funds under their respective contracts.
22 Smith Barney Small Cap Growth Fund | 2005 Semi-Annual Report
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SMITH BARNEY |
SMALL CAP GROWTH FUND | | |
| | DIRECTORS | INVESTMENT MANAGER |
| | Paul R. Ades | Smith Barney Fund Management LLC |
| | Dwight B. Crane | |
| | R. Jay Gerken, CFA | DISTRIBUTORS |
| | Chairman | Citigroup Global Markets Inc. |
| | Frank G. Hubbard | PFS Distributors, Inc. |
| | Jerome H. Miller | |
| | Ken Miller | CUSTODIAN |
| | | State Street Bank and |
| | OFFICERS | Trust Company |
| | R. Jay Gerken, CFA | |
| | President and | TRANSFER AGENT |
| | Chief Executive Officer | Citicorp Trust Bank, fsb. |
| | | 125 Broad Street, 11th Floor |
| | Andrew B. Shoup | New York, New York 10004 |
| | Senior Vice President and | |
| | Chief Administrative Officer | SUB-TRANSFER AGENTS |
| | | PFPC Inc. |
| | Kaprel Ozsolak | P.O. Box 9699 |
| | Chief Financial Officer | Providence, Rhode Island |
| | and Treasurer | 02940-9699 |
| |
| | Timothy Woods, CFA | Primerica Shareholder Services |
| | Vice President and | P.O. Box 9662 |
| | Investment Officer | Providence, Rhode Island |
| | | 02940-9662 |
| | Andrew Beagley | |
| | Chief Anti-Money Laundering | |
| | Compliance Officer and | |
| | Chief Compliance Officer | |
| |
| | Robert I. Frenkel | |
| | Secretary and | |
| | Chief Legal Officer | |
Smith Barney Investment Funds Inc.
Smith Barney Small Cap Growth Fund
The Fund is a separate investment fund of the Smith Barney
Investment Funds Inc., a Maryland corporation. | | This report is submitted for general information of the shareholders of Smith Barney Investment Funds Inc. — Smith Barney Small Cap Growth Fund, but it may also be used as sales literature when preceded or accompanied by the current Prospectus. SMITH BARNEY SMALL CAP GROWTH FUND
Smith Barney Mutual Funds
125 Broad Street
10th Floor, MF-2
New York, New York 10004 This report must be preceded or accompanied by a free prospectus. Investors should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Fund. Please read the prospectus carefully before investing. www.citigroupam.com |
| | | |
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the Commission’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call 1-800-451-2010. Information on how the Fund voted proxies relating to portfolio securities during the 12-month period ended June 30, 2004 and a description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling 1-800-451-2010, (2) on the Fund’s website at www.citigroupam.com and (3) on the SEC’s website at www.sec.gov. | | ©2005 Citigroup Global Markets Inc.
Member NASD, SIPC
FD01884 5/05 05-8494 |
| ITEM 2. | CODE OF ETHICS. |
| | |
| | Not Applicable. |
| | |
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
| | |
| | Not Applicable. |
| | |
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
| | |
| | Not applicable. |
| |
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
| | |
| | Not applicable. |
| | |
| ITEM 6. | [RESERVED] |
| | |
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END |
| | |
| | MANAGEMENT INVESTMENT COMPANIES. |
| | |
| | Not applicable. |
| | |
| ITEM 8. | [RESERVED] |
| | |
| ITEM 9. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
| | |
| | Not applicable. |
| | |
| ITEM 10. | CONTROLS AND PROCEDURES. |
| | | |
| | (a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. |
| | | |
| | (b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal half-year (the registrant’s second fiscal half-year in the case of an annual report) that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. |
| | | |
| ITEM 11. | EXHIBITS. | |
| | | | |
| | (a) | Not applicable. |
| | | | |
| | (b) | Attached hereto. |
| |
| | Exhibit 99.CERT | Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
| |
| | Exhibit 99.906CERT | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Smith Barney Investment Funds Inc.
| By: | /s/ R. Jay Gerken |
| | R. Jay Gerken |
| | Chief Executive Officer of |
| | Smith Barney Investment Funds Inc. |
Date: June 9, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ R. Jay Gerken |
| | R. Jay Gerken |
| | Chief Executive Officer of |
| | Smith Barney Investment Funds Inc. |
Date: June 9, 2005
| By: | /s/ Kaprel Ozsolak |
| | Kaprel Ozsolak |
| | Chief Financial Officer of |
| | Smith Barney Investment Funds Inc. |
Date: June 9, 2005
Style Pure Series
