Legg Mason Partners International Large Cap Fund (formerly known as Smith Barney International Large Cap Fund) (the “Fund”) is a separate diversified series of Legg Mason Partners Trust II (formerly known as Smith Barney Trust II) (the “Trust”). The Trust, a Massachusetts business trust, is registered under the Investment Company Act of 1940, as amended (the”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)
(d) Foreign Currency Translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities, at the date of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
(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) Expenses. Direct expenses are charged to the Fund; general expenses of the Trust are allocated to the funds within the Trust based on each fund’s relative net assets.
(g) 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.
(h) 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. Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates.
(i) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share.
18 Legg Mason Partners International Large Cap Fund 2006 Semi-Annual Report
Notes to Financial Statements (unaudited) (continued)
2. Investment Management Agreement and Other Transactions with Affiliates
For the period of this report, Smith Barney Fund Management LLC (“SBFM”), an indirect wholly-owned subsidiary of Legg Mason, Inc. (“Legg Mason”), acted as the investment manager of the Fund. Under the investment management agreement, the Fund paid an investment management fee calculated daily and paid monthly, in accordance with the following breakpoint schedule:
| Average Daily Net Assets | Annual Rate |
| Up to $1 billion | 0.850 | % |
| Next $1 billion | 0.825 | % |
| Next $3 billion | 0.800 | % |
| Next $5 billion | 0.775 | % |
| Over $10 billion | 0.750 | % |
During the six months ended June 30, 2006, the Fund’s Class A, B, C and Y shares had expense limitations in place of 1.75%, 2.50%, 2.50% and 1.50%, respectively.
During the six months ended June 30, 2006, SBFM waived a portion of its fee in the amount of $1,886. In addition, during the six months ended June 30, 2006, the Fund was reimbursed for expenses in the amount of $23,086.
Citigroup Global Markets Inc. (“CGM”), and Legg Mason Investor Services, LLC (“LMIS”), a wholly-owned broker-dealer subsidiary of Legg Mason, act as co-distributors of the Fund.
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 June 30, 2006, LMIS and its affiliates did not receive any sales charges or CDSCs.
Certain officers and one Trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.
The Trustees of the Fund have adopted a Retirement Plan (the “Plan”) for all Trustees who are not “interested persons” of the Fund, within the meaning of the 1940 Act. Under the Plan, each Trustee is required to retire from the Board as of the last day of the calendar year in which such Trustee attains age 75. Trustees may retire under the Plan before attaining the mandatory retirement age. Trustees who have served as Trustee of the Trust or any of the investment companies associated with SBFM for at least ten years when they retire are eligible to receive the maximum retirement benefit under the Plan. The maximum retirement benefit is an amount equal to five times the amount of retainer and regular meeting fees payable to a Trustee during the entirety of the calendar year of the Trustee’s
Legg Mason Partners International Large Cap Fund 2006 Semi-Annual Report 19
Notes to Financial Statements (unaudited) (continued)
retirement (assuming no change in relevant facts for the balance of the year following the Trustee’s retirement). Amounts under the Plan may be paid in installments or in a lump sum (discounted to present value). Benefits under the Plan are unfunded. Two former Trustees are currently receiving payments under the Plan. In addition, three other Trustees received full payments under the Plan. At June 30, 2006, $2,633 was accrued in connection with the Plan.
3. Investments
During the six months ended June 30, 2006, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
| Purchases | $ | 97,079,135 |
| Sales | | 88,595,766 |
At June 30, 2006, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:
| Gross unrealized appreciation | $ | 11,532,032 | |
| Gross unrealized depreciation | | (2,768,577 | ) |
| Net unrealized appreciation | $ | 8,763,455 | |
4. Class Specific Expenses
The Fund has adopted a Rule 12b-1distribution plan and under that plan the Fund pays a service fee with respect to its Class A, B and C shares calculated at the annual rate of 0.25% of the average daily net assets of each respective class. The Fund also pays a distribution fee with respect to its Class B and C shares calculated at the annual rate of 0.75% of the average daily net assets of each class, respectively. Distribution fees are accrued daily and paid monthly.
For the six months ended June 30, 2006, class specific expenses were as follows:
| | | | | | | | | Shareholder |
| | | | | | Transfer | Reports |
| | | Distribution Fees | Agent Fees | Expenses |
| Class A | | $ | 50,378 | | $ | 15,794 | | $ | 7,118 | |
| Class B | | | 36,447 | | | 6,593 | | | 4,308 | |
| Class C | | | 223,809 | | | 90,414 | | | 10,662 | |
| Class Y | | | — | | | 17 | | | 20 | |
| Total | | $ | 310,634 | | $ | 112,818 | | $ | 22,108 | |
20 Legg Mason Partners International Large Cap Fund 2006 Semi-Annual Report
Notes to Financial Statements (unaudited) (continued)
5. Distributions to Shareholders by Class
| | Six Months Ended | Year Ended |
| | June 30, 2006 | December 31, 2005 |
| Net Investment Income | | | | | | |
| Class A | | — | | $ | 482,242 | |
| Class B | | — | | | 29,392 | |
| Class C | | — | | | 139,879 | |
| Class Y | | — | | | 38,193 | |
| Total | | — | | $ | 689,706 | |
| Net Realized Gains | | | | | | |
| Class A | $ | 10,445 | | | — | |
| Class B | | 1,769 | | | — | |
| Class C | | 12,893 | | | — | |
| Class Y | | 521 | | | — | |
| Total | $ | 25,628 | | | — | |
6. Shares of Beneficial Interest
At June 30, 2006, the Trust had an unlimited number of shares of beneficial interest authorized with a par value of $0.00001 per share. The Fund has the ability to issue multiple classes of shares. Each share of a class represents an identical interest and has the same rights, except that each class bears certain direct expenses specifically related to the distribution of its shares.
Transactions in shares of each class were as follows:
| | | Six Months Ended | | Year Ended |
| | | June 30, 2006 | | December 31, 2005 |
| | | Shares | | Amount | | Shares | | Amount |
| Class A | | | | | | | | | | | | | | |
| Shares sold | | 273,652 | | | $ | 3,543,019 | | | 380,215 | | | $ | 4,200,802 | |
| Shares issued on reinvestment | | 622 | | | | 7,734 | | | 27,710 | | | | 331,408 | |
| Shares repurchased | | (312,966 | ) | | | (3,995,252 | ) | | (415,422 | ) | | | (4,569,874 | ) |
| Net Decrease | | (38,692 | ) | | $ | (444,499 | ) | | (7,497 | ) | | $ | (37,664 | ) |
| | | | | | | | | | | | | | | |
| Class B | | | | | | | | | | | | | | |
| Shares sold | | 48,395 | | | $ | 605,865 | | | 110,698 | | | $ | 1,186,436 | |
| Shares issued on reinvestment | | 138 | | | | 1,656 | | | 2,371 | | | | 27,522 | |
| Shares repurchased | | (161,119 | ) | | | (2,025,935 | ) | | (192,140 | ) | | | (2,054,311 | ) |
| Net Decrease | | (112,586 | ) | | $ | (1,418,414 | ) | | (79,071 | ) | | $ | (840,353 | ) |
| | | | | | | | | | | | | | | |
| Class C | | | | | | | | | | | | | | |
| Shares sold | | 1,297,353 | | | $ | 16,862,811 | | | 2,127,417 | | | $ | 23,921,180 | |
| Shares issued on reinvestment | | 1,018 | | | | 12,772 | | | 11,365 | | | | 138,088 | |
| Shares repurchased | | (619,786 | ) | | | (7,971,648 | ) | | (666,920 | ) | | | (7,522,992 | ) |
| Net Increase | | 678,585 | | | $ | 8,903,935 | | | 1,471,862 | | | $ | 16,536,276 | |
| | | | | | | | | | | | | | | |
| Class Y | | | | | | | | | | | | | | |
| Shares sold | | 15,064 | | | $ | 206,975 | | | 36,658 | | | $ | 401,786 | |
| Shares repurchased | | (43,048 | ) | | | (548,007 | ) | | (53,180 | ) | | | (600,959 | ) |
| Net Decrease | | (27,984 | ) | | $ | (341,032 | ) | | (16,522 | ) | | $ | (199,173 | ) |
Legg Mason Partners International Large Cap Fund 2006 Semi-Annual Report 21
Notes to Financial Statements (unaudited) (continued)
7. Regulatory Matters
On 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 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 Funds’ 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 bid-
22 Legg Mason Partners International Large Cap Fund 2006 Semi-Annual Report
Notes to Financial Statements (unaudited) (continued)
ding 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.
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 as 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, 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 it’s 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 then affiliates, including SBFM and Salomon Brothers Asset Management, Inc. (“SBAM”), which were then investment adviser or manager to certain of the Funds (the “Managers”), substantially all of the mutual funds then managed by the Managers (the “Defendant Funds”), and Board Members of the Defendant 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 Managers caused the Defendant 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 Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds’ contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.
Legg Mason Partners International Large Cap Fund 2006 Semi-Annual Report 23
Notes to Financial Statements (unaudited) (continued)
On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the shareholders of the Funds in which none of the plaintiffs had invested (including Legg Mason Partners International Large Cap Fund) and dismissing those Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining Defendants, with prejudice, except for the cause of action under Section 36(b) of the Investment Company Act, which the court granted plaintiffs leave to repeal as a derivative claim.
9. Other Matters
On September 16, 2005, the staff of the SEC informed SBFM and SBAM that the staff is considering recommending that the SEC institute administrative proceedings against SBFM and SBAM for alleged violations of Section 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 by the Commission 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 Investment Company 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 Fund.
10. Subsequent Events
The Fund’s Board has approved the appointment of Legg Mason Partners Fund Advisor, LLC (“LMPFA”) as the Fund’s investment manager effective August 1, 2006. The Fund’s Board has also approved the appointment of Batterymarch Financial Management, Inc. (“Batterymarch”), as the Fund’s subadviser effective August 1, 2006. The portfolio managers who are responsible for the day-to-day management of the Fund remain the same immediately prior to and immediately after the date of these changes. LMPFA and Batterymarch are wholly-owned subsidiaries of Legg Mason.
LMPFA will provide administrative and certain oversight services to the Fund. LMPFA will delegate to the subadviser the day-to-day portfolio management of the Fund, except for the management of cash and short-term instruments. The Fund’s investment management fee will remain unchanged. For its services, LMPFA will pay Batterymarch 70% of the net management fee that it receives from the Fund.
The Fund’s Board has also approved a number of changes to the Fund, including changes to the Fund’s investment strategy and the name of the Fund. On or about October 1, 2006, the name of the Fund will change to Legg Mason Partners Global Equity Fund. Concurrent with the change in its name, the investment policy of the Fund will also change
24 Legg Mason Partners International Large Cap Fund 2006 Semi-Annual Report
Notes to Financial Statements (unaudited) (continued)
to a global strategy, permitting an increased investment in U.S. securities. Under normal circumstances the Fund will invest at least 80% of its assets in equity and equity-related securities.
To better reflect the Fund’s revised investment strategy, following the change, the Fund will compare its performance to that of the MSCI World Index.
The Fund’s Board has also approved certain share class modifications which, among other things, will standardize share class features for all funds in the fund complex. The features standardized include such things as sales loads, distribution charges and other costs. These modifications are expected to be implemented during the fourth quarter of 2006.
The Fund’s Board has also approved a number of other initiatives designed to streamline and restructure the fund complex, and has authorized seeking shareholder approval for those initiatives where shareholder approval is required. As a result, Fund shareholders will be asked to elect a new Board, approve matters that will result in the Fund being grouped for organizational and governance purposes with other funds in the fund complex, and domicile the Fund as a Maryland business trust, with all funds operating under uniform charter documents. Fund shareholders also will be asked to approve investment matters, including standardized fundamental investment policies.
Proxy materials describing these matters are expected to be sent to shareholders later in 2006. If shareholder approval is obtained, these matters generally are expected to be implemented during the first quarter of 2007.
11. Recent Accounting Pronouncement
During June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48” or the “Interpretation”), Accounting for Uncertainty in Income Taxes – an interpretation of FASB statement 109. FIN 48 supplements FASB Statement 109 by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 prescribes a comprehensive model for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more likely than not” to be sustained based solely on its technical merits. Management must be able to conclude that the tax law, regulations, case law, and other objective information regarding the technical merits sufficiently support the position’s sustainability with a likelihood of more than 50 percent. FIN 48 is effective for fiscal periods beginning after December 15, 2006, which for this Fund will be January 1, 2007. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund is currently evaluating the impact that FIN 48 will have on the financial statements.
Legg Mason Partners International Large Cap Fund 2006 Semi-Annual Report 25
Board Approval of Management and Subadvisory Agreements (unaudited)
At a meeting held in person on June 19, 2006, the Fund’s Board, including a majority of the Board Members who are not “interested persons” of the Fund or Legg Mason Partners Fund Advisor, LLC (the “Manager”) or any sub-investment adviser or proposed sub-investment adviser as defined in the Investment Company Act of 1940, as amended (the “1940 Act”) (the “Independent Board Members”), approved a new management agreement (the “New Management Agreement”) between the Fund and the Manager. The Fund’s Board, including a majority of the Independent Board Members, also approved one or more new subadvisory agreements between the Manager and Batterymarch Financial Management, Inc. (the “Subadvisor”) the (“New Subadvisory Agreement”). The New Management Agreement and the New Subadvisory Agreement replaced the Fund’s prior management agreement with Smith Barney Fund Management LLC and were entered into in connection with an internal reorganization of the Manager’s and the prior manager’s parent organization, Legg Mason. In approving the New Management Agreement and New Subadvisory Agreement, the Board, including the Independent Board Members, considered the factors discussed below, among other things.
The Board noted that the Manager will provide administrative and certain oversight services to the Fund, and that the Manager will delegate to the Subadviser the day-to-day portfolio management of the Fund. The Board Members reviewed the qualifications, backgrounds and responsibilities of the senior personnel that will provide oversight and general management services and the portfolio management team that would be primarily responsible for the day-to-day management of the Fund. The Board Members noted that the portfolio management team was expected to be the same as then managing the Fund.
The Board Members received and considered information regarding the nature, extent and quality of services expected to be provided to the Fund by the Manager under the New Management Agreement and by the Subadviser under the New Subadvisory Agreement. The Board Members’ evaluation of the services expected to be provided by the Manager and the Subadviser took into account the Board Members’ knowledge and familiarity gained as Fund Board Members, including as to the scope and quality of Legg Mason’s investment management and other capabilities and the quality of its administrative and other services. The Board Members considered, among other things, information and assurances provided by Legg Mason as to the operations, facilities and organization of the Manager and the Subadviser and the qualifications, backgrounds and responsibilities of their senior personnel. The Board Members further considered the financial resources available to the Manager, the Subadviser and Legg Mason. The Board Members concluded that, overall, the nature, extent and quality of services expected to be provided under the New Management Agreement and the New Subadvisory Agreement were acceptable.
The Board Members also received and considered performance information for the Fund as well as comparative information with respect to a peer group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board Members were provided with a description of the methodology Lipper used to determine the similarity of the Fund to the funds included in the Performance Universe. The Board Members noted that they had received and discussed with management, at periodic intervals, information comparing the Fund’s performance
26 Legg Mason Partners International Large Cap Fund
Board Approval of Management and Subadvisory Agreements (unaudited) (continued)
against, among other things, its benchmark. The Board Members reviewed and considered the management fee that would be payable by the Fund to the Manager in light of the nature, extent and quality of the management services expected to be provided by the Manager, including the fee waiver and/or expense reimbursement arrangements currently in place. Additionally, the Board Members received and considered information comparing the Fund’s management fee and overall expenses with those of comparable funds in both the relevant expense group and a broader group of funds, each selected and provided by Lipper. The Board Members also reviewed and considered the subadvisory fee that would be payable by the Manager to the Subadviser in light of the nature, extent and quality of the management services expected to be provided by the Subadviser. The Board Members noted that the Manager, and not the Fund, will pay the subadvisory fee to the Subadviser. The Board Members determined that the Fund’s management fee and the Fund’s subadvi-sory fee were reasonable in light of the nature, extent and quality of the services expected to be provided to the Fund under the New Management Agreement and the New Subadvisory Agreement.
The Board Members received and considered a pro-forma profitability analysis of Legg Mason and its affiliates in providing services to the Fund, including information with respect to the allocation methodologies used in preparing the profitability data. The Board Members recognized that Legg Mason may realize economies of scale based on its internal reorganization and synergies of operations. The Board Members noted that it was not possible to predict with a high degree of confidence how Legg Mason’s and its affiliates’ profitability would be affected by its internal reorganization and by other factors including potential economies of scale, but that based on their review of the pro forma profitability analysis, their most recent prior review of the profitability of the predecessor manager and its affiliates from their relationship with the Fund and other factors considered, they determined that the management fee was reasonable. The Board Members noted that they expect to receive and evaluate profitability information on an annual basis.
In their deliberations, the Board Members also considered the information that had been received, the factors that had been identified and the conclusions that had been reached by the Board in connection with the Board’s most recent approval of the Fund’s prior management agreement, in addition to information provided in connection with the Board’s evaluation of the terms and conditions of the New Management Agreement and the New Subadvisory Agreement.
The Board Members considered Legg Mason’s advice and the advice of its counsel that the New Management Agreement and the New Subadvisory Agreement were being entered into in connection with an internal reorganization within Legg Mason that did not involve an actual change of control or management. The Board Members further noted that the terms and conditions of the New Management Agreement are substantially identical to those of the Fund’s previous management agreement except for the identity of the Manager, and that the initial term of the New Management Agreement (after which it will continue in effect only if such continuance is specifically approved at least annually by the Board, including a majority of the Independent Board Members) was the same as that under the prior management agreement.
Legg Mason Partners International Large Cap Fund 27
Board Approval of Management and Subadvisory Agreements (unaudited) (continued)
In light of all of the foregoing, the Board, including the Independent Board Members, approved the New Management Agreement and the New Subadvisory Agreement. No single factor reviewed by the Board Members was identified as the principal factor in determining whether to approve the New Management Agreement and the New Subadvisory Agreement. The Independent Board Members were advised by separate independent legal counsel throughout the process. The Independent Board Members also discussed the proposed approval of the New Management Agreement and the New Subadvisory Agreement in private sessions with their independent legal counsel at which no representatives of the Manager or Subadviser were present.
28 Legg Mason Partners International Large Cap Fund
| | Legg Mason Partners
International Large Cap Fund |
| | | | |
| | | | |
| | | | |
| | TRUSTEES | | INVESTMENT MANAGER |
| | Elliott J. Berv | | Legg Mason Partners |
| | Donald M. Carlton | | Fund Advisor, LLC |
| | A. Benton Cocanougher | | |
| | Mark T. Finn | | SUBADVISER |
| | R. Jay Gerken, CFA | | Batterymarch Financial |
| | Chairman | | Management, Inc. |
| | Stephen Randolph Gross | | |
| | Diana R. Harrington | | DISTRIBUTORS |
| | Susan B. Kerley | | Citigroup Global Markets Inc. |
| | Alan G. Merten | | Legg Mason Investor Services, LLC |
| | R. Richardson Pettit | | |
| | | | 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, New York 10154 |
This report is submitted for
the general information of
the shareholders of Legg Mason
Partners International Large Cap
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
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.leggmason.com/
InvestorServices
©2006 Legg Mason Investor
Services, LLC
Member NASD, SIPC
FD02625 8/06 SR06-108 
| | Legg Mason Partners
International Large Cap Fund The Fund is a separate investment fund of the Legg Mason Partners Trust II,
a Massachusetts Business Trust. LEGG MASON PARTNERS INTERNATIONAL LARGE CAP 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 securities during the prior 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.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 continue to be listed under the Fund’s former Smith Barney Trust II –Smith Barney International Large Cap 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. |
| ITEM 12. | EXHIBITS. |
| | | |
| | (a) | Not applicable. |
| | | |
| | (b) | Attached hereto. |
| |
| | Exhibit 99.CERT | Certifications pursuant to section 302 of |
| | | | the Sarbanes-Oxley Act of 2002 |
| | | |
| | Exhibit 99.906CERT | Certifications pursuant to Section 906 of |
| | | | the Sarbanes-Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Legg Mason Partners Trust II
| By: | /s/ R. Jay Gerken |
| | (R. Jay Gerken) |
| | Chief Executive Officer of |
| | Legg Mason Partners Trust II |
| |
| Date: | September 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 Trust II |
| |
| Date: | September 8, 2006 |
| |
| By: | /s/ Frances M. Guggino |
| | (Frances M. Guggino) |
| | Chief Financial Officer of |
| | Legg Mason Partners Trust II |
| |
| Date: | September 8, 2006 |
