UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-3275
Smith Barney Investment Funds Inc.
(Exact name of registrant as specified in charter)
125 Broad Street, New York, NY 10004
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
c/o Citigroup Asset Management
300 First Stamford Place, 4th Floor
Stamford, CT 06902
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 451-2010
Date of fiscal year end: September 30
Date of reporting period: September 30, 2005
ITEM 1. REPORT TO STOCKHOLDERS.
The Annual Report to Stockholders is filed herewith.
E X P E R I E N C E | Smith Barney Small Cap Value Fund | |
A N N U A L R E P O R T | ||
![]() | INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE |
Smith Barney Small Cap Value Fund |
Annual Report • September 30, 2005
What’s
Fund Objective The Fund seeks long-term capital growth. Under normal conditions the Fund invests at least 80% of the value of its net assets, plus any borrowings for investment purposes, in common stock and other equity securities of small-cap U.S. companies. Small-cap companies are those companies with market capi- talization values not exceeding (i) $3 billion or (ii) the highest month-end market capitalization value of any stock in the Russell 2000 Index for the pre- vious 12 months, whichever is greater. | ||||
Letter from the Chairman | 1 | |||
Manager Overview | 4 | |||
Fund at a Glance | 7 | |||
Fund Expenses | 8 | |||
Fund Performance | 10 | |||
Historical Performance | 11 | |||
Schedule of Investments | 12 | |||
Statement of Assets and Liabilities | 18 | |||
Statement of Operations | 19 | |||
Statements of Changes in Net Assets | 20 | |||
Financial Highlights | 21 | |||
Notes to Financial Statements | 25 | |||
Report of Independent Registered Public Accounting Firm | 33 | |||
Board Approval of Management Agreement | 34 | |||
Additional Information | 40 | |||
Important Tax Information | 43 |
Letter from the Chairman | ||
![]() R. JAY GERKEN, CFA Chairman, President and Chief Executive Officer | Dear Shareholder, There was no shortage of potential threats to the U.S. economy during the reporting period. These included record high oil prices, rising short-term interest rates, the devastation inflicted by Hurricanes Katrina and Rita, geopolitical issues, and falling consumer confidence. However, the economy proved to be surprisingly resilient during the Fund’s fiscal year. Fourth quarter 2004 and first quarter 2005 gross domestic product (“GDP”)i growth was 3.8% and second quarter GDP growth was 3.3%, another solid advance. This marked nine consecutive quarters in which GDP grew at least 3.0% . The Federal Reserve Board (“Fed”)ii continued to raise interest rates over the period in an attempt to ward off inflation. After raising rates in June, August, and September 2004, the Fed increased its target for the federal funds rateiii in 0.25% increments eight additional times. All told, the Fed’s eleven rate hikes have brought the target for the federal funds rate from 1.00% to 3.75% . Following the end of the Fund’s reporting period, at its November meeting, the Fed once again raised the target rate by 0.25% to 4.00% . This also represents the longest sustained Fed tightening cycle since 1977-1979. During the 12-month period covered by this report, the U.S. stock market generated strong overall results, with the S&P 500 Indexiv returning 12.25% . Generally positive economic news, relatively benign core inflation, and strong corporate profits supported the market during much of the period. Looking at the fiscal year as a whole, mid-cap stocks generated superior returns, with the Russell Midcapv, Russell 1000vi, and Russell 2000vii Indexes returning 25.10%, 14.26%, and 17.95%, respectively. From an investment style perspective, value-oriented stocks significantly outperformed their growth counterparts, with the Russell 3000 Valueviii and Russell 3000 Growthix Indexes returning 16.78% and 12.13%, respectively. |
Smith Barney Small Cap Value Fund 2005 Annual Report 1
Please read on for a more detailed look at prevailing economic and market conditions during the Fund’s fiscal year and to learn how those conditions have affected Fund performance. Special Shareholder Notice On June 24, 2005, Citigroup Inc. (“Citigroup”) announced that it has signed a definitive agreement under which Citigroup will sell substantially all of its worldwide asset management business to Legg Mason, Inc. (“Legg Mason”). As part of this transaction, Smith Barney Fund Management LLC (the “Manager”), currently an indirect wholly owned subsidiary of Citigroup, would become an indirect wholly owned subsidiary of Legg Mason. The Manager is the investment manager to the Fund. The transaction is subject to certain regulatory approvals, as well as other customary conditions to closing. Subject to such approvals and the satisfaction of the other conditions, Citigroup expects the transaction to be completed later this year. Under the Investment Company Act of 1940, consummation of the transaction will result in the automatic termination of the investment management contract between the Fund and the Manager. Therefore the Fund’s Board of Directors has approved a new investment management contract between the Fund and the Manager to become effective upon the closing of the sale to Legg Mason. The new investment management contract has been presented to shareholders for their approval. Information About Your Fund As you may be aware, several issues in the mutual fund industry have recently come under the scrutiny of federal and state regulators. The Fund’s Manager and some of its affiliates have received requests for information from various government regulators regarding market timing, late trading, fees, and other mutual fund issues in connection with various investigations. The regulators appear to be examining, among other things, the Fund’s response to market timing and shareholder exchange activity, including compliance with prospectus disclosure related to these subjects. The Fund has been informed that the Manager and its affiliates are responding to those information requests, but are not in a position to predict the outcome of these requests and investigations. | |
2 Smith Barney Small Cap Value Fund 2005 Annual Report
Important information concerning the Fund and its Manager with regard to recent regulatory developments is contained in the Notes to the Financial Statements included in this report. As always, thank you for your confidence in our stewardship of your assets. We look forward to helping you continue to meet your financial goals. Sincerely, ![]() R. Jay Gerken, CFA November 1, 2005 | |
Smith Barney Small Cap Value Fund 2005 Annual Report 3
Manager Overview
| ||
![]() PETER J. HABLE Vice President and Investment Officer | Q. What were the overall market conditions during the Fund’s reporting period? A. For the past 12 months, rising short-term interest rates and energy prices have proven to be significant headwinds for the overall stock market. With the Fed indicating it may continue to raise rates and with energy prices unlikely to abate soon, it appears market gains will be limited this year and that a more defensive stance is warranted in the short term. We have stressed for over a year that we believe the sector most at risk as the Fed raises rates is the financial sector, which represents greater than 30% of the Russell 2000 Value Index, the Fund’s benchmark. Our concern with this sector has been driven by a flattening yield curve compressing earnings for banks at a time when valuations for the stocks remain rich. Further, we are concerned with the banking sectors increased real estate exposure and decreasing loan loss reserves at a time when many real estate markets are showing signs of froth. Taking an underweight position in the financials sector helped the Fund’s performance in the first quarter of 2005, hurt the Fund’s performance in the second quarter as investors anticipated the Fed assuming a neutral stance, and put the Fund back ahead of its benchmark in the third quarter as the Fed reaffirmed its bias towards raising rates. Given the Fed’s bias, we believe it is too early to increase our weighting in the financial sector and hope to see more attractive valuations in this sector later this calendar year. | |
Performance Review
For the 12 months ended September 30, 2005, Class A shares of the Smith Barney Small Cap Value Fund, excluding sales charges, returned 17.37% . These shares underperformed the Fund’s unmanaged benchmark, the Russell 2000 Value Indexx, which returned 17.75% for the same period. The Lipper Small-Cap Value Funds Category Average1 increased 18.54% over the same time frame.
1 | Lipper, Inc. is a major independent mutual-fund tracking organization. Returns are based on the 12-month period ended September 30, 2005, including the reinvestment of distributions, including returns of capital, if any, calculated among the 242 Funds in the fund’s Lipper category, and excluding sales charges. |
4 Smith Barney Small Cap Value Fund 2005 Annual Report
Performance Snapshot as of September 30, 2005 (excluding sales charges) (unaudited)
Small Cap Value Fund — Class A Shares | 7.14 | % | 17.37 | % | ||
Russell 2000 Value Index | 8.33 | % | 17.75 | % | ||
Lipper Small-Cap Value Funds Category Average | 7.40 | % | 18.54 | % | ||
The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown above. Principal value and investment returns will fluctuate and investors’ shares, when redeemed, may be worth more or less than their original cost.To obtain performance data current to the most recent month-end, please visit our web-site at www.citigroupam.com.
All class share returns assume the reinvestment of all distributions, including returns of capital, if any, at net asset value and the deduction of all Fund expenses. Returns have not been adjusted to include sales charges that may apply when shares are purchased or the deduction of taxes that a shareholder would pay on Fund distributions. Excluding sales charges, Class B shares returned 6.80%, Class C shares returned 6.71% and Class Y shares returned 7.38% for the six months ended September 30, 2005. Excluding sales charges, Class B shares returned 16.49%, Class C shares returned 16.40% and Class Y shares returned 17.81% for the twelve months ended September 30, 2005.
Lipper, Inc. is a major independent mutual fund tracking organization. Returns are based on the period ended September 30, 2005, including the reinvestment of distributions, including returns of capital if any, calculated among the 250 funds for the six-month period and among the 242 funds for the 12-month period in the Fund’s Lipper category and excluding sales charges.
Q. What were the most significant factors affecting the Fund’s performance?
A. During the past year, the industrials sector contributed 5.5% to the Fund’s fiscal year overall performance of 17.37% . The energy sector followed with 4.5%, and the consumer discretionary sector was responsible for 3.2% . The materials sector (-1.0% contribution to the Fund’s return), the consumer staples sector (+0.3%), and the utilities sector (+0.3%) were the sectors with the least positive impact on the Fund’s 2005 fiscal-year performance.
What were the leading contributors to performance?
A. The ten best performing stocks, in terms of contribution-to-return in the last fiscal year, were Todco (+1.22%) in the energy sector, Neiman Marcus (+0.96%) in the consumer discretionary sector, Denbury Resources (+0.96%) and XTO Energy (+0.84%) in the energy sector, Steiner Leisure (+0.83%) in the consumer discretionary sector, Labor Ready (+0.83%) in the industrials sector, SkyWest Inc. (+0.67%) in the industrials sector, National-Oilwell Varco Inc. (+0.60%) in the energy sector, Roper Industries (+0.46%) in the industrials sector and Cato Corp (+0.46%) in the consumer discretionary sector. Four of these stocks are in the energy sector, reflecting the powerful pricing trends at work in that sector during the last fiscal-year just ended.
Smith Barney Small Cap Value Fund 2005 Annual Report 5
What were the leading detractors from performance?
A. Conversely, the largest detractors from performance included Smurfit-Stone Container (-0.50%) and Pope & Talbot in the materials sector (-0.48%), AGCO (-0.25%) and Furniture Brands (-0.24%) in the consumer discretionary sector, AMERIGROUP Corp (-0.23%) in the health care sector, Triad Guaranty (-0.17%) and First Albany (-0.16%) in the financials sector, IKON Office Solutions in the industrials sector (-0.15%), Lear Corp (-0.14%) in the consumer discretionary sector, and A. Schulman (-0.13) in the materials sector.
Q. Were there any significant changes made to the Fund during the reporting period?
A. There were no significant changes made to the Fund during the reporting period.
Sincerely,
![](https://capedge.com/proxy/N-CSR/0000930413-05-008177/c39691_n-csrsx8x1.jpg)
Peter J. Hable
Vice President and
Investment Officer
November 1, 2005
The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole. | ||
RISKS: Keep in mind, stocks of small-cap companies may involve a higher degree of risk and volatility than stocks of large-cap companies. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. | ||
All index performance reflects no deduction for fees, expenses or taxes. Please note an investor cannot invest directly in an index. | ||
i | Gross domestic product is a market value of goods and services produced by labor and property in a given country. | |
ii | The Federal Reserve Board is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. | |
iii | The federal funds rate is the interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. | |
iv | The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger public companies in the U.S. | |
v | The Russell Midcap Index measures the performance of the 800 smallest companies in the Russell 1000 Index whose average market capitalization was approximately $4.7 billion as of June 24, 2005. | |
vi | The Russell 1000 Index measures the performance of the 1000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. | |
vii | The Russell 2000 Index measures the performance of the 2000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. | |
viii | The Russell 3000 Value Index measures the performance of those Russell 3000 Index companies with lower price-to-book ratios and lower forecasted growth values. (A price-to-book ratio is the price of a stock compared to the difference between a company’s assets and liabilities.) | |
ix | The Russell 3000 Growth Index measures the performance of those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth values. | |
x | The Russell 2000 Value Index measures the performance of those Russell 2000 Index companies with lower price-to-book ratios and lower forecasted growth values. |
6 Smith Barney Small Cap Value Fund 2005 Annual Report
Investment Breakdown
![](https://capedge.com/proxy/N-CSR/0000930413-05-008177/c39691_n-csrsx9x1.jpg)
Smith Barney Small Cap Value Fund 2005 Annual Report 7
Fund Expenses (unaudited)
Example
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including front-end and back-end sales charges (loads) on purchase payments; and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
This example is based on an investment of $1,000 invested on April 1, 2005 and held for the six months ended September 30, 2005.
Actual Expenses
The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid During the Period”.
Based on Actual Total Return(1)
Actual | ||||||||||
Total Return | Beginning | Ending | Annualized | Expenses | ||||||
Without | Account | Account | Expense | Paid During | ||||||
Sales Charges(2) | Value | Value | Ratio | the Period(3) | ||||||
Class A | 7.14 | % | $1,000.00 | $1,071.40 | 1.23 | % | $ 6.39 | |||
Class B | 6.80 | 1,000.00 | 1,068.00 | 1.94 | 10.06 | |||||
Class C | 6.71 | 1,000.00 | 1,067.10 | 2.04 | 10.57 | |||||
Class Y | 7.38 | 1,000.00 | 1,073.80 | 0.80 | 4.16 | |||||
(1) | For the six months ended September 30, 2005. |
(2) | Assumes reinvestment of all distributions, including returns of capital, if any, at net asset value and does not reflect the deduc- tion of the applicable sales charge with respect to Class A shares or the applicable contingent deferred sales charges (“CDSC”) with respect to Class B and C shares. Total return is not annualized, as it may not be representative of the total return for the year. Performance figures may reflect voluntary fee waivers and/or expense reimbursements. Past performance is no guarantee of future results. In the absence of voluntary fee waivers and/or expense reimbursements, the total return would have been lower. |
(3) | Expenses are equal to each class’ respective annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 365. |
8 Smith Barney Small Cap Value Fund 2005 Annual Report
Fund Expenses (unaudited) (continued)
Hypothetical Example for Comparison Purposes
The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other funds. To do so, compare the 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front-end or back-end sales charges (loads). Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
Based on Hypothetical Total Return(1)
Hypothetical | Beginning | Ending | Annualized | Expenses | |||||||
Annualized | Account | Account | Expense | Paid During | |||||||
Total Return | Value | Value | Ratios | the Period(2) | |||||||
Class A | 5.00 | % | $1,000.00 | $1,018.90 | 1.23 | % | $ 6.23 | ||||
Class B | 5.00 | 1,000.00 | 1,015.34 | 1.94 | 9.80 | ||||||
Class C | 5.00 | 1,000.00 | 1,014.84 | 2.04 | 10.30 | ||||||
Class Y | 5.00 | 1,000.00 | 1,021.06 | 0.80 | 4.05 | ||||||
(1) | For the six months ended September 30, 2005. |
(2) | Expenses are equal to each class’ respective annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most |
Smith Barney Small Cap Value Fund 2005 Annual Report 9
Average Annual Total Returns† (unaudited)
Twelve Months Ended 9/30/05 | 17.37 | % | 16.49 | % | 16.40 | % | 17.81 | % | |||
Five Years Ended 9/30/05 | 14.76 | 13.89 | 13.87 | NA | |||||||
Inception* through 9/30/05 | 15.83 | 14.95 | 14.93 | 27.32 | |||||||
Twelve Months Ended 9/30/05 | 11.48 | % | 11.49 | % | 15.40 | % | 17.81 | % | |||
Five Years Ended 9/30/05 | 13.59 | 13.77 | 13.87 | NA | |||||||
Inception* through 9/30/05 | 14.93 | 14.95 | 14.93 | 27.32 | |||||||
Cumulative Total Returns† (unaudited)
Without Sales Charges(1) | ||
Class A (Inception* through 9/30/05) | 163.43 | % |
Class B (Inception* through 9/30/05) | 150.58 | |
Class C (Inception* through 9/30/05) | 150.30 | |
Class Y (Inception* through 9/30/05) | 81.28 | |
† | All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance figures may reflect voluntary fee waivers and/or expense reimbursements. In the absence of voluntary fee waivers and/or expense reimbursements, the total return would have been lower. | |
(1) | Assumes reinvestment of all distributions, including returns of capital, if any, at net asset value and does not reflect the deduc tion of the applicable sales charges with respect to Class A shares or the applicable contingent deferred sales charges ("CDSC") with respect to Class B and C shares. | |
(2) | Assumes reinvestment of all distributions, including returns of capital, if any, at net asset value. In addition, Class A shares reflect the deduction of the maximum initial sales charge of 5.00%; Class B shares reflect the deduction of a 5.00% CDSC, which applies if shares are redeemed within one year from purchase payment and declines thereafter by 1.00% per year until no CDSC is incurred. Class C shares reflect the deduction of a 1.00% CDSC, which applies if shares are redeemed within one year from purchase payment. | |
* | Inception date for Class A, B and C shares is February 26, 1999. Inception date for Class Y shares is April 14, 2003. |
10 Smith Barney Small Cap Value Fund 2005 Annual Report
Value of $10,000 Invested in Class A, B and C Shares of the Smith Barney Small Cap
Value Fund vs. the Russell 2000 Value Index† (February 26, 1999—September 2005)
![](https://capedge.com/proxy/N-CSR/0000930413-05-008177/c39691_n-csrsx13x1.jpg)
† | Hypothetical illustration of $10,000 invested in Class A, B and C shares at inception on February 26, 1999, assuming deduction of the maximum 5.00% sales charge at the time of investment for Class A shares; and the deduction of the maximum 5.00% and 1.00% contingent deferred sales charges for Class B and C shares, respectively. It also assumes reinvestment of distributions, including returns of capital, if any, at net asset value through September 30, 2005. The Russell 2000 Value Index is a capitalization weighted total return index which is comprised of 2,000 of the smallest capitalized U.S. domiciled companies with less-than-average growth orientation whose common stock is traded in the United States on the New York Stock Exchange, American Stock Exchange and NASDAQ. The Index is unmanaged and is not subject to the same management and trading expenses as a mutual fund. Please note that an investor cannot invest directly in an index. |
All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Performance figures may reflect fee waivers and/or expense reimbursements. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. |
Smith Barney Small Cap Value Fund 2005 Annual Report 11
Schedule of Investments (September 30, 2005)
SMITH BARNEY SMALL CAP VALUE FUND
Shares | Value | ||
COMMON STOCKS — 93.4% | |||
CONSUMER DISCRETIONARY — 13.7% | |||
Auto Components — 2.8% | |||
230,500 | Cooper Tire & Rubber Co. | $ 3,519,735 | |
277,500 | Lear Corp. | 9,426,675 | |
440,400 | Sauer-Danfoss Inc. | 8,808,000 | |
Total Auto Components | 21,754,410 | ||
Diversified Consumer Services — 1.1% | |||
257,750 | Steiner Leisure Ltd.* | 8,755,768 | |
Hotels, Restaurants & Leisure — 1.1% | |||
210,234 | Benihana Inc., Class A Shares* | 3,782,110 | |
332,400 | O’Charleys Inc.* | 4,756,644 | |
Total Hotels, Restaurants & Leisure | 8,538,754 | ||
Household Durables — 1.1% | |||
244,700 | Furniture Brands International Inc. | 4,411,941 | |
127,800 | Snap-on Inc. | 4,616,136 | |
Total Household Durables | 9,028,077 | ||
Leisure Equipment & Products — 1.0% | |||
105,000 | Fairchild Corp., Class A Shares* | 243,600 | |
301,400 | K2 Inc.* | 3,435,960 | |
304,000 | Leapfrog Enterprises Inc.* | 4,490,080 | |
Total Leisure Equipment & Products | 8,169,640 | ||
Multiline Retail — 2.4% | |||
212,275 | Dillard’s Inc., Class A Shares | 4,432,302 | |
145,200 | Neiman-Marcus Group Inc., Class A Shares | 14,512,740 | |
Total Multiline Retail | 18,945,042 | ||
Specialty Retail — 3.2% | |||
128,100 | Buckle Inc. | 4,351,557 | |
454,650 | Cato Corp., Class A Shares | 9,061,174 | |
128,300 | DEB Shops Inc. | 2,789,242 | |
193,200 | Linens ‘n Things Inc.* | 5,158,440 | |
300,200 | Pomeroy IT Solutions Inc.* | 3,410,272 | |
Total Specialty Retail | 24,770,685 | ||
Textiles, Apparel & Luxury Goods — 1.0% | |||
233,000 | Timberland Co., Class A Shares* | 7,870,740 | |
TOTAL CONSUMER DISCRETIONARY | 107,833,116 | ||
CONSUMER STAPLES — 1.2% | |||
Food Products — 1.2% | |||
888,900 | Del Monte Foods Co.* | 9,537,897 | |
ENERGY — 6.6% | |||
Energy Equipment & Services — 3.2% | |||
160,887 | National-Oilwell Varco Inc.* | 10,586,364 |
See Notes to Financial Statements.
12 Smith Barney Small Cap Value Fund 2005 Annual Report
Schedule of Investments (September 30, 2005) (continued)
Shares | Value | ||
Energy Equipment & Services — 3.2% (continued) | |||
88,300 | Superior Well Services Inc.* | $ 2,039,730 | |
302,000 | Todco, Class A Shares* | 12,596,420 | |
Total Energy Equipment & Services | 25,222,514 | ||
Oil, Gas & Consumable Fuels — 3.4% | |||
175,700 | Denbury Resources Inc.* | 8,862,308 | |
132,256 | Newfield Exploration Co.* | 6,493,770 | |
253,388 | XTO Energy Inc. | 11,483,544 | |
Total Oil, Gas & Consumable Fuels | 26,839,622 | ||
TOTAL ENERGY | 52,062,136 | ||
EXCHANGE TRADED FUNDS — 6.3% | |||
138,100 | iShares Nasdaq Biotechnology Index Fund | 10,633,700 | |
587,400 | iShares Russell 2000 Value Index Fund | 38,727,282 | |
TOTAL EXCHANGE TRADED FUNDS | 49,360,982 | ||
FINANCIALS — 17.3% | |||
Commercial Banks — 7.5% | |||
178,544 | AMCORE Financial Inc. | 5,572,358 | |
73,700 | BancTrust Financial Group Inc. | 1,420,936 | |
134,466 | Central Pacific Financial Corp. | 4,730,514 | |
132,200 | Cullen/Frost Bankers Inc. | 6,522,748 | |
264,000 | First Charter Corp. | 6,462,720 | |
424,463 | First Security Group Inc.* | 4,174,594 | |
273,600 | First State Bancorp | 5,797,584 | |
51,625 | IBERIABANK Corp. | 2,743,869 | |
67,500 | Midwest Banc Holdings Inc. | 1,560,600 | |
240,733 | Pacific Capital Bancorp | 8,014,001 | |
141,570 | Sterling Bancorp | 3,186,741 | |
19,023 | Tompkins Trustco Inc. | 822,745 | |
315,300 | Umpqua Holdings Corp. | 7,668,096 | |
Total Commercial Banks | 58,677,506 | ||
Diversified Financial Services — 0.6% | |||
123,600 | Financial Federal Corp. | 4,919,280 | |
Insurance — 2.7% | |||
317,100 | CNA Surety Corp.* | 4,509,162 | |
219,100 | Midland Co. | 7,894,173 | |
119,200 | RLI Corp. | 5,514,192 | |
87,282 | Triad Guaranty Inc.* | 3,423,200 | |
Total Insurance | 21,340,727 | ||
Real Estate — 4.8% | |||
129,300 | American Land Lease, Inc. | 3,070,875 | |
154,600 | Cousins Properties Inc. | 4,672,012 | |
90,700 | Duke Realty Corp. | 3,072,916 | |
198,200 | Equity One Inc. | 4,608,150 |
See Notes to Financial Statements.
Smith Barney Small Cap Value Fund 2005 Annual Report 13
Schedule of Investments (September 30, 2005) (continued)
Shares | Value | ||
Real Estate — 4.8% (continued) | |||
289,200 | Host Marriott Corp. | $ 4,887,480 | |
176,900 | LaSalle Hotel Properties | 6,094,205 | |
80,600 | Liberty Property Trust | 3,428,724 | |
111,800 | Pan Pacific Retail Properties Inc. | 7,367,620 | |
Total Real Estate | 37,201,982 | ||
Thrifts & Mortgage Finance — 1.7% | |||
24,700 | City Bank | 845,481 | |
200,500 | PMI Group Inc. | 7,993,935 | |
102,100 | Webster Financial Corp. | 4,590,416 | |
Total Thrifts & Mortgage Finance | 13,429,832 | ||
TOTAL FINANCIALS | 135,569,327 | ||
HEALTH CARE — 5.7% | |||
Health Care Equipment & Supplies — 0.8% | |||
314,100 | National Dentex Corp.* | 6,470,460 | |
Health Care Providers & Services — 4.1% | |||
239,800 | AMERIGROUP Corp.* | 4,584,976 | |
237,200 | Apria Healthcare Group Inc.* | 7,569,052 | |
416,400 | Cross Country Healthcare Inc.* | 7,728,384 | |
278,500 | Dendrite International Inc.* | 5,595,065 | |
316,300 | RehabCare Group Inc.* | 6,490,476 | |
Total Health Care Providers & Services | 31,967,953 | ||
Pharmaceuticals — 0.8% | |||
543,600 | Bentley Pharmaceuticals Inc.* | 6,496,020 | |
TOTAL HEALTH CARE | 44,934,433 | ||
INDUSTRIALS — 25.7% | |||
Aerospace & Defense — 2.7% | |||
139,400 | DRS Technologies Inc. | 6,880,784 | |
256,400 | HEICO Corp., Class A Shares | 4,563,920 | |
161,500 | Mercury Computer Systems Inc.* | 4,239,375 | |
461,000 | Orbital Sciences Corp.* | 5,762,500 | |
Total Aerospace & Defense | 21,446,579 | ||
Air Freight & Logistics — 0.1% | |||
534,500 | Stonepath Group Inc.* | 539,845 | |
Airlines — 1.3% | |||
386,900 | SkyWest Inc. | 10,376,658 | |
Building Products — 0.5% | |||
368,300 | Patrick Industries Inc.* | 3,940,810 | |
Commercial Services & Supplies — 5.8% | |||
524,700 | IKON Office Solutions Inc. | 5,236,506 | |
134,000 | John H. Harland Co. | 5,949,600 | |
70,700 | Korn/Ferry International* | 1,158,773 |
See Notes to Financial Statements.
14 Smith Barney Small Cap Value Fund 2005 Annual Report
Schedule of Investments (September 30, 2005) (continued)
Shares | Security | Value | |
Commercial Services & Supplies — 5.8% (continued) | |||
454,200 | Labor Ready Inc.* | $ 11,650,230 | |
135,500 | Portfolio Recovery Associates Inc.* | 5,850,890 | |
173,085 | United Stationers Inc.* | 8,283,848 | |
283,500 | Watson Wyatt & Co. Holdings | 7,640,325 | |
Total Commercial Services & Supplies | 45,770,172 | ||
Construction & Engineering — 0.9% | |||
111,300 | EMCOR Group Inc.* | 6,600,090 | |
Electrical Equipment — 1.3% | |||
256,400 | Roper Industries Inc. | 10,073,956 | |
Machinery — 11.4% | |||
254,800 | Albany International Corp., Class A Shares | 9,394,476 | |
281,400 | Crane Co. | 8,368,836 | |
63,800 | Cummins Inc. | 5,613,762 | |
120,000 | Harsco Corp. | 7,868,400 | |
248,200 | IDEX Corp. | 10,560,910 | |
259,900 | Kaydon Corp. | 7,383,759 | |
136,800 | Kennametal Inc. | 6,708,672 | |
80,400 | Lindsay Manufacturing Co. | 1,769,604 | |
173,500 | Mueller Industries Inc. | 4,818,095 | |
59,600 | Navistar International Corp.* | 1,932,828 | |
247,900 | Pentair Inc. | 9,048,350 | |
294,300 | Timken Co. | 8,720,109 | |
266,000 | Wabtec Corp. | 7,256,480 | |
Total Machinery | 89,444,281 | ||
Marine — 0.8% | |||
124,400 | Kirby Corp.* | 6,149,092 | |
Road & Rail — 0.9% | |||
201,000 | Arkansas Best Corp. | 7,008,870 | |
TOTAL INDUSTRIALS | 201,350,353 | ||
INFORMATION TECHNOLOGY — 10.5% | |||
Communications Equipment — 1.2% | |||
67,900 | Bel Fuse Inc., Class B Shares | 2,473,597 | |
159,200 | Black Box Corp. | 6,680,032 | |
Total Communications Equipment | 9,153,629 | ||
Computers & Peripherals — 0.4% | |||
27,400 | Electronics for Imaging Inc.* | 628,556 | |
107,600 | Rimage Corp.* | 2,869,692 | |
Total Computers & Peripherals | 3,498,248 | ||
Electronic Equipment & Instruments — 2.1% | |||
100,600 | Tech Data Corp.* | 3,693,026 | |
296,739 | Tektronix Inc. | 7,486,725 |
See Notes to Financial Statements.
Smith Barney Small Cap Value Fund 2005 Annual Report 15
Schedule of Investments (September 30, 2005) (continued)
Shares | Security | ||
Electronic Equipment & Instruments — 2.1% (continued) | |||
367,400 | Woodhead Industries Inc. | $ 5,044,402 | |
Total Electronic Equipment & Instruments | 16,224,153 | ||
IT Services — 1.7% | |||
414,500 | MedQuist Inc.* | 5,201,975 | |
262,700 | Pegasus Solutions Inc.* | 2,359,046 | |
398,600 | Perot Systems Corp., Class A Shares* | 5,640,190 | |
Total IT Services | 13,201,211 | ||
Semiconductors & Semiconductor Equipment — 2.9% | |||
438,700 | ATI Technologies Inc.* | 6,115,478 | |
133,500 | Cabot Microelectronics Corp.* | 3,922,230 | |
374,200 | Exar Corp.* | 5,246,284 | |
188,020 | Varian Semiconductor Equipment Associates Inc.* | 7,966,407 | |
Total Semiconductors & Semiconductor Equipment | 23,250,399 | ||
Software — 2.2% | |||
294,900 | EPIQ Systems Inc.* | 6,434,718 | |
170,700 | McAfee Inc.* | 5,363,394 | |
267,100 | Micromuse Inc.* | 2,104,748 | |
252,000 | NetIQ Corp.* | 3,084,480 | |
Total Software | 16,987,340 | ||
TOTAL INFORMATION TECHNOLOGY | 82,314,980 | ||
MATERIALS — 5.2% | |||
Chemicals — 1.7% | |||
215,300 | A. Schulman Inc. | 3,864,635 | |
148,565 | Lyondell Chemical Co. | 4,251,930 | |
255,500 | Olin Corp. | 4,851,945 | |
Total Chemicals | 12,968,510 | ||
Containers & Packaging — 1.9% | |||
139,600 | AptarGroup Inc. | 6,953,476 | |
799,858 | Smurfit-Stone Container Corp.* | 8,286,529 | |
Total Containers & Packaging | 15,240,005 | ||
Metals & Mining — 1.0% | |||
329,400 | Gibraltar Industries Inc. | 7,533,378 | |
Paper & Forest Products — 0.6% | |||
469,900 | Pope & Talbot Inc. | 4,797,679 | |
TOTAL MATERIALS | 40,539,572 | ||
UTILITIES — 1.2% | |||
Electric Utilities — 0.2% | |||
50,100 | MGE Energy Inc. | 1,829,151 | |
Gas Utilities — 1.0% | |||
86,100 | New Jersey Resources Corp. | 3,958,878 |
See Notes to Financial Statements.
16 Smith Barney Small Cap Value Fund 2005 Annual Report
Schedule of Investments (September 30, 2005) (continued)
Shares | Value | ||||||
Gas Utilities — 1.0% (continued) | |||||||
107,100 | Northwest Natural Gas Co. | $ | 3,986,262 | ||||
Total Gas Utilities | 7,945,140 | ||||||
TOTAL UTILITIES | 9,774,291 | ||||||
TOTAL COMMON STOCKS | |||||||
(Cost — $538,118,765) | 733,277,087 | ||||||
Rating | |||||||
CORPORATE BONDS & NOTES — 0.1% | |||||||
INDUSTRIALS — 0.1% | |||||||
Machinery — 0.1% | |||||||
$ 1,245,000 | NR (a) | Mueller Industries Inc., Subordinated Notes, | |||||
6.000% due 11/1/14 (Cost — $1,245,000) | 1,213,875 | ||||||
TOTAL INVESTMENTS BEFORE SHORT-TERM INVESTMENT | |||||||
(Cost — $539,363,765) | 734,490,962 | ||||||
SHORT-TERM INVESTMENT — 6.7% | |||||||
Repurchase Agreement — 6.7% | |||||||
$ 52,350,000 | Interest in $836,655,000 joint tri-party repurchase agreement dated | ||||||
9/30/05 with Greenwich Capital Markets Inc., 3.850% due 10/3/05; | |||||||
Proceeds at maturity —$52,366,796; (Fully collateralized by various | |||||||
U.S. government & agency obligations, 0.000% to 8.875% due 10/15/05 | |||||||
to 8/6/38; Market value — $53,397,024 | |||||||
(Cost — $52,350,000) | 52,350,000 | ||||||
TOTAL INVESTMENTS — 100.2% | |||||||
(Cost — $591,713,765#) | 786,840,962 | ||||||
Liabilities in Excess of Other Assets — (0.2)% | (1,933,637 | ) | |||||
TOTAL NET ASSETS — 100.0% | $ | 784,907,325 | |||||
* | Non-income producing security. | |
(a) | The bond is not rated by Standard & Poor’s Ratings Service or Moody’s Investors Service. | |
# | Aggregate cost for federal income tax purposes is $591,330,917. |
See Notes to Financial Statements.
Smith Barney Small Cap Value Fund 2005 Annual Report 17
Statement of Assets and Liabilities (September 30, 2005)
ASSETS: | ||
Investments, at value (Cost — $591,713,765) | $ | 786,840,962 |
Cash | 455 | |
Receivable for Fund shares sold | 1,308,796 | |
Receivable for securities sold | 705,910 | |
Dividends and interest receivable | 500,431 | |
Prepaid expenses | 37,086 | |
Total Assets | 789,393,640 | |
LIABILITIES: | ||
Payable for securities purchased | 2,511,183 | |
Payable for Fund shares repurchased | 952,493 | |
Management fee payable | 481,296 | |
Transfer agent fees payable | 268,378 | |
Distribution fees payable | 164,923 | |
Directors’ fees payable | 3,332 | |
Accrued expenses | 104,710 | |
Total Liabilities | 4,486,315 | |
Total Net Assets | $ | 784,907,325 |
NET ASSETS: | ||
Par value (Note 6) | $ | 33,006 |
Paid-in capital in excess of par value | 560,998,251 | |
Accumulated net realized gain on investments | 28,748,871 | |
Net unrealized appreciation on investments | 195,127,197 | |
Total Net Assets | $ | 784,907,325 |
Shares Outstanding: | ||
Class A | 12,153,323 | |
Class B | 6,473,945 | |
Class C | 7,688,234 | |
Class Y | 6,690,546 | |
Net Asset Value: | ||
Class A (and redemption price) | $24.02 | |
Class B* | $23.41 | |
Class C* | $23.38 | |
Class Y (and redemption price) | $24.16 | |
Maximum Public Offering Price Per Share: | ||
Class A (based on maximum sales charge of 5.00%) | $25.28 | |
* | Redemption price is NAV of Class B and C shares reduced by a 5.00% and 1.00% contingent deferred sales charge, respectively, if shares are redeemed within one year from purchase payment (See Note 2). |
See Notes to Financial Statements.
18 Smith Barney Small Cap Value Fund 2005 Annual Report
Statement of Operations (For the year ended September 30, 2005)
INVESTMENT INCOME: | ||
Dividends | $ | 10,452,862 |
Interest | 2,038,330 | |
Total Investment Income | 12,491,192 | |
EXPENSES: | ||
Management fee (Note 2) | 5,351,695 | |
Distribution fees (Notes 2 and 4) | 3,815,943 | |
Transfer agent fees (Notes 2 and 4) | 905,876 | |
Shareholder reports (Note 4) | 103,971 | |
Registration fees | 56,968 | |
Custody fees | 51,050 | |
Directors’ fees | 49,704 | |
Audit and tax | 26,983 | |
Legal fees | 23,360 | |
Insurance | 9,375 | |
Miscellaneous expenses | 6,131 | |
Total Expenses | 10,401,056 | |
Net Investment Income | 2,090,136 | |
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTES 1 AND 3): | ||
Net Realized Gain From Investments | 29,207,465 | |
Change in Net Unrealized Appreciation/Depreciation From Investments | 77,361,878 | |
Net Gain on Investments | 106,569,343 | |
Increase in Net Assets From Operations | $ | 108,659,479 |
See Notes to Financial Statements.
Smith Barney Small Cap Value Fund 2005 Annual Report 19
Statements of Changes in Net Assets (For the years ended September 30,)
2005 | 2004 | ||||||
OPERATIONS: | |||||||
Net investment income (loss) | $ | 2,090,136 | $ | (1,993,926 | ) | ||
Net realized gain | 29,207,465 | 28,038,327 | |||||
Change in net unrealized appreciation/depreciation | 77,361,878 | 58,847,882 | |||||
Increase in Net Assets From Operations | 108,659,479 | 84,892,283 | |||||
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 5): | |||||||
Net investment income | (2,400,458 | ) | — | ||||
Net realized gains | (20,577,703 | ) | (22,270,541 | ) | |||
Decrease in Net Assets From Distributions to Shareholders | (22,978,161 | ) | (22,270,541 | ) | |||
FUND SHARE TRANSACTIONS (NOTE 6): | |||||||
Net proceeds from sale of shares | 252,523,814 | 194,505,372 | |||||
Reinvestment of distributions | 19,913,134 | 21,127,525 | |||||
Cost of shares repurchased | (124,419,574 | ) | (96,095,589 | ) | |||
Increase in Net Assets From Fund Share Transactions | 148,017,374 | 119,537,308 | |||||
Increase in Net Assets | 233,698,692 | 182,159,050 | |||||
NET ASSETS: | |||||||
Beginning of year | 551,208,633 | 369,049,583 | |||||
End of year | $ | 784,907,325 | $ | 551,208,633 | |||
See Notes to Financial Statements.
20 Smith Barney Small Cap Value Fund 2005 Annual Report
Financial Highlights
For a share of each class of capital stock outstanding throughout each year ended September 30:
Class A Shares(1) | 2005 | 2004 | 2003 | 2002 | 2001 | |||||
Net Asset Value, | ||||||||||
Beginning of Year | $21.19 | $18.24 | $14.45 | $14.19 | $14.85 | |||||
Income From Operations: | ||||||||||
Net investment income | 0.13 | 0.00 | (2) | 0.06 | 0.09 | 0.20 | ||||
Net realized and unrealized gain | 3.50 | 4.01 | 3.94 | 0.64 | 0.27 | |||||
Total Income From Operations | 3.63 | 4.01 | 4.00 | 0.73 | 0.47 | |||||
Less Distributions From: | ||||||||||
Net investment income | (0.12 | ) | — | — | (0.14 | ) | (0.18 | ) | ||
Net realized gains | (0.68 | ) | (1.06 | ) | (0.21 | ) | (0.33 | ) | (0.95 | ) |
Total Distributions | (0.80 | ) | (1.06 | ) | (0.21 | ) | (0.47 | ) | (1.13 | ) |
Net Asset Value, End of Year | $24.02 | $21.19 | $18.24 | $14.45 | $14.19 | |||||
Total Return(3) | 17.37 | % | 22.35 | % | 27.98 | % | 4.88 | % | 3.26 | % |
Net Assets, End of Year (000s) | $291,923 | $205,357 | $101,798 | $72,196 | $52,670 | |||||
Ratios to Average Net Assets: | ||||||||||
Gross expenses | 1.18 | % | 1.16 | % | 1.19 | % | 1.18 | % | 1.20 | % |
Net expenses | 1.18 | 1.14 | (4) | 1.19 | 1.18 | 1.20 | ||||
Net investment income | 0.58 | 0.02 | 0.36 | 0.58 | 1.33 | |||||
Portfolio Turnover Rate | 18 | % | 31 | % | 68 | % | 49 | % | 47 | % |
(1) | Per share amounts have been calculated using the average shares method. |
(2) | Amount represents less than $0.01 per share. |
(3) | Performance figures may reflect voluntary fee waivers and/or expense reimbursements. Past performance is no guarantee of future results. In the absence of voluntary fee waivers and/or expense reimbursements, the total return would have been lower. |
(4) | The investment manager voluntarily waived a portion of its fees. |
See Notes to Financial Statements.
Smith Barney Small Cap Value Fund 2005 Annual Report 21
Financial Highlights (continued)
For a share of each class of capital stock outstanding throughout each year ended September 30:
Class B Shares(1) | 2005 | 2004 | 2003 | 2002 | 2001 | |||||
Net Asset Value, | ||||||||||
Beginning of Year | $20.71 | $17.99 | $14.35 | $14.10 | $14.76 | |||||
Income (Loss) From Operations: | ||||||||||
Net investment income (loss) | (0.03 | ) | (0.15 | ) | (0.06 | ) | (0.03 | ) | 0.08 | |
Net realized and unrealized gain | 3.41 | 3.93 | 3.91 | 0.63 | 0.28 | |||||
Total Income From Operations | 3.38 | 3.78 | 3.85 | 0.60 | 0.36 | |||||
Less Distributions From: | ||||||||||
Net investment income | — | — | — | (0.02 | ) | (0.07 | ) | |||
Net realized gains | (0.68 | ) | (1.06 | ) | (0.21 | ) | (0.33 | ) | (0.95 | ) |
Total Distributions | (0.68 | ) | (1.06 | ) | (0.21 | ) | (0.35 | ) | (1.02 | ) |
Net Asset Value, End of Year | $23.41 | $20.71 | $17.99 | $14.35 | $14.10 | |||||
Total Return(2) | 16.49 | % | 21.35 | % | 27.12 | % | 4.03 | % | 2.52 | % |
Net Assets, End of Year (000s) | $151,555 | $142,896 | $131,657 | $112,946 | $83,426 | |||||
Ratios to Average Net Assets: | ||||||||||
Gross expenses | 1.93 | % | 1.93 | % | 1.95 | % | 1.94 | % | 1.97 | % |
Net expenses | 1.93 | 1.91 | (3) | 1.95 | 1.94 | 1.97 | ||||
Net investment income (loss) | (0.13 | ) | (0.77 | ) | (0.41 | ) | (0.19 | ) | 0.56 | |
Portfolio Turnover Rate | 18 | % | 31 | % | 68 | % | 49 | % | 47 | % |
(1) | Per share amounts have been calculated using the average shares method. |
(2) | Performance figures may reflect voluntary fee waivers and/or expense reimbursements. Past performance is no guarantee of future results. In the absence of voluntary fee waivers and/or expense reimbursements, the total return would have been lower. |
(3) | The investment manager voluntarily waived a portion of its fees. |
See Notes to Financial Statements.
22 Smith Barney Small Cap Value Fund 2005 Annual Report
Financial Highlights (continued)
For a share of each class of capital stock outstanding throughout each year ended September 30:
Class C Shares(1)(2) | 2005 | 2004 | 2003 | 2002 | 2001 | |||||
Net Asset Value, | ||||||||||
Beginning of Year | $20.70 | $17.98 | $14.35 | $14.10 | $14.76 | |||||
Income (Loss) From Operations: | ||||||||||
Net investment income (loss) | (0.05 | ) | (0.16 | ) | (0.06 | ) | (0.03 | ) | 0.08 | |
Net realized and unrealized gain | 3.41 | 3.94 | 3.90 | 0.63 | 0.28 | |||||
Total Income From Operations | 3.36 | 3.78 | 3.84 | 0.60 | 0.36 | |||||
Less Distributions From: | ||||||||||
Net investment income | — | — | — | (0.02 | ) | (0.07 | ) | |||
Net realized gains | (0.68 | ) | (1.06 | ) | (0.21 | ) | (0.33 | ) | (0.95 | ) |
Total Distributions | (0.68 | ) | (1.06 | ) | (0.21 | ) | (0.35 | ) | (1.02 | ) |
Net Asset Value, End of Year | $23.38 | $20.70 | $17.98 | $14.35 | $14.10 | |||||
Total Return(3) | 16.40 | % | 21.36 | % | 27.05 | % | 4.04 | % | 2.52 | % |
Net Assets, End of Year (000s) | $179,762 | $142,272 | $111,838 | $91,275 | $69,712 | |||||
Ratios to Average Net Assets: | ||||||||||
Gross expenses | 2.01 | % | 1.96 | % | 1.96 | % | 1.94 | % | 1.96 | % |
Net expenses | 2.01 | 1.94 | (4) | 1.96 | 1.94 | 1.96 | ||||
Net investment income (loss) | (0.23 | ) | (0.80 | ) | (0.41 | ) | (0.19 | ) | 0.55 | |
Portfolio Turnover Rate | 18 | % | 31 | % | 68 | % | 49 | % | 47 | % |
(1) | Per share amounts have been calculated using the average shares method. |
(2) | On April 29, 2004, Class L shares were renamed as Class C shares. |
(3) | Performance figures may reflect voluntary fee waivers and/or expense reimbursements. Past performance is no guarantee of future results. In the absence of voluntary fee waivers and/or expense reimbursements, the total return would have been lower. |
(4) | The investment manager voluntarily waived a portion of its fees. |
See Notes to Financial Statements.
Smith Barney Small Cap Value Fund 2005 Annual Report 23
Financial Highlights (continued)
For a share of each class of capital stock outstanding throughout each year ended September 30, unless otherwise noted:
Class Y Shares(1) | 2005 | 2004 | 2003 | (2) | ||
Net Asset Value, Beginning of Year | $21.29 | $18.27 | $14.57 | |||
Income From Operations: | ||||||
Net investment income | 0.19 | 0.07 | 0.06 | |||
Net realized and unrealized gain | 3.55 | 4.01 | 3.64 | |||
Total Income From Operations | 3.74 | 4.08 | 3.70 | |||
Less Distributions From: | ||||||
Net investment income | (0.19 | ) | — | — | ||
Net realized gains | (0.68 | ) | (1.06 | ) | — | |
Total Distributions | (0.87 | ) | (1.06 | ) | — | |
Net Asset Value, End of Year | $24.16 | $21.29 | $18.27 | |||
Total Return(3) | 17.81 | % | 22.71 | % | 25.39 | % |
Net Assets, End of Year (000s) | $161,667 | $60,684 | $23,757 | |||
Ratios to Average Net Assets: | ||||||
Gross expenses | 0.81 | % | 0.86 | % | 0.80%(4) | |
Net expenses | 0.81 | 0.84 | (5) | 0.80 | (4) | |
Net investment income | 0.84 | 0.32 | 0.75 | (4) | ||
Portfolio Turnover Rate | 18 | % | 31 | % | 68 | % |
(1) | Per share amounts have been calculated using the average shares method. |
(2) | For the period April 14, 2003 (inception date) to September 30, 2003. |
(3) | Performance figures may reflect voluntary fee waivers and/or expense reimbursements. Past performance is no guarantee of future results. In the absence of voluntary fee waivers and/or expense reimbursements, the total return would have been lower. |
Total returns for periods of less than one year are not annualized. | |
(4) | Annualized. |
(5) | The investment manager voluntarily waived a portion of its fees. |
See Notes to Financial Statements.
24 Smith Barney Small Cap Value Fund 2005 Annual Report
Notes to Financial Statements
1. Organization and Significant Accounting Policies
The Smith Barney Small Cap Value Fund (the “Fund”) is a separate diversified series of Smith Barney Investment Funds Inc. (“Company”). The Company, a Maryland corporation, is registered under the Investment Company Act of 1940 (“1940 Act”), as amended, as an open-end management investment company.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.
(a) Investment Valuation. Equity securities for which market quotations are available are valued at the last sale price or official closing price on the primary market or exchange on which they trade. Debt securities are valued at the mean between the bid and asked prices provided by an independent pricing service that are based on transactions in debt obligations, quotations from bond dealers, market transactions in comparable securities and various relationships between securities. When prices are not readily available, or are determined not to reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund may value these investments at fair value as determined in accordance with the procedures approved by the Fund’s Board of Directors. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates market value.
(b) Repurchase Agreements. When entering into repurchase agreements, it is the Fund’s policy that its custodian or a third party custodian takes possession of the underlying collateral securities, the market value of which at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market to ensure the adequacy of the collateral. If the seller defaults, and the market value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.
(c) Security Transactions and Investment Income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Foreign dividend income is recorded on the ex-dividend date or as soon as practical after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults on an expected interest payment, the Fund’s policy is to generally halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default.
(d) REIT Distributions. The character of distributions received from Real Estate Investment Trusts (“REITs”) held by the Fund is generally comprised of net investment income, capital gains, and return of capital. It is the policy of the Fund to estimate the character of distributions received from underlying REITs based on historical data provided
Smith Barney Small Cap Value Fund 2005 Annual Report 25
Notes to Financial Statements (continued)
by the REITs. After each calendar year end, REITs report the true tax character of these distributions. Differences between the estimated and actual amounts reported by the REITs are reflected in the Fund’s records in the year in which they are reported by the REITs.
(e) Distributions to Shareholders. Distributions from net investment income and distributions of net realized gains, if any, are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(f ) Class Accounting. Investment income, common expenses and realized/unrealized gain (loss) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that class.
(g) Federal and Other Taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute substantially all of its taxable income and net realized gains on investments, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Fund’s financial statements.
(h) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. During the current year, the following reclassifications have been made:
Undistributed | Accumulated | ||
Net | Net | ||
Investment | Realized | ||
Income | Gain | ||
(a) | $310,322 | $(310,322) | |
(a) | Reclassifications are primarily due to book/tax differences in the treatment of distributions from real estate investment trusts. |
2. Management Agreement and Other Transactions
Smith Barney Fund Management LLC (“SBFM”), an indirect wholly-owned subsidiary of Citigroup Inc. (“Citigroup”), acts as investment manager to the Fund.The Fund pays SBFM a management fee calculated at an annual rate of 0.75% of the Fund’s average daily net assets. This fee is calculated daily and paid monthly.
Citicorp Trust Bank, fsb. (“CTB”), another subsidiary of Citigroup, acts as the Fund’s transfer agent. PFPC Inc. (“PFPC”) acts as the Fund’s sub-transfer agent. CTB receives account fees and asset-based fees that vary according to the size and type of account. PFPC is responsible for shareholder recordkeeping and financial processing for all shareholder accounts and is paid by CTB. For the year ended September 30, 2005, the Fund paid transfer agent fees of $423,755 to CTB.
In addition, for the year ended September 30, 2005, the Fund also paid $81,502 to other Citigroup affiliates for shareholder recordkeeping services.
Citigroup Global Markets Inc. (“CGM”), another indirect wholly-owned subsidiary of Citigroup, acts as the Fund’s distributor.
There is a maximum 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 and declines thereafter by 1.00% per year
26 Smith Barney Small Cap Value Fund 2005 Annual Report
Notes to Financial Statements (continued)
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 year ended September 30, 2005, CGM received sales charge of approximately $336,000 on sales of the Fund’s Class A shares. In addition, for the year ended September 30, 2005, CDSCs paid to CGM were approximately:
Class A | Class B | Class C | |||
CDSCs | $1,000 | $175,000 | $10,000 | ||
For the year ended September 30, 2005, CGM and its affiliates received brokerage commissions of $9,500.
Certain officers and one Director of the Company are employees of Citigroup or its affiliates and do not receive compensation from the Company.
3. Investments
During the year ended September 30, 2005, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
Purchases | $ | 227,719,245 | |
Sales | 116,588,506 | ||
At September 30, 2005, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows: | |||
Gross unrealized appreciation | $ | 210,695,990 | |
Gross unrealized depreciation | (15,185,945 | ) | |
Net unrealized appreciation | $ | 195,510,045 | |
4. Class Specific Expenses
Pursuant to a Distribution Plan, the Fund pays a service fee with respect to its Class A, B and C shares calculated at the annual rate of 0.25% of the average daily net assets of each respective class. The Fund also pays a distribution fee with respect to its Class B and C shares calculated at the annual rate of 0.75% of the average daily net assets of each class, respectively. For the year ended September 30, 2005, total Distribution fees, which are accrued daily and paid monthly, were as follows:
Distribution Fees | |||||||
For the year ended September 30, 2005, total Transfer Agent fees were as follows: | |||||||
Transfer Agent Fees | |||||||
Smith Barney Small Cap Value Fund 2005 Annual Report 27
Notes to Financial Statements (continued)
For the year ended September 30, 2005, total Shareholder Reports expenses were as follows:
Shareholder Reports Expenses | |||||||
5. Distributions to Shareholders by Class
Year Ended | ||||
September 30, 2005 | ||||
Class A | ||||
Net Investment Income | $1,281,716 | — | ||
Net realized gains | 7,049,974 | $6,325,351 | ||
Total�� | $8,331,690 | $6,325,351 | ||
Class B | ||||
Net realized gains | $4,674,470 | $7,643,465 | ||
Total | $4,674,470 | $7,643,465 | ||
Class C* | ||||
Net realized gains | $4,826,977 | $6,657,543 | ||
Total | $4,826,977 | $6,657,543 | ||
Class Y | ||||
Net Investment Income | $1,118,742 | — | ||
Net realized gains | $4,026,282 | $1,644,182 | ||
Total | $5,145,024 | $1,644,182 | ||
* | On April 29, 2004, Class L shares were renamed as Class C shares. |
6. Capital Shares
At September 30, 2005, the Company had ten billion shares of capital stock authorized with a par value of $0.001 per share. The Fund has the ability to issue multiple classes of shares. Each share of a class represents an identical interest in the Fund and has the same rights, except that each class bears certain direct expenses, including those specifically related to the distribution of its shares.
Transactions in shares of each class were as follows:
Year Ended | ||||||||||
September 30, 2004 | ||||||||||
Shares | Amount | Shares | Amount | |||||||
Class A | ||||||||||
Shares sold | 3,864,412 | $ | 87,218,823 | 5,382,763 | $ | 109,237,622 | ||||
Shares issued on reinvestment | 354,404 | 8,002,446 | 303,138 | 6,026,382 | ||||||
Shares repurchased | (1,756,405 | ) | (39,816,426 | ) | (1,575,075 | ) | (31,758,736 | ) | ||
Net Increase | 2,462,411 | $ | 55,404,843 | 4,110,826 | $ | 83,505,268 | ||||
Class B | ||||||||||
Shares sold | 810,582 | $ | 17,827,187 | 705,999 | $ | 14,031,653 | ||||
Shares issued on reinvestment | 198,142 | 4,384,892 | 365,804 | 7,151,471 | ||||||
Shares repurchased | (1,434,066 | ) | (31,747,408 | ) | (1,492,717 | ) | (29,720,849 | ) | ||
Net Decrease | (425,342 | ) | $ | (9,535,329 | ) | (420,914 | ) | $ | (8,537,725 | ) |
28 Smith Barney Small Cap Value Fund 2005 Annual Report
Notes to Financial Statements (continued)
Shares | Amount | Shares | Amount | |||||||
Class C* | ||||||||||
Shares sold | 2,077,024 | $ | 45,790,964 | 1,523,277 | $ | 30,251,909 | ||||
Shares issued on reinvestment | 209,369 | 4,631,234 | 326,455 | 6,378,942 | ||||||
Shares repurchased | (1,470,317 | ) | (32,543,537 | ) | (1,196,595 | ) | (23,759,457 | ) | ||
Net Increase | 816,076 | $ | 17,878,661 | 653,137 | $ | 12,871,394 | ||||
Class Y | ||||||||||
Shares sold | 4,599,389 | $ | 101,686,840 | 2,004,154 | $ | 40,984,188 | ||||
Shares issued on reinvestment | 127,852 | 2,894,562 | 78,773 | 1,570,730 | ||||||
Shares repurchased | (886,499 | ) | (20,312,203 | ) | (533,115 | ) | (10,856,547 | ) | ||
Net Increase | 3,840,742 | $ | 84,269,199 | 1,549,812 | $ | 31,698,371 | ||||
* | On April 29, 2004, Class L shares were renamed as Class C shares. |
7. Income Tax Information and Distributions to Shareholders
The tax character of distributions paid during the fiscal years ended September 30 were as follows:
2005 | 2004 | ||||||
Distributions paid from | |||||||
Ordinary Income | $ | 6,250,777 | $ | 4,002,083 | |||
Net Long-term Capital Gains | 16,727,384 | 18,268,458 | |||||
Total Taxable Distributions | $ | 22,978,161 | $ | 22,270,541 | |||
As of September 30, 2005, the components of accumulated earnings on a tax basis were as follows: | |||||||
Undistributed ordinary income – net | $ | 4,810,054 | |||||
Undistributed long-term capital gains – net | 23,555,969 | ||||||
Total undistributed earnings | $ | 28,366,023 | |||||
Unrealized appreciation (a) | $ | 195,510,045 | |||||
Total accumulated earnings – net | 223,876,068 | ||||||
(a) | The difference beween book-basis and tax-basis unrealized appreciation is attributable primarily to the tax deferral of losses on wash sales and the difference between the book and tax cost basis of investments in real estate investment trusts. |
8. 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:
Smith Barney Small Cap Value Fund 2005 Annual Report 29
Notes to Financial Statements (continued)
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 includes 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, among other things, for 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 misrepresentation 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 by Citigroup 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 requires SBFM to recommend a new transfer agent contract to the Fund boards within 180 days of the entry of the order; if a Citigroup affiliate submits a proposal to serve as transfer agent or sub-transfer agent, an independent monitor must be engaged at the expense of SBFM and CGM to oversee a competitive bidding process. Under the order, Citigroup also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004. That policy, as amended, among other things, requires that when requested by a Fund board, CAM will retain at its own expense an independent consulting expert to advise and assist the board on the selection of certain service providers affiliated with Citigroup.
At this time, there is no certainty as to how the proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made. Although there can be no assurance, Citigroup does not believe that this matter will have a material adverse effect on the Funds.
30 Smith Barney Small Cap Value Fund 2005 Annual Report
Notes to Financial Statements (continued)
9. Legal Matters
Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGM and SBFM, (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the SEC described in Note 8. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the adviser 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, CAM 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 Advisers and their affiliates to continue to render services to the Funds under their respective contracts.
* * *
Beginning in June 2004, class action-lawsuits alleging violations of the federal securities laws were filed against CGM and a number of its affiliates, including SBFM and Salomon Brothers Asset Management Inc (the “Advisers”), substantially all of the mutual funds managed by the Advisers, including the Fund (the “Funds”), and directors or trustees of the Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGM created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Advisers caused the Funds to pay excessive brokerage commissions to CGM for steering clients towards proprietary funds. The complaints also alleged that the defendants breached their fiduciary duty to the Funds by improperly charging Rule l2b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Funds failed to adequately disclose certain 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, CAM 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, CAM 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.
Smith Barney Small Cap Value Fund 2005 Annual Report 31
Notes to Financial Statements (continued)
The Defendants have moved to dismiss the Complaint. Those motions are pending before the court.
10. Other Matters
On June 24, 2005, Citigroup announced that is has signed a definitive agreement under which Citigroup will sell substantially all of its worldwide asset management business to Legg Mason, Inc. (“Legg Mason”).
As part of this transaction, SBFM (the “Manager”), currently an indirect wholly owned subsidiary of Citigroup, would become an indirect wholly owned subsidiary of Legg Mason. The Manager is the investment adviser to the Fund.
The transaction is subject to certain regulatory approvals, as well as other customary conditions to closing. Subject to such approvals and the satisfaction of the other conditions, Citigroup expects the transaction to be completed later this year.
Under the Investment Company Act of 1940, consummation of the transaction will result in the automatic termination of the investment management agreement between the Fund and the Manager. Therefore, the Fund’s Board has approved a new investment management agreement between the Fund and the Manager to become effective upon the closing of the sale to Legg Mason. The new investment management agreement has been presented to the shareholders of the Fund for their approval.
The Fund has received information from CAM concerning SBFM, an investment advisory company that is part of CAM. The information received from CAM is as follows: On September 16, 2005, the staff of the SEC 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 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.
The Commission staff’s recent notification will not affect the sale by Citigroup of substantially all of CAM’s worldwide business to Legg Mason, which Citigroup continues to expect will occur in the fourth quarter of this year.
32 Smith Barney Small Cap Value Fund 2005 Annual Report
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors Smith Barney Investment Funds Inc.:
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Smith Barney Small Cap Value Fund of Smith Barney Investment Funds Inc. as of September 30, 2005, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits 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 September 30, 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Smith Barney Small Cap Value Fund of Smith Barney Investment Funds Inc. as of September 30, 2005, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
New York, New York
November 18, 2005
Smith Barney Small Cap Value Fund 2005 Annual Report 33
Board Approval of Management Agreement (unaudited)
Background
At separate meetings of the Fund’s Board of Directors, the Board considered the re-approval for an annual period of the Fund’s management agreement (the “Agreement”), pursuant to which Smith Barney Fund Management LLC (the “Manager”) provides the Fund with investment advisory and administrative services. The Board members who are not “interested persons” (as defined in the Investment Company Act of 1940, as amended (the “Independent Directors”)) of the Fund were assisted in their review by Fund counsel and independent legal counsel and met with independent legal counsel in executive sessions separate from representatives of the Manager. The Independent Directors requested and received information from the Manager they deemed reasonably necessary for their review of the Agreement and the Manager’s performance. This information was initially reviewed by a special committee comprised of all of the Independent Directors and then by the full Board. Prior to the Board’s deliberations, Citigroup had announced an agreement to sell the Manager to Legg Mason, which, subject to certain approvals, was expected to be effective later in the year. Consequently, representatives of Legg Mason discussed with the Board Legg Mason’s intentions regarding the preservation and strengthening of the Manager’s business. The Independent Directors also requested and received certain assurances from senior management of Legg Mason regarding the continuation of the Fund’s portfolio management team and of the level of other services provided to the Fund and its shareholders should the sale of the Manager be consummated. At subsequent Board meetings, representatives of Citigroup Asset Management (“CAM”) and Legg Mason made additional presentations to and responded to further questions from the Board regarding Legg Mason’s acquisition of the Manager. After considering these presentations and reviewing additional written materials provided by CAM and Legg Mason, the Board, including the Independent Directors, approved, subject to shareholder approval, a new Agreement permitting the Manager to continue to provide its services to the Fund after consummation of the sale of the Manager to Legg Mason.
In voting to approve the Agreement, the Independent Directors considered whether the approval of the Agreement would be in the best interests of the Fund and its shareholders, an evaluation based on several factors including those discussed below.
Analysis of the Nature, Extent and Quality of the Services provided to the Fund
The Board received a presentation from representatives of the Manager regarding the nature, extent and quality of services provided to the Fund and other funds in the CAM fund complex. In addition, the Independent Directors received and considered other information regarding the services provided to the Fund by the Manager under the Agreement during the past year, including a description of the administrative and other services rendered to the Fund and its shareholders by the Manager. The Board noted information received at regular meetings throughout the year related to the services rendered by the Manager about the 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 CAM fund complex, including the scope and quality of the
34 Smith Barney Small Cap Value Fund 2005 Annual Report
Board Approval of Management Agreement (unaudited) (continued)
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 and the Fund’s Chief Compliance Officer regarding the implementation to date of 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-to-day portfolio management of the Fund. The Board also considered the willingness of the Manager to consider and implement organizational changes to improve investment results and the services provided to the CAM fund complex. The Board noted that the Manager’s Office of the Chief Investment Officer, comprised of the senior officers of the investment teams managing the funds in the CAM complex, participates in reporting to the Board on investment matters. The Board also considered, based on its knowledge 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, it was satisfied with the nature, extent and quality of services provided (and expected to be provided) under the Agreement by the Manager.
Fund Performance
The Board received and reviewed performance information for the Fund and for a group of comparable funds (the “Performance Universe”) selected by Lipper Inc., 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 was provided with information comparing the Fund’s performance to the Lipper category averages over various time periods. The Board members noted that they had also received and discussed with management information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark index. The information comparing the Fund’s performance to that of the Performance Universe, consisting of all retail and institutional funds classified as “small-cap value funds” by Lipper, was for the one-, three- and five-year periods ended March 31, 2005. The Fund performed better than the median for each period. The Board also reviewed performance information provided by the Manager for periods ended June 2005, which showed the Fund’s performance, although competitive, was below the Lipper cate-
Smith Barney Small Cap Value Fund 2005 Annual Report 35
Board Approval of Management Agreement (unaudited) (continued)
gory average during the second quarter. Based on its review, the Board generally was satisfied with the Fund’s 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 for investment advisory and administrative services in light of the nature, extent and quality of the management services provided by the Manager.
Additionally, the Board received and considered information comparing the Fund’s Contractual Management Fee and the Fund’s overall expense ratio with those of funds in both the relevant expense group (the “Expense Group”) and a broader group of funds, each selected and provided by Lipper. The Board also reviewed information regarding the fees the Manager charged any of its 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 the scope of services provided to the Fund and to these other clients, noting that the Fund is provided with regulatory compliance and administrative services, office facilities and 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 service providers. The Board considered the fee comparisons in light of the scope of services 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 distributors and how the amounts received by the distributors are expended.
The information comparing the Fund’s Actual Management Fee as well as its actual total expense ratio to its Expense Group, consisting of 14 retail front-end load funds (including the Fund) classified as “small-cap value funds” by Lipper, showed that the Fund’s Contractual Management Fee was lower than the median of management fees paid by the other funds in the Expense Group. The Board noted that the Fund’s actual total expense ratio was the lowest of the total expense ratios of the funds in the Expense Group.
Taking all of the above into consideration, the Board determined that the management fee was reasonable in light of the comparative performance and expense information and the nature, extent and quality of the services provided to the Fund under the 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
36 Smith Barney Small Cap Value Fund 2005 Annual Report
Board Approval of Management Agreement (unaudited) (continued)
methodology. The Board also noted the profitability percentage ranges determined by appropriate court cases to be reasonable given the services rendered to investment companies. The Board determined that the Manager’s profitability was not excessive in light of the nature, extent and quality of the services provided to the Fund.
Economies of Scale
The Board received and considered information regarding whether there have been economies of scale with respect to the management of the Fund, whether the Fund has appropriately benefited from any economies of scale, and whether there is potential for realization of any further economies of scale. The Board considered whether economies of scale in the provision of services to the Fund were being passed along to the shareholders. The Board also considered whether alternative management fee structures (such as with breakpoints) would be more appropriate or reasonable taking into consideration economies of scale or other efficiencies.
The Board noted that as the Fund’s assets increased over time, the Fund and its shareholders realized economies of scale as certain expenses, such as fixed Fund fees, became a smaller percentage of overall assets. The Board noted that it appeared that the benefits of any economies of scale also would be appropriately shared with shareholders through increased investment in fund management and administration resources.
Other Benefits to the Manager
The Board considered other benefits received by the Manager and its affiliates as a result of the Manager’s relationship with the Fund, including any soft dollar arrangements, receipt of brokerage commissions and 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.
Based on their discussions and considerations, including those described above, the Board members approved the 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 Agreement.
Approval of the New Agreement
The Board, including the Independent Directors, approved the new Agreement to take effect if shareholders approve the new Agreement and Legg Mason acquires the Manager (the “Transaction”). Such approval was based on a number of factors, including Legg Mason’s assurances regarding the continuation of the Fund’s portfolio management team and the level of other services provided after the Transaction, and several of the factors discussed above continued to be relevant to the Board’s deliberations regarding the new Agreement. The Board also considered the following:
(i) | the reputation, financial strength and resources of Legg Mason and its investment advisory subsidiaries; |
Smith Barney Small Cap Value Fund 2005 Annual Report 37
Board Approval of Management Agreement (unaudited) (continued)
(ii) | that representatives of CAM and Legg Mason advised the Board that following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Fund and its shareholders by the Manager, including compliance services; |
(iii) | the assurances from Citigroup and Legg Mason that, for a three year period fol- lowing the closing of the Transaction, the Manager will have substantially the same access to the Citigroup sales force when distributing Fund shares as is cur- rently provided to CAM and that other arrangements between the Manager and Citigroup sales channels will be preserved; |
(iv) | that Legg Mason and Citigroup intend to enter into an agreement in connection with the Transaction under which 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; |
(v) | 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; |
(vi) | 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 con- sidered; |
(vii) | the potential effects of regulatory restrictions on the Fund if Citigroup-affiliated broker-dealers remain the Fund’s principal underwriters; and |
(viii) | the fact that the Fund’s total advisory and administrative fees will not increase by virtue of the new Agreement, but will remain the same. |
Based on their review of the materials provided and the assurances they had received from senior management of CAM and Legg Mason, the Board members determined that the Transaction was not expected to adversely affect the nature, extent and quality of services provided by the Manager and that the Transaction was not expected to have a material adverse effect on the ability of the Manager to provide those services. It was noted, however, that changes in portfolio managers and other personnel could occur following the Transaction or after the combination of CAM’s operations with those of Legg Mason subsidiaries. The Board members noted that if current portfolio managers or other personnel cease to be available, the Board would consider all available options, which could include seeking the investment advisory or other services of Legg Mason affiliates or investment advisers not affiliated with Legg Mason. In this regard, it was noted that Legg Mason indicated that it could potentially make available to the Manager additional portfolio management resources. Accordingly, the Board members concluded that, overall, they were satisfied at the present time with assurances from Legg Mason and CAM as to the expected nature, extent and quality of the services to be provided to the Fund under the new Agreement.
In evaluating the costs of the services to be provided by the Manager under the new Agreement and the profitability to the Manager resulting from its relationships with the Fund, the Board members considered, among other things, whether advisory and administrative fees or other expenses would change as a result of the Transaction. Based on their review of the materials provided and the assurances they had received from senior manage-
38 Smith Barney Small Cap Value Fund 2005 Annual Report
Board Approval of Management Agreement (unaudited) (continued)
ment of CAM and Legg Mason, the Board members determined that the Transaction would not increase the total fees payable for advisory and administrative services and that overall Fund expenses were not expected to increase materially as a result of the Transaction. The Board members noted that it was not possible to predict how the Transaction would affect the profitability to the Manager from its relationship with the Fund, but that they had been satisfied in their most recent review of the current Agreement that the level of profitability from the Manager’s relationship with the Fund was not excessive.
In evaluating the fall-out benefits to be received by the Manager under the new Agreement, the Board members considered whether the Transaction would have an impact on the fall-out benefits received by virtue of the current Agreement. The Board members determined that those benefits could include an increased ability for Legg Mason to distribute shares of its current funds and other investment products and to obtain research services using the Fund’s portfolio transaction brokerage. The Board members noted that any such benefits were difficult to quantify with certainty at this time, and indicated that they would continue to evaluate them going forward.
In reviewing the Transaction, the Board Members considered, among other things, whether advisory and administrative fees or other expenses would change as a result of the Transaction. Based on the assurances they had received from senior management of CAM and Legg Mason, the Board members determined that as a result of the Transaction, the Fund’s total advisory and administrative fees would not increase. The Board members concluded that because the advisory and administrative fees for the Fund were not expected to increase as a result of the Transaction, the Fund’s fees for advisory and administrative services remain appropriate and that no additional fee reductions or breakpoints were necessary at this time.
Finally, the Board members noted Legg Mason’s considerable investment management experience and capabilities, but were unable to predict what effect, if any, consummation of the Transaction would have on the future performance of the Fund.
Smith Barney Small Cap Value Fund 2005 Annual Report 39
Additional Information (unaudited)
Information about Directors and Officers
The business and affairs of the Smith Barney Small Cap Value Fund (the “Fund”) are managed under the direction of the Smith Barney Investment Funds Inc.’s (“Company”) Board of Directors. Information pertaining to the Directors and certain officers of the Company is set forth below. The Statement of Additional Information includes additional information about the Company’s Directors and is available, without charge, upon request by calling the Fund’s transfer agent (Citicorp Trust Bank, fsb. at 1-800-451-2010).
Number of | ||||||||||
Term of | Principal | Portfolios In | Other Board | |||||||
Office* and | Occupation(s) | Fund Complex | Memberships | |||||||
Name, Address | Length of | During Past | Overseen by | Held by | ||||||
and Birth Year | Time Served | Five Years | Director | Director | ||||||
Non-Interested Directors: | ||||||||||
Paul R. Ades | Director | Since | Law Firm of Paul R. Ades, PLLC | None | ||||||
Paul R. Ades, PLLC | 1994 | (from April 2000 to Present); | ||||||||
181 West Main Street | Partner in Law Firm of Murov & | |||||||||
Suite C | Ades, Esqs. (from November 1976 | |||||||||
Babylon, NY 11702 | to March 2000) | |||||||||
Birth Year: 1940 | ||||||||||
Dwight B. Crane | Director | Since | Professor, Harvard | 49 | None | |||||
Harvard Business School | 1981 | Business School | ||||||||
Soldiers Field | ||||||||||
Morgan Hall #375 | ||||||||||
Boston, MA 02163 | ||||||||||
Birth Year: 1937 | ||||||||||
Frank G. Hubbard | Director | Since | President of Avatar | 15 | None | |||||
Avatar International, Inc. | 1993 | International, Inc. (Business | ||||||||
87 Whittredge Road | Development) (since 1998) | |||||||||
Summit, NJ 07901 | ||||||||||
Birth Year: 1937 | ||||||||||
Jerome H. Miller | Director | Since | Retired | 15 | None | |||||
c/o Smith Barney | 1998 | |||||||||
Mutual Funds | ||||||||||
125 Broad Street, | ||||||||||
11th Floor | ||||||||||
New York, NY 10004 | ||||||||||
Birth Year: 1938 | ||||||||||
Ken Miller | Director | Since | President of Young | 15 | None | |||||
Young Stuff Apparel Group, Inc. | 1994 | Stuff Apparel | ||||||||
930 Fifth Avenue | Group, Inc. (since 1963) | |||||||||
Suite 610 | ||||||||||
New York, NY 10021 | ||||||||||
Birth Year: 1942 |
40 Smith Barney Small Cap Value Fund 2005 Annual Report
Additional Information (unaudited) (continued)
Number of | ||||||||||
Term of | Principal | Portfolios In | Other Board | |||||||
Office* and | Occupation(s) | Fund Complex | Memberships | |||||||
Name, Address | Length of | During Past | Overseen by | Held by | ||||||
and Birth Year | Time Served | Five Years | Director | Director | ||||||
Interested Director: | ||||||||||
R. Jay Gerken, CFA** | Chairman, | Since | Managing Director of Citigroup | 171 | None | |||||
CAM | President | 2002 | Global Markets Inc. (“CGM”); | |||||||
399 Park Avenue, | and Chief | Chairman, President and Chief | ||||||||
4th Floor | Executive | Executive Officer of Smith Barney | ||||||||
New York, NY 10022 | Officer | Fund Management LLC (“SBFM”), | ||||||||
Birth Year: 1951 | Travelers Investment Adviser, Inc. | |||||||||
(“TIA”) and Citi Fund Management | ||||||||||
Inc. (“CFM”); President and Chief | ||||||||||
Executive Officer of certain mutual | ||||||||||
funds associated with Citigroup | ||||||||||
Inc. (“Citigroup”); Formerly, | ||||||||||
Portfolio Manager of Smith Barney | ||||||||||
Allocation Series Inc. (from 1996 to | ||||||||||
2001) and Smith Barney Growth | ||||||||||
and Income Fund (from 1996 | ||||||||||
to 2000) | ||||||||||
Officers: | ||||||||||
Andrew B. Shoup | Senior Vice | Since | Director of CAM; Senior Vice | N/A | N/A | |||||
CAM | President | 2003 | President and Chief Administrative | |||||||
125 Broad Street, | and Chief | Officer of mutual funds associated | ||||||||
11th Floor | Administrative | with Citigroup; Head of International | ||||||||
New York, NY 10004 | Officer | Funds Administration of CAM (from | ||||||||
Birth Year: 1956 | 2001 to 2003); Director of Global | |||||||||
Funds Administration of CAM (from | ||||||||||
2000 to 2001); Head of U.S. | ||||||||||
Citibank Funds Administration of | ||||||||||
CAM (from 1998 to 2000) | ||||||||||
Kaprel Ozsolak | Chief Financial | Since | Vice President of CGM; Chief | N/A | N/A | |||||
CAM | Officer and | 2004 | Financial Officer and Treasurer of | |||||||
125 Broad Street, | Treasurer | certain mutual funds associated | ||||||||
11th Floor | with Citigroup; Controller of | |||||||||
New York, NY 10004 | certain mutual funds associated | |||||||||
Birth Year: 1965 | with Citigroup (since 2002) | |||||||||
Peter J. Hable | Vice President | Since | Managing Director of CGM and | N/A | N/A | |||||
CAM | and Investment | Investment Officer of SBFM | ||||||||
One Sansome Street | Officer | |||||||||
San Francisco, CA 94104 | ||||||||||
Birth Year: 1958 |
Smith Barney Small Cap Value Fund 2005 Annual Report 41
Additional Information (unaudited) (continued)
Number of | ||||||||||
Principal | Portfolios In | Other Board | ||||||||
Occupation(s) | Fund Complex | Memberships | ||||||||
Name, Address | During Past | Overseen by | Held by | |||||||
and Birth Year | Five Years | Director | Director | |||||||
Officers: | ||||||||||
Andrew Beagley | Chief Anti-Money | Director of CGM (since 2000); | N/A | N/A | ||||||
CAM | Laundering | Director of Compliance, North | ||||||||
399 Park Avenue, | Compliance | America, CAM (since 2000); | ||||||||
4th Floor | Officer | Chief Anti-Money Laundering | ||||||||
New York, NY 10022 | Compliance Officer, Chief Compliance | |||||||||
Birth Year: 1962 | Chief Compliance | Officer and Vice President of certain | ||||||||
Officer | mutual funds associated with Citigroup; | |||||||||
Director of Compliance, Europe, | ||||||||||
the Middle East and Africa, CAM | ||||||||||
(from 1999 to 2000); Compliance | ||||||||||
Officer, Salomon Brothers Asset | ||||||||||
Management Limited, Smith Barney | ||||||||||
Global Capital Management Inc., | ||||||||||
Salomon Brothers Asset | ||||||||||
Management Asia Pacific Limited | ||||||||||
(from 1997 to 1999); Formerly Chief | ||||||||||
Compliance Officer TIA | ||||||||||
(from 2002 to 2005) | ||||||||||
Steven Frank | Controller | Vice President of CAM (since 2002); | N/A | N/A | ||||||
CAM | Controller of certain mutual funds | |||||||||
125 Broad Street | associated with Citigroup; Assistant | |||||||||
11th Floor | Controller of CAM (from 2001 to 2005); | |||||||||
New York, NY 10004 | Accounting Manager of CAM | |||||||||
Birth Year: 1967 | (from 1996 to 2001) | |||||||||
Robert I. Frenkel | Secretary | Managing Director and General | N/A | N/A | ||||||
CAM | and Chief | Counsel of Global Mutual Funds | ||||||||
300 First Stamford Place | Legal | for CAM and its predecessor (since | ||||||||
4th Floor | Officer | 1994); Secretary of CFM (from | ||||||||
Stamford, CT 06902 | 2001 to 2004); Secretary and Chief | |||||||||
Birth Year: 1954 | Legal Officer of certain mutual | |||||||||
funds associated with Citigroup |
* | Each Director and officer serves until his or her successor has been duly elected and qualified. |
** | Mr. Gerken is an “interested person” of the Company as defined in the Investment Company Act of 1940, as amended, because Mr. Gerken is an officer of SBFM and certain of its affiliates. |
42 Smith Barney Small Cap Value Fund 2005 Annual Report
Important Tax Information (unaudited)
The following information is provided with respect to the distributions paid during the taxable year ended September 30, 2005.
Record Date | 12/15/2004 | |
Payable Date | 12/17/2004 | |
Qualified Dividend Income for Individuals | 99.32% | |
Dividends Qualifying for the Dividends Received Deduction for Corporations | 89.58% | |
Long-term Capital Gain Dividend | $0.550000 | |
Please retain this information for your records. |
Smith Barney Small Cap Value Fund 2005 Annual Report 43
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Smith Barney
| |||
DIRECTORS | INVESTMENT MANAGER | ||
Paul R. Ades | Smith Barney Fund | ||
Dwight B. Crane | Management LLC | ||
R. Jay Gerken, CFA | |||
Chairman | DISTRIBUTOR | ||
Frank G. Hubbard | Citigroup Global Markets Inc. | ||
Jerome H. Miller | |||
Ken Miller | CUSTODIAN | ||
State Street Bank and | |||
OFFICERS | Trust Company | ||
R. Jay Gerken, CFA | |||
President and | TRANSFER AGENT | ||
Chief Executive Officer | Citicorp Trust Bank, fsb. | ||
125 Broad Street, 11th Floor | |||
Andrew B. Shoup | New York, New York 10004 | ||
Senior Vice President and | |||
Chief Administrative Officer | SUB-TRANSFER AGENT | ||
PFPC Inc. | |||
Kaprel Ozsolak | P.O. Box 9699 | ||
Chief Financial Officer | Providence, Rhode Island | ||
and Treasurer | 02940-9699 | ||
Peter J. Hable | INDEPENDENT | ||
Vice President and | REGISTERED PUBLIC | ||
Investment Officer | ACCOUNTING FIRM | ||
KPMG LLP | |||
Andrew Beagley | 345 Park Avenue | ||
Chief Anti-Money Laundering | New York, NY 10154 | ||
Compliance Officer and | |||
Chief Compliance Officer | |||
Steven Frank | |||
Controller | |||
Robert I. Frenkel | |||
Secretary and | |||
Chief Legal Officer | |||
This report is submitted for the This report must be preceded www.citigroupam.com ©2005 Citigroup Global Markets Inc. FD01745 11/05 05-7461 ![]() | Smith Barney Small Cap Value Fund SMITH BARNEY SMALL CAP VALUE FUND 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 Directors of the registrant has determined that Dwight B. Crane, a Member of the Board’s Audit Committee, possesses the technical atributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated Mr. Crane as the Audit Committee’s financial expert. Mr. Crane is an “independent” Director pursuant to paragraph (a)(2) of Item 3 to Form N-CSR. | |
ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
a) Audit Fees. The aggregate fees billed in the last two fiscal years ending September 30, 2004 and September 30, 2005 (the "Reporting Periods") for professional services rendered by the Registrant's principal accountant (the "Auditor") 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 $118,100 in 2004 and $46,600 in 2005. | |
b) Audit-Related Fees. The aggregate fees billed in the Reporting Periods for assurance and related services by the Auditor 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 $4,000 in 2005. These services rendered in connection with the review of the registration statement filed on Form N-1A for the Smith Barney Investment Funds Inc. | |
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 Investment Funds Inc. (“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 the Auditor for tax compliance, tax advice and tax planning ("Tax Services") were $12,500 in 2004 and $9,800 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. | |
There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee. | |
d) All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item for the Smith Barney Investment Funds Inc. | |
All Other Fees. There were no other non-audit services rendered by the Auditor 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 Investment Funds Inc. 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 Investment Funds Inc., 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 the Auditor for services rendered to Smith Barney Investment Funds Inc. and CAM and any entity controlling, controlled by, or under common control with CAM that provides ongoing services to Smith Barney Investment Funds Inc. during the reporting period were $0 in 2005 for fees related to the transfer agent matter as fully described in the notes the financial statements titled “additional information” and $75,000 for 2004. | |
(h) Yes. The Smith Barney Investment Funds Inc.‘ 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 Investment Funds Inc. 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. | [RESERVED] |
ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable. |
ITEM 8. | [RESERVED] | ||
ITEM 9. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. | ||
Not applicable. | |||
ITEM 10. | CONTROLS AND PROCEDURES. | ||
(a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. | ||
(b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal half-year (the registrant’s second fiscal half-year in the case of an annual report) that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. | ||
ITEM 11. | EXHIBITS. | ||
(a) | Code of Ethics attached hereto. | ||
Exhibit 99.CODE ETH | |||
(b) | Attached hereto. | ||
Exhibit 99.CERT | Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 | ||
Exhibit 99.906CERT | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Smith Barney Investment Funds Inc.
By: | /s/ R. Jay Gerken |
(R. Jay Gerken) | |
Chief Executive Officer of | |
Smith Barney Investment Funds Inc. | |
Date: | December 9, 2005 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: | /s/ R. Jay Gerken |
(R. Jay Gerken) | |
Chief Executive Officer of | |
Smith Barney Investment Funds Inc. | |
Date: | December 9, 2005 |
By: | /s/ Kaprel Ozsolak |
(Kaprel Ozsolak) | |
Chief Financial Officer of | |
Smith Barney Investment Funds Inc. | |
Date: | December 9, 2005 |