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 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 prepared and submitted for approval by the SEC. The order also requires that transfer agency fees received from the Funds since December 1, 2004 less certain expenses be placed in escrow and provides that a portion of such fees may be subsequently distributed in accordance with the terms of the order.
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.
Notes to Financial Statements (continued)
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, 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 Inc.
10. 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 based in Note 9 . The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the advisor 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, the Fund’s investment manager believes that 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 Fund’s investment manager 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 Citigroup Global Markets Inc. (the “Distributor”) 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 the 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 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
30 Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report
Notes to Financial Statements (continued)
Fund’s investment manager 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, 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 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.
The Defendants have moved to dismiss the Complaint. Those motions are pending before the court.
11. Other Matters
The Fund has received information concerning SBFM as follows:
On September 16, 2005, the staff of the Securities and Exchange Commission (the “Commission”) informed SBFM that the staff is considering recommending that the Commission institute administrative proceedings against SBFM for alleged violations of Sections 19(a) and 34(b) of the Investment Company Act (and related Rule 19a-1). The notification is a result of an industry wide inspection undertaken by the Commission and is based upon alleged deficiencies in disclosures regarding dividends and distributions paid to shareholders of certain funds. In connection with the contemplated proceedings, the staff may seek a cease and desist order and/or monetary damages from SBFM.
Although there can be no assurance, SBFM believes that this matter is not likely to have a material adverse effect on the Fund or SBFM’s ability to perform investment advisory services relating to the Fund.
12. Subsequent Events
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 adviser (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 19, 2005.
Legg Mason, whose principal executive offices are at 100 Light Street, Baltimore, Maryland 21202, is a financial services holding company. As of December 2, 2005, Legg Mason’s asset management operation had aggregate assets under management of approximately $830 billion.
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 amended and restated Rule 12b-1 Plans. CGM and other broker-dealers, financial intermediaries and financial institutions (each called a “Service Agent”) that currently offer fund shares will continue to make the Fund’s shares available to their clients. Additional Service Agents may offer fund shares in the future.
Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report 31
Notes to Financial Statements (unaudited) (continued)
Effective December 1, 2005, with respect to those fund classes subject to a 12b-1 Plan, the Fund pays service and distribution fees to each of LMIS and CGM for the services they provide and expenses they bear under the Distribution Agreements. The expenses intended to be covered by the distribution fees include those of each co-distributor. The co-distributors will provide the Fund’s Board with periodic reports of amounts expended under the Fund’s Rule 12b-1 Plans and the purposes for which such expenditures were made.
Effective December 1, 2005, CGM will no longer be an affiliated person of the Fund under the Investment Company Act of 1940, as amended. As a result, the Fund will be permitted to execute transactions with CGM or an affiliate of CGM as agent (but not as principal) without the restrictions applicable to transactions with affiliated persons. Similarly, the fund generally will be permitted to purchase securities in underwritings in which CGM or an affiliate of CGM is a member without the restrictions imposed by certain rules of the Securities and Exchange Commission. The Manager’s use of CGM or affiliates of CGM as agent in portfolio transactions with the Fund will be governed by the Fund’s policy of seeking the best overall terms available.
Certain officers and one Trustee of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the Fund.
The Fund’s Board has approved PFPC Inc. (“PFPC”) to serve as transfer agent for the Fund. The principal business office of PFPC is located at P.O. Box 9699, Providence, RI 02940-9699.
32 Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Trustees
Smith Barney Trust II:
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Smith Barney Diversified Large Cap Growth Fund, a series of Smith Barney Trust II, as of October 31, 2005, and the related statement of operations, the statement of changes in net assets, and the financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The statement of changes in net assets for the year ended October 31, 2004 and the financial highlights for each of the years in the four-year period then ended October 31, 2004 were audited by other independent registered public accountants whose report thereon, dated December 21, 2004, expressed an unqualified opinion on that financial statement and those financial highlights.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 October 31, 2005, by correspondence with the custodian and broker or by 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 Smith Barney Diversified Large Cap Growth Fund as of October 31, 2005, and the results of its operations, the changes in its net assets and the financial highlights for the year then ended, in conformity with U.S. generally accepted accounting principles.
New York, New York
December 16, 2005
Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report 33
Board Approval of Management Agreement (unaudited)
Background
The members of the Board of Smith Barney Diversified Large Cap Growth Fund (the “Fund”), a series of Smith Barney Trust II, including the Fund’s Board members that are not considered to be “interested persons” under the Investment Company Act of 1940, as amended (the “Independent Board Members”), received information from the Fund’s manager (the “Manager”) to assist them in their consideration of the Fund’s management agreement (the “Management Agreement”). The Board received and considered a variety of information about the Manager and the Fund’s distributor, as well as the advisory and distribution arrangements for the Fund and other funds overseen by the Board, certain portions of which are discussed below. The presentation made to the Board encompassed the Fund and all the funds for which the Board has responsibility. The discussion below covers both advisory and administrative functions being rendered by the Manager, each function encompassed by the Management Agreement.
Board Approval of Management Agreement
In approving the Management Agreement, the Fund’s Board, including the Independent Board Members, considered the factors below. In all of the Board’s considerations with respect to the approval of the Management Agreement, the Board was mindful of the proposed acquisition of the Manager by Legg Mason, Inc.
Nature, Extent and Quality of the Services under the Management Agreement
The Board received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager under the Management Agreement during the past year. The Board noted information received at regular meetings throughout the year related to the services rendered by the Manager in its management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Fund’s other service providers. The Board’s evaluation of the services provided by the Manager took into account the Board’s knowledge and familiarity gained as Board members of funds in the Citigroup Asset Management (“CAM”) fund complex, including the scope and quality of the Manager’s investment management and other capabilities and the quality of its administrative and other services. The Board observed that the scope of services provided by the Manager had expanded over time as a result of regulatory and other developments, including maintaining and monitoring its own and the Fund’s expanded compliance programs. The Board also considered the Manager’s response to recent regulatory compliance issues affecting it and the CAM fund complex. The Board reviewed information received from the Manager regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the Investment Company Act of 1940, as amended.
The Board reviewed the qualifications, backgrounds and responsibilities of the Fund’s senior personnel and the portfolio management team primarily responsible for the day-today portfolio management of the Fund. The Board also considered the degree to which the Manager implemented organizational changes to improve investment results and the services provided to the CAM fund complex. The Board also considered, based on its knowl-
34 Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report
Board Approval of Management Agreement (unaudited)
(continued)
edge of the Manager and its affiliates, the financial resources available to CAM and its parent organization, Citigroup Inc.
The Board also considered the Manager’s brokerage policies and practices, the standards applied in seeking best execution, the Manager’s policies and practices regarding soft dollars, the use of a broker affiliated with the Manager and the existence of quality controls applicable to brokerage allocation procedures. In addition, management also reported to the Board on, among other things, its business plans, recent organizational changes and portfolio manager compensation plan.
The Board concluded that, overall, the nature, extent and quality of services provided (and expected to be provided) under the Management Agreement were acceptable.
Fund Performance
The Board received and considered performance information for the Fund as well as for a group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Board also noted that it had received and discussed with management information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark(s).
The information comparing the Fund’s performance to that of its Performance Universe, consisting of all retail and institutional funds classified as “large-cap core funds” by Lipper, showed, among other data, that the Fund’s performance for the 1-, 3- and 5-year periods ended March 31, 2005 was lower than the median. Management noted that there has been a change in the portfolio management team, effective April 2005, which was implemented in an attempt to improve the Fund’s results over time. Any potential impact of such changes were, therefore, not reflected in the Lipper materials.
Based on their review, which included careful consideration of all of the factors noted above, the Board, mindful of the proposed transaction with Legg Mason, concluded that it will continue to evaluate the Fund’s performance and investment strategies and the actions taken by the Manager to improve performance.
Management Fees and Expense Ratios
The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) payable by the Fund to the Manager in light of the nature, extent and quality of the management services provided by the Manager. The Board also reviewed and considered that fee waiver and/or expense reimbursement arrangements are currently in place for the Fund and considered the actual fee rate (after taking waivers and reimbursements into account) (the “Actual Management Fee”) and that the Manager had agreed to continue its fee waivers and reimbursements until further notice.
Additionally, the Board received and considered information comparing the Fund’s Contractual Management Fees and Actual Management Fee and the Fund’s overall expenses with those of funds in both the relevant expense group and a broader group of funds, each selected and provided by Lipper. The Board also reviewed information regarding fees
Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report 35
Board Approval of Management Agreement (unaudited)
(continued)
charged by the Manager to other U.S. clients investing primarily in an asset class similar to that of the Fund including, where applicable, separate accounts. The Manager reviewed with the Board the significant differences in scope of services provided to the Fund and to these other clients, noting that the Fund is provided with administrative services, office facilities, Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other Fund providers. The Board considered the fee comparisons in light of the differences required to manage these different types of accounts. The Board received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a proposed framework of fees based on asset classes.
Management also discussed with the Board the Fund’s distribution arrangements. The Board was provided with information concerning revenues received by and certain expenses incurred by the Fund’s affiliated distributor and how the amounts received by the distributor are paid.
The information comparing the Fund’s Contractual and Actual Management Fees as well as its actual total expense ratio to its Expense Group, consisting of 16 retail front-end load funds (including the Fund) classified as “large-cap core funds” and chosen by Lipper to be comparable to the Fund, showed that the Fund’s Contractual Management Fee was above the median and the Actual Management Fee (which reflects a fee waiver) was below the median. The Board noted that the Fund’s actual total expense ratio was also below the median. The Board also took into account that the Manager had agreed to reduce the management fee and to institute fee breakpoints effective October 1, 2005. The Board also noted that the Manager was continuing its voluntary waiver until further notice, resulting in the same net effective fee as currently in place, which is lower than the current and proposed contractual fee.
Taking all of the above into consideration, the Board determined that the Management Fee was reasonable in light of the nature, extent and quality of the services provided to the Fund under the Management Agreement.
Manager Profitability
The Board received and considered a profitability analysis of the Manager and its affiliates in providing services to the Fund. The Board also received profitability information with respect to the CAM fund complex as a whole. In addition, the Board received information with respect to the Manager’s allocation methodologies used in preparing this profitability data as well as a report from an outside consultant that had reviewed the Manager’s methodology. The Manager’s profitability was considered not excessive in light of the nature, extent and quality of the services provided to the Fund.
Economies of Scale
The Board received and discussed information concerning whether the Manager realizes economies of scale as the Fund’s assets grow. The Board noted that the Manager had agreed to reduce the management fee and to institute breakpoints in the Fund’s Contractual Management Fee, reflecting the potential for reducing the Contractual Management Fee as the Fund grows. The Board considered whether the breakpoint fee structure was a reason-
36 Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report
Board Approval of Management Agreement (unaudited)
(continued)
able means of sharing any economies of scale or other efficiencies that might accrue from increases in the Fund’s assets levels. The Board noted that the Fund had not yet reached the specified asset level at which a breakpoint to its Contractual Management Fee would be triggered. The Board also noted that as the Fund’s assets increase over time, certain expenses, such as fees for Board members, auditors and legal fees, become a smaller percentage of overall assets. The Board determined that the management fee structure, including the proposed breakpoints, was reasonable.
Other Benefits to the Manager
The Board considered other benefits received by the Manager and its affiliates as a result of their relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders.
In light of the costs of providing investment management and other services to the Fund and the Manager’s ongoing commitment to the Fund, the profits and other ancillary benefits that the Manager and its affiliates received were considered reasonable.
In light of all of the foregoing, the Board approved the Management Agreement to continue for another year.
No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Management Agreement, and each Board Member attributed different weight to the various factors. The Independent Board Members were advised by separate independent legal counsel throughout the process. The Board also discussed the proposed continuance of the Management Agreement in private sessions with their independent legal counsel at which no representatives of the Manager were present.
Additional Information
On June 23, 2005, Citigroup Inc. entered into a definitive agreement (the “Transaction Agreement”) with Legg Mason, Inc. under which Citigroup agreed to sell substantially all of its asset management business, Citigroup Asset Management (“CAM”), which includes the Adviser, 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 current 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 Adviser (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 the Fund, including the preservation, strengthening and growth of 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.
Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report 37
Board Approval of Management Agreement (unaudited)
(continued)
At a meeting held on August 7, 2005, the Fund’s Board, including a majority of the Board Members who are not “interested persons” of the Fund or the Adviser as defined in the 1940 Act (the “Independent Board Members”), approved the New Management Agreement. To assist the Board in its consideration of the New Management Agreement, Legg Mason previously provided materials and information about Legg Mason, including its financial condition and 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, including at meetings held prior to the August 2005 meeting. 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 automatic termination of the current management agreement upon completion of the Transaction and the need for continuity of services provided under the current management agreement; |
| |
| | (ii) | | the reputation, financial strength and resources of Legg Mason and its investment advisory subsidiaries; |
| |
| | (iii) | | that, following the Transaction, CAM will be part of an organization focused on the asset management business; |
| |
| | (iv) | | that Legg Mason is an experienced and respected asset management firm, and that Legg Mason has advised the Board Members that (a) it may wish to combine certain CAM operations with those of certain Legg Mason subsidiaries; (b) it is expected that these combination processes will result in changes to portfolio managers or portfolio management teams for a number of the CAM funds, subject to Board consent and appropriate notice to shareholders, and that, in other cases, the current portfolio managers or portfolio management teams will 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; |
| |
| | (v) | | 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; |
| |
| | (vi) | | that CAM management and Legg Mason have advised the Board that following the Transaction, there is not expected to be any diminution in the nature, quality |
| |
38 Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report
Board Approval of Management Agreement (unaudited)
(continued)
| | | | |
| | | | and extent of services provided to the Fund and their shareholders by the Adviser, including compliance services; |
| |
| | (vii) | | that Legg Mason has advised the Board that it has no present intention to alter the expense waivers and reimbursements currently in effect and, while it reserves the right to do so in the future, it would consult with the Board before making any changes; |
| |
| | (viii) | | that under the Transaction Agreement, Citigroup and Legg Mason have agreed not to take any action that is not contemplated by the Transaction or fail to take any action that to their respective knowledge would cause any of the requirements of Section 15(f) of the 1940 Act not to be met; |
| |
| | (ix) | | the assurances from Citigroup and Legg Mason that, for a three year period following the closing of the Transaction, Citigroup-affiliated broker-dealers will continue to offer the Fund as an investment product, and the potential benefits to Fund shareholders from this and other third-party distribution access; |
| |
| | (x) | | the potential benefits to Fund shareholders from being part of a combined fund family with Legg Mason sponsored funds including possible economies of scale and access to investment opportunities; |
| |
| | (xi) | | that Citigroup and Legg Mason would derive benefits from the Transaction and that, as a result, they have a financial interest in the matters that were being considered; |
| |
| | (xii) | | the potential effects of regulatory restrictions on the Fund if Citigroup-affiliated broker-dealers remain principal underwriters of the Fund after the closing of the Transaction; |
| |
| | (xiii) | | the fact that the Fund’s total advisory and administrative fees will not increase by virtue of the New Management Agreement, but will remain the same; |
| |
| | (xiv) | | the terms and conditions of the New Management Agreement, including the differences from the current management agreement, and the benefits of a single, uniform form of agreement covering these services; |
| |
| | (xv) | | that the Fund would not bear the costs of obtaining shareholder approval of the New Management Agreement; |
| |
| | (xvi) | | that Citigroup and Legg Mason were negotiating a license arrangement that would permit the Fund to maintain its current name for some agreed upon time period after the closing of the Transaction; and |
| |
| | (xvii) | | that, as discussed in detail above, within the past year the Board had performed a full annual review of the current management agreement as required by the 1940 Act. In that regard, the Board’s deliberations concerning the New Management Agreement reflected its prior evaluation of relevant factors, including the nature, quality and extent of services provided, costs of services provided, profitability, fall-out benefits, fees and economies of scale and investment performance considered in connection with the renewal of the current management agreement and its determination that information provided by CAM and Legg Mason management |
| |
Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report 39
Board Approval of Management Agreement (unaudited)
(continued)
prior to and at the August meeting supported the continued appropriateness of such conclusions with respect to the New Management Agreement.
No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the New Management Agreement, and each Board Member attributed different weight to the various factors. The Independent Board Members were advised by separate independent legal counsel throughout the process. The Board also discussed the New Management Agreement in private sessions with their independent legal counsel at which no representatives of the Adviser were present. In light of all of the foregoing, the Board approved the New Management Agreement and authorized the Fund’s officers to submit the New Management Agreement to shareholders for their approval.
A condition to the closing of the Transaction required the new management agreements to be approved by CAM advisory clients representing a substantial majority of investment management revenues. This condition was satisfied and the Transaction closed on December 1, 2005, prior to approval of the Fund’s New Management Agreement having been obtained. The Fund’s current management agreement terminated upon consummation of the Transaction. Prior to the closing of the Transaction, the Fund’s Board, at a meeting held on November 21, 2005, approved an interim management agreement for the Fund.
In their deliberations concerning the interim management agreement and subadvisory agreement, the Board Members considered that, as discussed in detail above, within the past year the Board had performed a full annual review of the current management agreement and had approved the New Management Agreement, subject to shareholder approval. In that regard, the Board, in its deliberations concerning the interim management agreement, met with management of CAM and Legg Mason to receive a status report on Legg Mason’s plans and intentions regarding CAM’s business and its combination with Legg Mason, including its plans for Fund portfolio management. On the basis of that report, the Board determined that its evaluation of relevant factors, including the nature, quality and extent of services provided, costs of services provided, profitability, fall out benefits, fees and economies of scale and investment performance and conclusions with respect thereto in connection with its approval of the New Management Agreement would apply to the interim management agreement. However, the Board gave substantial weight to the imminent automatic termination of the current management agreement upon the completion of the Transaction and the need for continuity of the services provided thereunder pending shareholder approval of the New Management Agreement.
In accordance with Rule 15a-4 under the 1940 Act, which regulates the use of interim management agreements, the interim management agreement for the Fund will have a term no longer than 150 days. The terms of the interim management agreement approved by the Board are the same as those of the Fund’s current management agreement, differing only as to the effective date, the termination date and certain additional provisions required by law. Management fees will be held in escrow and not paid to the Manager until shareholders approve the New Management Agreement. If shareholders do not approve the New Management Agreement, the management fees held in escrow will be disbursed in accordance with applicable law.
40 Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report
Additional Information (unaudited)
Information about Trustees and Officers
The business and affairs of the Smith Barney Diversified Large Cap Growth Fund are managed under the direction of the Fund’s Board of Trustees. Information pertaining to the Trustees and officers of the Fund is set forth below. The Statement of Additional Information includes additional information about Fund Trustees and is available, without charge, upon request by calling 1-800-451-2010.
| | | | | | | | | Number of | | |
| | | | | Term of | | Principal | | Portfolios In | | Other Board |
| | | Position(s) | | Office* and | | Occupation(s) | | Fund Complex | | Memberships |
| Name, Address | | Held with | | Length of | | During Past | | Overseen by | | Held by |
| and Birth Year | | Fund | | Time Served | | 5 Years | | Trustee | | Trustee |
|
| Non-Interested Trustees: | | | | | | | | | | |
| Elliott J. Berv | | Trustee | | Since 2001 | | Executive Vice President and | | 37 | | Board Member, |
| c/o R. Jay Gerken | | | | | | Chief Operations Officer, | | | | American Identity |
| Citigroup Asset | | | | | | DigiGym Systems (on-line | | | | Corp. (doing |
| Management (“CAM”) | | | | | | personal training systems) | | | | business as |
| 399 Park Avenue | | | | | | (since 2001); Consultant, | | | | Morpheus |
| New York, NY 10022 | | | | | | Catalyst (consulting) (since | | | | Technologies) |
| Birth Year: 1943 | | | | | | 1984); Chief Executive | | | | (biometric |
| | | | | | | Officer, Motocity USA | | | | information |
| | | | | | | (motorsport racing) (since | | | | management) (since) |
| | | | | | | 2004) | | | | 2001); Director, |
| | | | | | | | | | | Lapoint Industries |
| | | | | | | | | | | (industrial filter |
| | | | | | | | | | | company) (since |
| | | | | | | | | | | 2002); Director, |
| | | | | | | | | | | Alzheimer’s |
| | | | | | | | | | | Association (New |
| | | | | | | | | | | England Chapter) |
| | | | | | | | | | | (since 1998) |
Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report 41
Additional Information (unaudited) (continued)
| | | | | | | | | Number of | | |
| | | | | Term of | | Principal | | Portfolios In | | Other Board |
| | | Position(s) | | Office* and | | Occupation(s) | | Fund Complex | | Memberships |
| Name, Address | | Held with | | Length of | | During Past | | Overseen by | | Held by |
| and Birth Year | | Fund | | Time Served | | 5 Years | | Trustee | | Trustee |
|
| Non-Interested Trustees: | | | | | | | | | | |
| Donald M. Carlton | | Trustee | | Since 2001 | | Consultant, URS Corporation | | 37 | | Director, |
| c/o R. Jay Gerken | | | | | | (engineering) (since 1999); | | | | Temple-Inland |
| CAM | | | | | | former Chief Executive Officer, | | (forest products) |
| 399 Park Avenue | | | | | | Radian International L.L.C. | | | | (since 2003); |
| New York, NY 10022 | | | | | | (engineering) (from 1996 to | | | | Director, |
| Birth Year: 1937 | | | | | | 1998); Member of the | | | | American Electric |
| | | | | | | Management Committee, | | | | Power Co. (electric) |
| | | | | | | Signature Science | | | | utility) (since 1999); |
| | | | | | | (research and development) | | | | Director, National |
| | | | | | | (since 2000) | | | | Instruments Corp. |
| | | | | | | | | | | (technology) |
| | | | | | | | | | | (since 1994); |
| | | | | | | | | | | former Director, |
| | | | | | | | | | | Valcro Energy |
| | | | | | | | | | | (petroleum refining) |
| | | | | | | | | | | (from 1999 to 2003) |
| | | | | | | | | | | |
| A. Benton Cocanougher | | Trustee | | Since 2001 | | Dean Emeritus and Professor, | | 37 | | None |
| c/o R. Jay Gerken | | | | | | Texas A&M University (since | | | | |
| CAM | | | | | | 2004); former Interim | | | | |
| 399 Park Avenue | | | | | | Chancellor, Texas A&M | | | | |
| New York, NY 10022 | | | | | | University System (from 2003 | | |
| Birth Year: 1938 | | | | | | to 2004); former Special | | | | |
| | | | | | | Advisor to the President, | | | | |
| | | | | | | Texas A&M University (from | | | | |
| | | | | | | 2002 to 2003); former Dean | | | | |
| | | | | | | Emeritus and Wiley Professor, | | |
| | | | | | | Texas A&M University (from | | | | |
| | | | | | | 2001 to 2002); former Dean | | | | |
| | | | | | | and Professor of Marketing, | | | | |
| | | | | | | College and Graduate School | | | | |
| | | | | | | of Business of Texas A&M | | | | |
| | | | | | | University (from 1987 | | | | |
| | | | | | | to 2001) | | | | |
42 Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report
Additional Information (unaudited) (continued)
| | | | | | | | | Number of | | | | |
| | | | | Term of | | Principal | | Portfolios In | | | | Other Board |
| | | Position(s) | | Office* and | | Occupation(s) | | Fund Complex | | | | Memberships |
| Name, Address | | Held with | | Length of | | During Past | | Overseen by | | | | Held by |
| and Birth Year | | Fund | | Time Served | | 5 Years | | Trustee | | | | Trustee |
|
| Non-Interested Trustees: | | | | | | | | | | | | |
| Mark T. Finn | | Trustee | | Since 2001 | | Adjunct Professor, College of | | 37 | | | | Former President |
| c/o R. Jay Gerken | | | | | | William & Mary (since 2002); | | | | | | and Director, Delta |
| CAM | | | | | | Principal/Member, Balvan | | | | | | Financial, Inc. |
| 399 Park Avenue | | | | | | Partners (investment | | | | | | (investment advisory |
| New York, NY 10022 | | | | | | management) (since 2002); | | | | | | firm) (from 1983 |
| Birth Year: 1943 | | | | | | Chairman, Chief Executive | | | | | | to 1999) |
| | | | | | | Officer and Owner, Vantage | | | | | | |
| | | | | | | Consulting Group, Inc. | | | | | | |
| | | | | | | (investment advisory and | | | | | | |
| | | | | | | consulting firm) (since 1998); | | | | | | |
| | | | | | | former Vice Chairman and | | | | | | |
| | | | | | | Chief Operating Officer, | | | | | | |
| | | | | | | Lindner Asset Management | | | | | | |
| | | | | | | Company (mutual fund | | | | | | |
| | | | | | | company) (from 1988 to 2001); | | | | |
| | | | | | | former General Partner and | | | | | | |
| | | | | | | Shareholder, Greenwich | | | | | | |
| | | | | | | Ventures, L.L.C. (investment | | | | | | |
| | | | | | | partnership) (from 1996 to 2001); | | | | |
| | | | | | | former President, Secretary, and | | | | |
| | | | | | | Owner, Phoenix Trading Co. | | | | | | |
| | | | | | | (commodity trading advisory | | | | | | |
| | | | | | | firm) (from 1997 to 2000) | | | | | | |
| | | | | | | | | | | | | |
| Stephen Randolph Gross | | Trustee | | Since 2001 | | Chairman, HLB Gross Collins, | | 37 | | | | Director, Andersen |
| c/o R. Jay Gerken | | | | | | PC (accounting and consulting | | | | Calhoun (assisted |
| CAM | | | | | | firm) (since 1979); Treasurer, | | | | | | living) (since 1987); |
| 399 Park Avenue | | | | | | Coventry Limited, Inc. (Senior | | | | former Director, Yu |
| New York, NY 10022 | | | | | | Living Facilities) (since 1985); | | | | | | Save, Inc. (internet |
| Birth Year: 1947 | | | | | | former Managing Director, | | | | | | company) (from 1998 |
| | | | | | | Fountainhead Ventures, L.L.C. | | | | | | to 2000); former |
| | | | | | | (technology accelerator) | | | | | | Director, Hotpalm.com, |
| | | | | | | (from 1998 to 2003); former | | | | | | Inc. (wireless |
| | | | | | | Treasurer, Hank Aaron | | | | | | applications) (from |
| | | | | | | Enterprises (fast food | | | | | | 1998 to 2000); former |
| | | | | | | franchise) (from 1985 to | | | | | | Director, United |
| | | | | | | 2001); former Partner, Capital | | | | | | Telesis, Inc. |
| | | | | | | investment Advisory | | | | | | (telecommunications) |
| | | | | | | Partners (leverage buyout | | | | | | (from 1997 to 2002); |
| | | | | | | consulting) (from 2000 to | | | | | | former Director, |
| | | | | | | 2002); former Secretary, | | | | | | ebank.com, Inc. |
| | | | | | | Carint N.A. (manufacturing) | | | | | | (from 1997 to 2004) |
| | | | | | | (from 1998 to 2002) | | | | | | |
Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report 43
Additional Information (unaudited) (continued)
| | | | | | | | | Number of | | |
| | | | | Term of | | Principal | | Portfolios In | | Other Board |
| | | Position(s) | | Office* and | | Occupation(s) | | Fund Complex | | Memberships |
| Name, Address | | Held with | | Length of | | During Past | | Overseen by | | Held by |
| and Birth Year | | Fund | | Time Served | | 5 Years | | Trustee | | Trustee |
|
| Non-Interested Trustees: | | | | | | | | | | |
| Diana R. Harrington | | Trustee | | Since 1992 | | Professor, Babson College | | 37 | | None |
| c/o R. Jay Gerken | | | | | | (since 1993) | | | | |
| CAM | | | | | | | | | | |
| 399 Park Avenue | | | | | | | | | | |
| New York, NY 10022 | | | | | | | | | | |
| Birth Year: 1940 | | | | | | | | | | |
| | | | | | | | | | | |
| Susan B. Kerley | | Trustee | | Since 1992 | | Consultant, Strategic | | 37 | | Chairperson and |
| c/o R. Jay Gerken | | | | | | Management Advisors, | | | | Independent Board |
| CAM | | | | | | LLC (investment consulting) | | | | Member of Eclipse |
| 399 Park Avenue | | | | | | (since 1990) | | | | Fund, Inc. and Eclipse |
| New York, NY10022 | | | | | | | | | | Funds (which trade |
| Birth Year: 1951 | | | | | | | | | | as Mainstay Funds) |
| | | | | | | | | | | (currently supervises |
| | | | | | | | | | | 16 investment |
| | | | | | | | | | | companies in the |
| | | | | | | | | | | fund complex) |
| | | | | | | | | | | |
| Alan G. Merten | | Trustee | | Since 2001 | | President, George Mason | | 37 | | Director, Xybernaut |
| c/o R. Jay Gerken | | | | | | University (since 1996) | | | | Corporation |
| CAM | | | | | | | | | | (information |
| 399 Park Avenue | | | | | | | | | | technology) |
| New York, NY 10022 | | | | | | | | | | (since 2004); Director, |
| Birth Year: 1941 | | | | | | | | | | Digital Net Holdings, |
| | | | | | | | | | | Inc. (since 2003); |
| | | | | | | | | | | Director, Comshare, |
| | | | | | | | | | | Inc. (information |
| | | | | | | | | | | technology) (from |
| | | | | | | | | | | 1985 to 2003) |
| | | | | | | | | | | |
| R. Richardson Pettit | | Trustee | | Since 2001 | | Professor of Finance, | | 37 | | None |
| c/o R. Jay Gerken | | | | | | University of Houston | | | | |
| CAM | | | | | | (from 1977 to 2002); | | | | |
| 399 Park Avenue | | | | | | independent consultant | | | | |
| New York, NY 10022 | | | | | | (since 1984) | | | | |
| Birth Year: 1942 | | | | | | | | | | |
44 Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report
Additional Information (unaudited) (continued)
| | | | | | | | | Number of | | |
| | | | | Term of | | Principal | | Portfolios In | | Other Board |
| | | Position(s) | | Office* and | | Occupation(s) | | Fund Complex | | Memberships |
| Name, Address | | Held with | | Length of | | During Past | | Overseen by | | Held by |
| and Birth Year | | Fund | | Time Served | | 5 Years | | Trustee | | Trustee |
|
| Interested Trustee: | | | | | | | | | | |
| R. Jay Gerken, CFA** | | Chairman, | | Since 2002 | | Managing Director of | | 171 | | N/A |
| CAM | | President, | | | | CAM (since 1996); | | | | |
| 399 Park Avenue | | and Chief | | | | Chairman, President, and | | | | |
| Mezzanine | | Executive | | | | Chief Executive Officer of | | | | |
| New York, NY 10022 | | Officer | | | | Smith Barney Fund | | | | |
| Birth Year: 1951 | | | | | | Management LLC (“SBFM”), | | | | |
| | | | | | | Travelers Investment | | | | |
| | | | | | | Advisers, Inc. (“TIA”) and | | | | |
| | | | | | | Citi Fund Management Inc. | | | | |
| | | | | | | (“CFM”); President and Chief | | | | |
| | | | | | | Executive Officer of certain | | | | |
| | | | | | | mutual funds associated with | | |
| | | | | | | CAM; Formerly, Portfolio Manager | | |
| | | | | | | of Smith Barney Allocation | | | | |
| | | | | | | Series Inc. (from 1996 to | | | | |
| | | | | | | 2001) and Smith Barney | | | | |
| | | | | | | Growth and Income Fund | | | | |
| | | | | | | (from 1996 to 2000)’ | | | | |
| | | | | | | Chairman, President and | | | | |
| | | | | | | Chief Executive Officer of | | | | |
| | | | | | | Travelers Investment Adviser, | | |
| | | | | | | Inc. (“TIA”) (from 2002 | | | | |
| | | | | | | to 2005) | | | | |
| | | | | | | | | | | |
| Officers: | | | | | | | | | | |
| Andrew B. Shoup | | Senior | | Since 2003 | | Director of CAM; Senior Vice | | N/A | | N/A |
| CAM | | Vice | | | | President and Chief | | | | |
| 125 Broad Street | | President | | | | Administrative Officer of | | | | |
| 11th Floor | | and | | | | mutual funds associated with | | |
| New York, NY 10004 | | Chief | | | | CAM; Chief Financial Officer | | | | |
| Birth Year: 1956 | | Adminis- | | | | and Treasurer of certain mutual | | |
| | | trative | | | | funds associated with CAM; | | | | |
| | | Officer | | | | Head of International Funds | | | | |
| | | | | | | Administration of CAM (from | | | | |
| | | | | | | 2001 to 2003); Director of | | | | |
| | | | | | | Global Funds Administration | | | | |
| | | | | | | of CAM (from 2000 to 2001); | | | | |
| | | | | | | Head of U.S. Citibank Funds | | | | |
| | | | | | | Administration of CAM | | | | |
| | | | | | | | | | | |
| Frances M. Guggino | | Chief | | Since 2004 | | Director of CAM; | | N/A | | N/A |
| CAM | | Financial | | | | Chief Financial Officer and | | | | |
| 125 Broad Street | | Officer | | | | Treasurer of certain mutual | | | | |
| 10th Floor | | and | | | | funds associated with | | | | |
| New York, NY 10004 | | Treasurer | | | | CAM; Controller of | | | | |
| Birth Year: 1957 | | | | | | certain mutual funds | | | | |
| | | Controller | | 2002-2004 | | associated with CAM | | | | |
Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report 45
Additional Information (unaudited) (continued)
| | | | | | | | | Number of | | |
| | | | | Term of | | Principal | | Portfolios In | | Other Board |
| | | Position(s) | | Office* and | | Occupation(s) | | Fund Complex | | Memberships |
| Name, Address | | Held with | | Length of | | During Past | | Overseen by | | Held by |
| and Birth Year | | Fund | | Time Served | | 5 Years | | Trustee | | Trustee |
|
| Officers: | | | | | | | | | | |
| Andrew Beagley | | Chief | | Since 2002 | | Director of CAM (since 2000); | | N/A | | N/A |
| CAM | | Anti- | | | | Director of Compliance, North | | |
| 399 Park Avenue | | Money | | | | America, CAM (since 2000); | | | | |
| 4th Floor | | Laundring | | | | Chief Anti-Money Laundering | | | | |
| New York, NY 10022 | | Compliance | | | | Compliance Officer, Chief | | | | |
| Birth Year: 1962 | | Officer | | | | Compliance Officer and Vice | | | | |
| | | | | | | President of certain mutual | | | | |
| | | Chief | | Since 2004 | | funds associated with CAM; | | | | |
| | | Compliance | | | | Director of Compliance, Europe, | | |
| | | Officer | | | | the Middle East and Africa, | | | | |
| | | | | | | CAM (from 1999 to 2000); Chief | | |
| | | | | | | Compliance Officer, SBFM | | | | |
| | | | | | | and CFM; Formerly Chief | | | | |
| | | | | | | Compliance Officer of TIA | | | | |
| | | | | | | (from 2002 to 2005) | | | | |
| | | | | | | | | | | |
| Wendy S. Setnicka | | Controller | | Since 2004 | | Vice President of CAM (since | | N/A | | N/A |
| CAM | | | | | | 2003); Controller of certain | | | | |
| 125 Broad Street | | | | | | mutual funds associated with | | |
| 10th Floor | | | | | | CAM; Assistant Controller | | | | |
| New York, NY 10004 | | | | | | of CAM (from 2002 to 2004); | | | | |
| Birth Year: 1964 | | | | | | Accounting Manager of CAM | | | | |
| | | | | | | (from 1998 to 2002) | | | | |
| | | | | | | | | | | |
| Robert I. Frenkel | | Secretary | | Since 2003 | | Managing Director and | | N/A | | N/A |
| CAM | | and Chief | | | | General Counsel, Global | | | | |
| 300 First Stamford Place | | Legal | | | | Mutual Funds for CAM | | | | |
| Stamford, CT 06902 | | Officer | | | | and its predecessor (since | | | | |
| Birth Year: 1954 | | | | | | 1994); Secretary of certain | | | | |
| | | | | | | mutual funds associated | | | | |
| | | | | | | with CAM; Chief Legal | | | | |
| | | | | | | Officer of mutual funds | | | | |
| | | | | | | associated with CAM | | | | |
| * | Each Trustee and Officer serves until his or her successor has been duly elected and qualified. |
| |
| ** | Mr. Gerken is an “interested person” of the Fund as defined in the Investment Company Act of 1940, as amended, because Mr. Gerken is an officer of the Manager and certain of its affiliates. |
| |
46 Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report
Additional Shareholder Information (unaudited)
Results of a Special Meeting of Shareholders
On October 21, 2005, a Special Meeting of Shareholders was held to elect Trustees. 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 each matter voted on at the Special Meeting of Shareholders.
| Item Voted On | | Votes For | | Votes Against | | Abstentions | | Broker Non-Votes |
|
| Election of Trustees1 | | | | | | | | |
|
| | | | | | | | | |
| Nominees: | | | | | | | | |
| | | | | | | | | |
| Elliot J. Berv | | 390,185,282.078 | | 17,007,145.913 | | 0 | | 0 |
| | | | | | | | | |
| Donald M. Carlton | | 390.309.164.112 | | 16,883,263.879 | | 0 | | 0 |
| | | | | | | | | |
| A. Benton Cocanougher | | 390,216,296.988 | | 16,976,131.003 | | 0 | | 0 |
| | | | | | | | | |
| Mark T. Finn | | 390,392,076.470 | | 16,800,351.521 | | 0 | | 0 |
| | | | | | | | | |
| Stephen Randolph Gross | | 390,214,170.384 | | 16,978,257.607 | | 0 | | 0 |
| | | | | | | | | |
| Diana R. Harrington | | 390,350,563.762 | | 16,841,864.228 | | 0 | | 0 |
| | | | | | | | | |
| Susan B. Kerley | | 390,230,241.659 | | 16,962,186.331 | | 0 | | 0 |
| | | | | | | | | |
| Alan G. Merten | | 390,331,665.182 | | 16,860,762.809 | | 0 | | 0 |
| | | | | | | | | |
| R. Richardson Pettit | | 390,227,821.252 | | 16,964,606.739 | | 0 | | 0 |
| | | | | | | | | |
| R. Jay Gerken | | 389,654,043.355 | | 17,538,384.636 | | 0 | | 0 |
|
1 Trustees are elected by the shareholders of all of the series of the Trust of which the Fund is a series.
Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report 47
Important Tax Information (unaudited)
The following information is provided with respect to the distributions paid during the taxable year ended October 31, 2005:
| Record Date: | | 12/13/2004 | |
| Payable Date: | | 12/15/2004 | |
|
| Qualified Dividend Income for Individuals | | 100.00% | |
|
| Dividends Qualifying for the Dividends | | | |
| Received Deduction for Corporations | | 100.00% | |
|
Please retain this information for your records.
48 Smith Barney Diversified Large Cap Growth Fund 2005 Annual Report
| | Smith Barney Diversified
Large Cap Growth Fund |
| | | | |
| | | | |
| | | | |
| | TRUSTEES | | Wendy S. Setnicka |
| | Elliott J. Berv | | Controller |
| | Donald M. Carlton | | |
| | A. Benton Cocanougher | | Robert I. Frenkel |
| | Mark T. Finn | | Secretary and Chief Legal Officer |
| | R. Jay Gerken, CFA, | | |
| | Chairman | | INVESTMENT MANAGER |
| | Stephen Randolph Gross | | Smith Barney Fund |
| | Diana R. Harrington | | Management LLC |
| | Susan B. Kerley | | |
| | Alan G. Merten | | DISTRIBUTORS |
| | R. Richardson Pettit | | Citigroup Global Markets Inc. |
| | | | Legg Mason Investor Services, LLC |
| | OFFICERS | | |
| | R. Jay Gerken, CFA | | CUSTODIAN |
| | President and | | State Street Bank |
| | Chief Executive Officer | | & Trust Company |
| | | | |
| | Andrew B. Shoup | | TRANSFER AGENT |
| | Senior Vice President and | | PFPC Inc. |
| | Chief Administrative Officer | | P.O. Box 9699 |
| | | | Providence, RI 02940-9699 |
| | Frances M. Guggino | | |
| | Chief Financial Officer and | | INDEPENDENT REGISTERED |
| | Treasurer | | PUBLIC ACCOUNTING FIRM |
| | | | KPMG LLP |
| | Harry D. Cohen | | 345 Park Avenue |
| | Vice President and | | New York, NY 10154 |
| | Investment Officer | | |
| | | | |
| | Scott K. Glasser | | |
| | Vice President and | | |
| | Investment Officer | | |
| | | | |
| | Andrew Beagley | | |
| | Chief Anti-Money Laundering | | |
| | Compliance Officer and | | |
| | Chief Compliance Officer | | |
| | | | |
| | | | |
This report is submitted for
the general information of
the shareholders of Smith
Barney Trust II — Smith
Barney Diversified Large Cap
Growth Fund, but it may also
be used as sales literature
when preceded or accompa-
nied by the current
Prospectus.
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 ©2005 Legg Mason Investor
Services, LLC
Member NASD, SIPC
FD02662 12/05 05-9436 
| | Smith Barney Trust II
Smith Barney Diversified Large Cap
Growth Fund The Fund is a separate series of the Smith Barney Trust II, a Maryland
corporation. SMITH BARNEY DIVERSIFIED LARGE CAP GROWTH FUND
Smith Barney Mutual 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 securities during the most recent 12-month period ended June 30 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. |
| ITEM 2. | CODE OF ETHICS. |
| | |
| | The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller. |
| | |
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
| | |
| | The Board of Trustees of the registrant has determined that Stephen Randolph Gross, the Chairman of the Board’s Audit Committee, possesses the attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated Mr. Gross as the audit committee financial expert. Mr. Gross is an “independent” Trustee pursuant to paragraph (a)(2) of Item 3 to Form N-CSR. |
| | |
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
| | |
| | a) Audit Fees. Effective June 17, 2005 PricewaterhouseCoopers LLP (“PWC”) resigned as the Registrant’s principal accountant (the “Auditor”). The Registrant’s audit committee approved the engagement of KPMG LLP (“KPMG”) as the Registrant’s new principal accountant for the fiscal year ended October 31, 2005. The aggregate fees billed in the last two fiscal years ending October 31, 2004 and October 31, 2005 (the "Reporting Periods") for professional services rendered by PWC for the audit of the Registrant's annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $31,500 in 2004 and $29,000 in 2005. KPMG has not billed the Registrant for professional services rendered as of October 31, 2005. |
| | |
| | b) Audit-Related Fees. The aggregate fees billed in the Reporting Periods for assurance and related services by PWC or KPMG that are reasonably related to the performance of the audit of the Registrant's financial statements and are not reported under paragraph (a) of this Item 4 were $0 in 2004 and $0 in 2005. |
| | |
| | In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Smith Barney Diversified Large Cap Growth Fund (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Periods (prior to May 6, 2003 services provided by the Auditor were not required to be pre-approved). |
| | |
| | (c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by PWC for tax compliance, tax advice and tax planning ("Tax Services") were $4,000 in 2004 and $4,000 in 2005. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held. As of October 30, 2005, KPMG has not billed the Registrant for any Tax Services rendered. |
| | |
| | There were no fees billed for tax services by PWC or KPMG to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee. |
| | |
| | d) All Other Fees. The aggregate fees billed for all other non-audit services rendered by PWC to Salomon Brothers Asset Management (“SBAM”), and any entity controlling, controlled by or under common control with SBAM that provided ongoing services to Smith Barney Diversified Large Cap Growth Fund, requiring pre-approval by the Audit Committee for the period May 6, 2003 through October 30, 2004 and for the year ended October 30, 2005, which include the issuance of reports on internal control under SAS No. 70 related to various Citigroup Asset Management (“CAM”) entities a profitability review of the Adviser and phase 1 pf an analysis of Citigroup’s |
| | current and future real estate occupancy requirements in the tri-state area and security risk issues in the New York metro region were $0.0 and $1.3 million, respectively, all of which were pre-approved by the Audit Committee. |
| | |
| | There were no non-audit services rendered by KPMG to SBAM, or any entity controlling, controlled by or under common control with SBAM that provided ongoing services to the Registrant. |
| | |
| | All Other Fees. There were no other non-audit services rendered by PWC or KPMG to Smith Barney Fund Management LLC (“SBFM”), and any entity controlling, controlled by or under common control with SBFM that provided ongoing services to Smith Barney Diversified Large Cap Growth Fund requiring pre-approval by the Audit Committee in the Reporting Period. |
| | |
| | (e) Audit Committee’s pre–approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X. |
| | |
| | (1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by Smith Barney Fund Management LLC or Salomon Brothers Asset Management Inc. or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee. |
| | |
| | The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible. |
| | |
| | Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit. |
| | |
| | (2) For the Smith Barney Diversified Large Cap Growth Fund, the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 100% for 2004 and 2005; Tax Fees were 100% and 100% for 2004 and 2005; and Other Fees were 100% and 100% for 2004 and 2005. |
| | |
| | (f) N/A |
| | |
| | (g) Non-audit fees billed by PWC for services rendered to Smith Barney Diversified Large Cap Growth Fund and CAM and any entity controlling, controlled by, or under common control with CAM that provides ongoing services to Smith Barney Diversified Large Cap Growth Fund during the reporting period were $6.4 million and $2.7 million for the years ended October 31, 2004 and October 31, 2005, respectively. |
| | Non-audit fees billed by KPMG for services rendered to Smith Barney Diversified Large Cap Growth Fund and CAM and any entity controlling, controlled by, or under common control with CAM that provides ongoing services to Smith Barney Diversified Large Cap Growth Fund during the reporting period was $75,000 and $0 for the years ended October 31, 2004 and October 31, 2005, respectively. Such fees relate to services provided in connection with the transfer agent matter as fully described in the notes to the financial statements. |
| | |
| | (h) Yes. The Smith Barney Diversified Large Cap Growth Fund‘s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates which were not pre-approved (not requiring pre-approval) is compatible with maintaining the Accountant's independence. All services provided by the Auditor to the Smith Barney Diversified Large Cap Growth Fund or to Service Affiliates, which were required to be pre-approved, were pre-approved as required. |
| | |
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. |
| | |
| | Not applicable. |
| | |
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
| | |
| | Not applicable. |
| | |
| ITEM 8. | [RESERVED] |
| | |
| 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. |
| | | |
| ITEM 12. | EXHIBITS. |
| | | |
| | (a) | Code of Ethics attached hereto. |
| | | |
| | Exhibit 99.CODE ETH |
| | | |
| | (a)(2) | Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto. |
| | | |
| | Exhibit 99.CERT | |
| | | | |
| | (b) | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto. |
| | | | |
| | Exhibit 99.906CERT | |
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 Trust II
| By: | /s/ R. Jay Gerken
(R. Jay Gerken)
Chief Executive Officer of
Smith Barney Trust II |
| | |
| Date: | January 9, 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
Smith Barney Trust II |
| | |
| Date: | January 9, 2006 |
| | |
| | |
| By: | /s/ Frances M. Guggino
(Frances M. Guggino)
Chief Financial Officer of
Smith Barney Trust II |
| | |
| Date: | January 9, 2006 |
