Effective April 7, 2006, Smith Barney Small Cap Value Fund was renamed Legg Mason Partners Small Cap Value Fund (the “Fund”), a separate diversified series of Legg Mason Partners Investment Funds, Inc. (formerly known as Smith Barney Investment Funds Inc.) (the “Company”). The Company, a Maryland corporation, is registered under the Investment Company Act of 1940, as amended (“1940 Act”), 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.
Notes to Financial Statements (unaudited) (continued)
character of distributions received from underlying REITs based on historical data provided by the REITs. After each calendar year end, REITs report the true tax character of these distributions. Differences between the estimated and actual amounts reported by the REITs are reflected in the Fund’s records in the year in which they are reported by the REITs.
(e) 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.
(f ) 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. Fees relating to a specific class are charged directly to that class.
(g) 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 income and net realized gains on investments, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Fund’s financial statements.
(h) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. During the current period, Accumulated Realized Gain and Cost of Investments have each been reduced by $385,825 as a result of return of capital distributions paid by REITs. These adjustments have no effect on net assets or net asset values per share.
2. Investment Management Agreement and Other Transactions with Affiliates
On December 1, 2005, Citigroup Inc. (“Citigroup”) completed the sale of substantially all of its asset management business, Citigroup Asset Management (“CAM”), to Legg Mason, Inc. (“Legg Mason”). As a result, the Fund’s investment manager, Smith Barney Fund Management LLC (“SBFM” or the “Manager”), previously an indirect wholly-owned subsidiary of Citigroup, has become a wholly-owned subsidiary of Legg Mason. Completion of the sale caused the Fund’s existing investment management contract to terminate.
The Fund’s shareholders approved a new investment management contract between the Fund and the Manager, which became effective on December 1, 2005.
Legg Mason, whose principal executive offices are in Baltimore, Maryland, is a financial services holding company.
Prior to the Legg Mason transaction, the Fund paid the Manager a fee calculated at an annual rate of 0.75% of the Fund’s average daily net assets.
Under the new investment management agreement, the Fund continues to pay the Manager 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.
During the six months ended March 31, 2006, the Manager waived and/or reimbursed a portion of its management fee amounting to $16,370.
The Fund’s Board has approved PFPC Inc. (“PFPC”) to serve as transfer agent for the Fund, effective January 1, 2006. The principal business office of PFPC is located at 4400
18 Legg Mason Partners Small Cap Value Fund 2006 Semi-Annual Report
Notes to Financial Statements (unaudited) (continued)
Computer Drive, Westborough, MA 01581. Prior to January 1, 2006, Citicorp Trust Bank, fsb. (“CTB”), a subsidiary of Citigroup, acted as the Fund’s transfer agent. Also, prior to January 1, 2006, PFPC acted as the Fund’s sub-transfer agent. CTB received account fees and asset-based fees that varied according to the size and type of account. PFPC was responsible for shareholder recordkeeping and financial processing for all shareholder accounts and was paid by CTB. For the six months ended March 31, 2006, the Fund paid transfer agent fees of $237,303 to CTB. In addition, for the six months ended March 31, 2006, the Fund paid $17,872 to other Citigroup affiliates for shareholder recordkeeping services.
The Fund’s Board has appointed the Fund’s current distributor, Citigroup Global Markets Inc. (“CGM”), and Legg Mason Investor Services, LLC (“LMIS”), a wholly-owned broker-dealer subsidiary of Legg Mason, as co-distributors of the Fund. The Fund’s Board has also approved an amended and restated Rule 12b-1 Plan. CGM and other broker-dealers, financial intermediaries and financial institutions (each called a “Service Agent”) that currently offer Fund shares continue to make the Fund’s shares available to their clients. Additional Service Agents may offer Fund shares in the future.
There is a maximum initial sales charge of 5.00% for Class A shares. There is a contingent deferred sales charge (“CDSC”) of 5.00% on Class B shares, which applies if redemption occurs within one year from 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, 2006, LMIS, CGM and its affiliates received sales charges of approximately $21,000 on sales of the Fund’s Class A shares. In addition, for the six months ended March 31, 2006, CDSCs paid to LMIS, CGM and its affiliates were approximately:
| | Class B | | Class C |
|
| CDSCs | $29,000 | | $1,000 |
|
For the six months ended March 31, 2006, CGM and its affiliates received broker commissions of $1,140. Certain officers and one Director of the Company are employees of Legg Mason or its affiliates and do not receive compensation from the Company.
3. Investments
During the six months ended March 31, 2006, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
| Purchases | $ 95,229,184 |
|
| Sales | 171,598,097 |
|
Legg Mason Partners Small Cap Value Fund 2006 Semi-Annual Report 19
Notes to Financial Statements (unaudited) (continued)
At March 31, 2006, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:
| Gross unrealized appreciation | $242,080,863 | |
| Gross unrealized depreciation | (12,813,755 | ) |
|
| Net unrealized appreciation | $229,267,108 | |
|
4. Class Specific ExpensesThe Fund has adopted a Rule 12b-1 distribution plan under which 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. Distribution fees are accrued daily and paid monthly.
For the six months ended March 31, 2006, class specific expenses were as follows:
| | | | | | | Shareholder |
| | | | | Transfer | Reports |
| | Distribution Fees | | Agent Fees | Expenses |
|
| Class A | $320,945 | | | $126,667 | | | $ 9,888 | |
| Class B | 736,339 | | | 62,336 | | | 16,038 | |
| Class C | 906,375 | | | 174,678 | | | 16,951 | |
| Class Y | — | | | — | | | 19 | |
5. Distributions to Shareholders by Class
| | Six Months Ended | Year Ended |
| | March 31, 2006 | September 30, 2005 |
|
| Net Investment Income | | | | | | |
| Class A | | — | | $ | 1,281,716 | |
| Class Y | | — | | | 1,118,742 | |
|
| Total | | — | | $ | 2,400,458 | |
|
| Net Realized Gains | | | | | | |
| Class A | $ | 15,640,283 | | $ | 7,049,974 | |
| Class B | | 9,719,642 | | | 4,674,470 | |
| Class C | | 11,919,549 | | | 4,826,977 | |
| Class Y | | 10,583,709 | | | 4,026,282 | |
|
| Total | $ | 47,863,183 | | $ | 20,577,703 | |
|
20 Legg Mason Partners Small Cap Value Fund 2006 Semi-Annual Report
Notes to Financial Statements (unaudited) (continued)
6. Capital Shares
At March 31, 2006, 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 in the Fund 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 | | Year Ended | |
| | | March 31, 2006 | | September 30, 2005 | |
| |
|
| | | Shares | | Amount | | Shares | | Amount | |
|
| | Class A | | | | | | | | | | |
| | Shares sold | 1,421,259 | | $ | 33,861,923 | | 3,864,412 | | $ | 87,218,823 | |
| | Shares issued on reinvestment | 640,163 | | | 14,845,376 | | 354,404 | | | 8,002,446 | |
| | Shares repurchased | (3,224,735 | ) | | (75,165,092 | ) | (1,756,405 | ) | | (39,816,426 | ) |
|
| | Net Increase (Decrease) | (1,163,313 | ) | $ | (26,457,793 | ) | 2,462,411 | | $ | 55,404,843 | |
|
| | Class B | | | | | | | | | | |
| | Shares sold | 119,492 | | $ | 2,761,320 | | 810,582 | | $ | 17,827,187 | |
| | Shares issued on reinvestment | 403,068 | | | 9,081,122 | | 198,142 | | | 4,384,892 | |
| | Shares repurchased | (774,501 | ) | | (17,891,635 | ) | (1,434,066 | ) | | (31,747,408 | ) |
|
| | Net Decrease | (251,941 | ) | $ | (6,049,193 | ) | (425,342 | ) | $ | (9,535,329 | ) |
|
| |
| | Class C | | | | | | | | | | |
| | Shares sold | 712,789 | | $ | 16,435,554 | | 2,077,024 | | $ | 45,790,964 | |
| | Shares issued on reinvestment | 510,142 | | | 11,473,076 | | 209,369 | | | 4,631,234 | |
| | Shares repurchased | (1,002,825 | ) | | (23,167,929 | ) | (1,470,317 | ) | | (32,543,537 | ) |
|
| | Net Increase | 220,106 | | $ | 4,740,701 | | 816,076 | | $ | 17,878,661 | |
|
| | Class Y | | | | | | | | | | |
| | Shares sold | 944,659 | | $ | 22,496,869 | | 4,599,389 | | $ | 101,686,840 | |
| | Shares issued on reinvestment | 252,420 | | | 5,896,546 | | 127,852 | | | 2,894,562 | |
| | Shares repurchased | (451,575 | ) | | (10,839,759 | ) | (886,499 | ) | | (20,312,203 | ) |
|
| | Net Increase | 745,504 | | $ | 17,553,656 | | 3,840,742 | | $ | 84,269,199 | |
|
7. Regulatory MattersOn May 31, 2005, the U.S. Securities and Exchange Commission (“SEC”) issued an order in connection with the settlement of an administrative proceeding against SBFM and CGM relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds (the “Funds”).
The SEC order finds that SBFM and CGM willfully violated Section 206(1) of the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the order finds that SBFM and CGM 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 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”), the Citigroup business unit
Legg Mason Partners Small Cap Value Fund 2006 Semi-Annual Report 21
Notes to Financial Statements (unaudited) (continued)
that, at the time, included the Fund’s investment manager and other investment advisory companies, 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 for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGM. The order also finds that SBFM and CGM 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 CGM do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding.
The SEC censured SBFM and CGM and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order requires 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, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for the approval of the SEC. At this time, there is no certainty as to how the above-described 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.
The order also required that transfer agency fees received from the Funds since December 1, 2004, less certain expenses, be placed in escrow and provided that a portion of such fees might be subsequently distributed in accordance with the terms of the order. On April 3, 2006, an aggregate amount of approximately $9 million was distributed to the affected Funds.
The order required 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 submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGM would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Fund’s Board selected a new transfer agent for the Fund. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.
Although there can be no assurance, SBFM does not believe that this matter will have a material adverse effect on the Funds.
On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.
22 Legg Mason Partners Small Cap Value Fund 2006 Semi-Annual Report
Notes to Financial Statements (unaudited) (continued)
8. Legal Matters
Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGM and SBFM (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the SEC described in Note 7. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the investment manager for the Smith Barney family of funds, rescission of the Funds’ management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses.
On October 5, 2005, a motion to consolidate the five actions and any subsequently filed, related action was filed. That motion contemplates that a consolidated amended complaint alleging substantially similar causes of action will be filed in the future.
As of the date of this report, SBFM believes that resolution of the pending lawsuit will not have a material effect on the financial position or results of operations of the Fund or the ability of SBFM and its affiliates to continue to render services to the funds under their respective contracts.
* * *
Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against CGM and a number of its affiliates, including SBFM 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 CGM 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 CGM for steering clients towards proprietary funds. The complaints also alleged that the Defendants breached their fiduciary duty to the Funds by improperly charging Rule l2b-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 aspects of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Funds’ contracts with the Advisers, recovery of all fees paid to 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 the Funds, the Funds’ investment managers believe 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 theses 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, the Fund’s investment manager and the Funds believe that the resolution of the pending lawsuit will not have a material effect on the financial posi-
Legg Mason Partners Small Cap Value Fund 2006 Semi-Annual Report 23
Notes to Financial Statements (unaudited) (continued)
tion 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.
The Defendants have moved to dismiss the Complaint. Those motions are pending before the court.
9. Other Matters
On September 16, 2005, the staff of the SEC informed SBFM and Salomon Brothers Asset Management Inc (“SBAM”) that the staff is considering recommending that the Commission institute administrative proceedings against SBFM and SBAM for alleged violations of Section 19(a) and 34(b) of the 1940 Act (and related Rule 19a-1). The notification is a result of an industry wide inspection by the SEC and is based upon alleged deficiencies in disclosures regarding dividends and distributions paid to shareholders of certain funds. Section 19(a) and related Rule 19a-1 of the 1940 Act generally require funds that are making dividend and distribution payments to provide shareholders with a written statement disclosing the source of the dividends and distributions, and, in particular, the portion of the payments made from each of net investment income, undistributed net profits and/or paid-in capital. In connection with the contemplated proceedings, the staff may seek a cease and desist order and/or monetary damages from SBFM or SBAM.
Although there can be no assurance, SBFM believes that this matter is not likely to have a material adverse effect on the Funds or SBFM’s ability to perform investment management services relating to the Funds.
24 Legg Mason Partners Small Cap Value Fund 2006 Semi-Annual Report
Board Approval of Management Agreement (unaudited)
On June 23, 2005, Citigroup Inc. (“Citigroup”) entered into a definitive agreement (the “Transaction Agreement”) with Legg Mason, Inc. (“Legg Mason”) under which Citigroup agreed to sell substantially all of its asset management business, Citigroup Asset Management (“CAM”), which included Smith Barney Fund Management LLC (the “Manager”), to Legg Mason in exchange for the broker-dealer and investment banking businesses of Legg Mason and certain other considerations (the “Transaction”). The Transaction closed on December 1, 2005.
The consummation of the Transaction resulted in the automatic termination of the Fund’s then current management agreement (the “Prior Management Agreement”) in accordance with the Investment Company Act of 1940, as amended (the “1940 Act”). Prior to the closing of the Transaction, the Fund’s Board approved a new management agreement between the Fund and the Manager (the “New Management Agreement”) and authorized the Fund’s officers to submit the New Management Agreement to shareholders for their approval.
On July 11, 2005, members of the Board discussed with CAM management and certain Legg Mason representatives the Transaction and Legg Mason’s general plans and intentions regarding CAM’s business and its combination with Legg Mason’s business. The Board members also inquired about the plans for and anticipated roles and responsibilities of certain CAM employees and officers after the Transaction.
At a meeting held on August 1, 2005, the Fund’s Board, including a majority of the Board members who are not “interested persons” of the Fund or the Manager as defined in the 1940 Act (the “Independent Board Members”), approved continuance of the Prior Management Agreement until the closing of the Transaction and the New Management Agreement to take effect upon such closing. To assist the Board in its consideration of the New Management Agreement, Legg Mason provided materials and information about Legg Mason, including its financial condition, asset management capabilities and organization, and CAM provided materials and information about the Transaction between Legg Mason and Citigroup. Representatives of CAM and Legg Mason also made presentations to and responded to questions from the Board. The Independent Board Members, through their independent legal counsel, also requested and received additional information from CAM and Legg Mason in connection with their consideration of the New Management Agreement. The additional information was provided in advance of and at the August meeting. After the presentations and after reviewing the written materials provided, the Independent Board Members met in executive session with their counsel to consider the New Management Agreement. The Independent Board Members also conferred separately and with their counsel about the Transaction on a number of occasions, including in connection with the July and August meetings.
In their deliberations concerning the New Management Agreement, among other things, the Board members considered:
(i) the reputation, financial strength and resources of Legg Mason and its investment advisory subsidiaries;
(ii) that, following the Transaction, CAM would be part of an organization focused on the asset management business;
Legg Mason Partners Small Cap Value Fund 25
Board Approval of Management Agreement (unaudited) (continued)
(iii) that Legg Mason is an experienced and respected asset management firm, and that Legg Mason had advised the Board members that (a) it may wish to combine certain CAM operations with those of certain Legg Mason subsidiaries; (b) it expected that these combination processes would result in changes to portfolio managers or portfolio management teams for a number of the CAM funds, subject to Board oversight and appropriate notice to shareholders, and that, in other cases, the current portfolio managers or portfolio management teams would remain in place; and (c) in the future, it may recommend that Legg Mason subsidiaries be appointed as the adviser or subadviser to some or all of the CAM funds, subject to applicable regulatory requirements;
(iv) that CAM management had advised the Board that a number of portfolio managers and other key CAM personnel would be retained after the closing of the Transaction;
(v) that CAM management and Legg Mason advised the Board that following the Transaction, they did not expect any diminution in the nature, quality and extent of services provided to the Fund and its shareholders by the Manager, including compliance services;
(vi) that under the Transaction Agreement, Citigroup and Legg Mason agreed not to take any action not contemplated by the Transaction or fail to take any action that to their respective knowledge would cause any “undue burden” on Fund shareholders under applicable provisions of the 1940 Act;
(vii) the assurances from Citigroup and Legg Mason that, for a three-year period following the closing of the Transaction, Citigroup-affiliated broker-dealers would continue to offer the Fund as an investment product, and the potential benefits to Fund shareholders from this and other third-party distribution access;
(viii) the potential benefits to Fund shareholders from being part of a combined fund family with Legg Mason-sponsored funds;
(ix) that Citigroup and Legg Mason would derive benefits from the Transaction and that, as a result, they had a financial interest in the matters that were being considered;
(x) the potential effects of regulatory restrictions on the Fund if Citigroup-affiliated broker-dealers remained principal underwriters of the Fund after the closing of the Transaction;
(xi) the fact that the Fund’s total advisory and administrative fees would not increase by virtue of the New Management Agreement, but would remain the same;
(xii) the terms and conditions of the New Management Agreement, including the differences from the Prior Management Agreement, and the benefits of a single, uniform form of agreement covering these services;
(xiii) that the Fund would not bear the costs of obtaining shareholder approval of the New Management Agreement;
(xiv) that the Fund would avail itself of permissions granted under certain licensing arrangements between Citigroup and Legg Mason that would permit the Fund (including any share classes thereof) to maintain its current name, as well as all logos, trademarks and service marks, related to Citigroup or any of its affiliates for some agreed upon time period after the closing of the Transaction; and
(xv) that, within the past year the Board had performed a full annual review of the Prior Management Agreement as required by the 1940 Act. In that regard, the Board, in its
26 Legg Mason Partners Small Cap Value Fund
Board Approval of Management Agreement (unaudited) (continued)
deliberations concerning the New Management Agreement, considered the same factors regarding the nature, quality and extent of services provided, costs of services provided, profitability, fall-out benefits, fees and economies of scale and investment performance as it did when it renewed the Prior Management Agreement, and reached substantially the same conclusions.
Legg Mason Partners Small Cap Value Fund 27
Additional Shareholder Information (unaudited)
Results of a Special Meeting of Shareholders
On November 29, 2005, a Special Meeting of Shareholders was held to elect directors of Legg Mason Partners Investment Funds, Inc. The following table provides the number of votes cast for or withheld, as well as the number of abstentions and broker non-votes as to this matter at the Special Meeting of Shareholders.
| | | | | | Authority | | | | Broker Non- |
| | Nominees | | Votes For | | Withheld | | Abstentions | | Votes |
|
| | Paul R. Ades | | 154,295,546.159 | | 5,699,406.286 | | 1,101,216.604 | | 0.000 |
| | Dwight B. Crane | | 154,269,645.182 | | 5,725,307.263 | | 1,101,216.604 | | 0.000 |
| | Frank G. Hubbard | | 154,276,889.022 | | 5,718,063.423 | | 1,101,216.604 | | 0.000 |
| | Jerome H. Miller | | 154,266,400.237 | | 5,728,552.208 | | 1,101,216.604 | | 0.000 |
| | Ken Miller | | 154,326,232.680 | | 5,668,719.765 | | 1,101,216.604 | | 0.000 |
| | R. Jay Gerken | | 154,204,059.413 | | 5,790,893.032 | | 1,101,216.604 | | 0.000 |
|
Results of a Special Meeting of ShareholdersOn November 29, 2005, a Special Meeting of Shareholders was held to approve a new management agreement for Legg Mason Partners Small Cap Value Fund. The following table provides the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to this matter at the Special Meeting of Shareholders.
| | | | | | | | | | Broker Non- |
| | Item Voted On | | Votes For | | Votes Against | | Abstentions | | Votes |
|
| | New Management Agreement | | 20,448,852.000 | | 285,878.000 | | 438,809.000 | | 516,766.000 |
|
28 Legg Mason Partners Small Cap Value Fund
| | | Legg Mason Partners
Investments Funds, Inc.
Legg Mason Partners
Small Cap Value Fund |
| | | |
| | DIRECTORS
Paul R. Ades
Dwight B. Crane
R. Jay Gerken, CFA
Chairman
Frank G. Hubbard
Jerome H. Miller
Ken Miller
OFFICERS
R. Jay Gerken, CFA
President and
Chief Executive Officer
Andrew B. Shoup
Senior Vice President and
Chief Administrative Officer
Kaprel Ozsolak
Chief Financial Officer
and Treasurer
Peter J. Hable
Vice President and
Investment Officer
Ted P. Becker
Chief Compliance Officer
John Chiota
Chief Anti-Money Laundering
Compliance Officer
Steven Frank
Controller
Robert I. Frenkel
Secretary and
Chief Legal Officer | INVESTMENT MANAGER
Smith Barney Fund
Management LLC
DISTRIBUTORS
Citigroup Global Markets Inc.
Legg Mason Investor Services, LLC
CUSTODIAN
State Street Bank and
Trust Company
TRANSFER AGENT
PFPC Inc.
4400 Computer Drive
Westborough, Massachusetts 01581
INDEPENDENT
REGISTERED PUBLIC
ACCOUNTING FIRM
KPMG LLP
345 Park Avenue
New York, NY 10154
|
| | | | |
This report is submitted for the
general information of the share-
holders of Legg Mason Partners
Investment Funds, Inc.—Legg
Mason Partners Small Cap Value
Fund but it may also be used as
sales literature when preceded or
accompanied by the current
Prospectus.
This report must be preceded
or accompanied by a free
prospectus. Investors should
consider the Fund’s invest-
ment objectives, risks,
charges and expenses care-
fully before investing. The
prospectus contains this and
other important information
about the Fund. Please read
the prospectus carefully
before investing.
www.leggmason.com/
InvestorServices
©2006 Legg Mason Investor
Services, LLC
Member NASD, SIPC
FD01653 5/06 SR06-28 
| | Legg Mason Partners
Investment Funds, Inc.
Legg Mason Partners
Small Cap Value Fund
The Fund is a separate series of the Legg Mason Partners Investment
Funds, Inc., a Maryland corporation.
LEGG MASON PARTNERS SMALL CAP VALUE FUND
Legg Mason Partners Funds
125 Broad Street
10th Floor, MF-2
New York, New York 10004
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 securi-
ties during the prior 12 month period ended June 30th of each year and
a description of the policies and procedures that the Fund uses to deter-
mine how to vote proxies related to portfolio transactions is available
(1) without charge, upon request, by calling 1-800-451-2010, (2) on the
Fund’s website at www.leggmason.com/InvestorServices and (3) on the
SEC’s website at www.sec.gov. Proxy voting reports for the period ending
June 30, 2005 will be continue to be listed under the Fund’s former
Smith Barney Investment Funds, Inc.—Smith Barney Small Cap Value Fund
name. | |
| 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. | SCHEDULE OF INVESTMENTS. |
| | | | Included herein under Item 1. |
| | |
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END |
| | | | MANAGEMENT INVESTMENT COMPANIES. |
| | | | Not applicable. |
| | |
| ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
| | | | Not applicable. |
| | |
| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT |
| | | | COMPANY AND AFFILIATED PURCHASERS. |
| | | | Not applicable. |
| | |
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
| | | | Not applicable. |
| | |
| ITEM 11. | 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. |
| | (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.
Legg Mason Partners Investment Funds, Inc.
| By: | /s/ R. Jay Gerken |
| | R. Jay Gerken |
| | Chief Executive Officer of |
| | Legg Mason Partners Investment Funds, Inc. |
Date: June 8, 2006
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 |
| | Legg Mason Partners Investment Funds, Inc. |
Date: June 8, 2006
| By: | /s/ Kaprel Ozsolak |
| | Kaprel Ozsolak |
| | Chief Financial Officer of |
| | Legg Mason Partners Investment Funds, Inc. |
Date: June 8, 2006
