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.
Smith Barney Fund Management LLC
300 First Stamford Place
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: December 31
Date of reporting period: December 31, 2003
ITEM 1. REPORT TO STOCKHOLDERS.
The Annual Report to Stockholders is filed herewith.
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SMITH BARNEY
INVESTMENT GRADE
BOND FUND
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CLASSIC SERIES | ANNUAL REPORT | DECEMBER 31, 2003
[LOGO] Smith Barney
Mutual Funds
Your Serious Money. Professionally Managed.(R)
Your Serious Money. Professionally Managed.(R) is a registered
service mark of Citigroup Global Markets Inc.
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NOT FDIC INSURED o NOT BANK GUARANTEED o MAY LOSE VALUE
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[PHOTO OMITTED] [PHOTO OMITTED]
DAVID A. TORCHIA GERALD J. CULMONE
PORTFOLIO MANAGER PORTFOLIO MANAGER
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DAVID A. TORCHIA
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David A. Tochia has more than 18 years of securities business experience. Mr.
Tochia holds a BS from the University of Pittsburgh and an MBA in Finance from
Lehigh University.
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GERALD J. CULMONE
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Gerald J. Culmone has more than 15 years of securities business experience. Mr.
Culmone holds a BS in Finance from Rider University.
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FUND OBJECTIVE
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The Fund seeks a high level of current income as is consistent with prudent
investment management and preservation of capital. Under normal circumstances,
the fund invests at least 80% of the value of its net assets, plus any
borrowings for investment purposes, in "investment-grade" fixed-income
securities.
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FUND FACTS
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FUND INCEPTION
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January 4, 1982
[LOGO] Classic Series
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Annual Report o December 31, 2003
SMITH BARNEY INVESTMENT
GRADE BOND FUND
What's Inside
Letter from the Chairman .................................................. 1
Manager Overview .......................................................... 2
Fund Performance .......................................................... 4
Historical Performance .................................................... 5
Schedule of Investments ................................................... 6
Statement of Assets and Liabilities ....................................... 12
Statement of Operations ................................................... 13
Statements of Changes in Net Assets ....................................... 14
Notes to Financial Statements ............................................. 15
Financial Highlights ...................................................... 20
Independent Auditors' Report .............................................. 22
Additional Information .................................................... 23
Tax Information ........................................................... 26
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LETTER FROM THE CHAIRMAN
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[PHOTO OMITTED]
R. JAY GERKEN, CFA
Chairman, President and
Chief Executive Officer
Dear Shareholder,
Early this past summer bonds generally surrendered some of the gains they had
generated previously in 2003 due in part to signs of a sharp pick-up in the pace
of second-quarter economic growth. Despite subsequent reports of robust
third-quarter economic growth, comments from the Fed suggested to many investors
that it was likely to leave its interest rate targets at low levels for the
foreseeable future. As of the period's close, higher-rated corporate bonds
generally outperformed U.S. Treasury bonds with comparable maturities.
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 and
changes made to the portfolio during this time may have affected fund
performance.
Information About Your Fund
In recent months several issues in the mutual fund industry have come under the
scrutiny of federal and state regulators. The fund's Adviser 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 Adviser and its
affiliates are responding to those information requests, but are not in a
position to predict the outcome of these requests and investigations.
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,
/s/ R. Jay Gerken
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
January 12, 2004
1 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
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MANAGER OVERVIEW
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Performance Review
For the 12 months ended December 31, 2003, Class A shares of the Smith Barney
Investment Grade Bond Fund, excluding sales charges, returned 5.22%. The fund's
Class A shares outperformed the fund's Lipper corporate debt funds A-rated
category average, which was 5.03% for the same period.(1) However, these shares
underperformed the fund's unmanaged benchmarks, the Lehman Brothers Long Term
Credit Bond Index(i) and Citigroup Credit Index 10+,(ii) which returned 10.81%
and 10.83%, respectively, for the same period. Over the period, corporate bonds
generally outperformed U.S. Treasuries with comparable maturities. We believe
the fund underperformed its unmanaged performance benchmarks, which are based
exclusively on the performance of corporate bonds, because during the reporting
period the fund held fixed-income instruments other than corporate bonds,
including U.S. government securities, to help preserve capital.
Market Overview
When the period began, we believe concerns about a faltering economy and stock
market volatility, coupled with expectations that interest rates would drop,
triggered an investor flight to quality and led to increased demand for
investment-grade fixed-income securities. Because bond prices typically move
opposite to interest rate movements, many longer-term fixed-income securities
appreciated over the first five months of 2003.
The Fed proceeded to reduce its interest rate targets in June to their lowest
levels since the Eisenhower Administration. Shortly after the Fed's rate
reduction, signs suggested to many that gross domestic product ("GDP")(iii)
growth was stronger than expected, sparking concerns that inflation could pick
up. This led many investors to question whether the Fed's rate-cutting cycle had
run its course, which resulted in rising bond yields and a sharp decline in
prices over the summer.
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PERFORMANCE SNAPSHOT
AS OF DECEMBER 31, 2003
(excluding sales charges)
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6 Months 12 Months
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Class A Shares -1.72% 5.22%
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Lehman Brothers Long Term
Credit Bond Index 0.05% 10.81%
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Citigroup Credit Index 10+ 0.01% 10.83%
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Lipper Corporate Debt Funds
A-Rated Category Average 0.20% 5.03%
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All figures represent past performance and are not a guarantee of future
results. Principal value and investment returns will fluctuate and investors'
shares, when redeemed may be worth more or less than their original cost.
Class A shares returns assume the reinvestment of income dividends and capital
gains distributions 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 -1.97%, Class L shares returned
- -1.87% and Class Y shares returned -1.46% for the six months ended December 31,
2003. Excluding sales charges, Class B shares returned 4.65%, Class L shares
returned 4.80% and Class Y shares returned 5.62% for the 12 months ended
December 31, 2003.
All index performance reflects no deductions for fees, expenses or taxes. The
Lehman Brothers Long-Term Credit Bond Index is a broad-based unmanaged index of
investment-grade corporate bonds. The Citigroup Credit Index 10+ is a
broad-based unmanaged index of investment-grade corporate bonds with maturities
of 10 years or more that is compiled by an affiliate of the fund's manager.
Lipper, Inc. is a major independent mutual-fund tracking organization. Returns
are based on the period ended December 31, 2003, calculated among the 206 funds
for the six-month period and among the 200 funds for the 12-month period in the
fund's Lipper category including the reinvestment of dividends and capital
gains, if any, and excluding sales charges.
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(1) Lipper, Inc. is a major independent mutual-fund tracking organization.
Returns are based on the 12-month period ended December 31, 2003,
calculated among the 200 funds in the fund's Lipper category including the
reinvestment of dividends and capital gains, if any, and excluding sales
charges.
2 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
The decline was exacerbated due to selling from certain investors who held
mortgage-backed securities in their portfolios. Although Treasury notes and
bonds fluctuated significantly in July, the prices of shorter-term U.S.
Treasuries issues held up considerably better that month.
Prices of Treasuries bounced back to some extent in September. Concerns about
rising interest rates resurfaced after the Commerce Department released
preliminary third-quarter data stating that the economy grew at its fastest pace
in almost 20 years. However, selling in the Treasury markets was more contained
than it was in July as we believe some of this economic growth was attributable
to one-time factors, such as the tax cuts and the end of major combat in Iraq,
and many analysts and investors felt that the Fed appeared to be in a holding
pattern.
According to estimates that were revised higher by the U.S. government later in
the quarter, real GDP increased 8.2% over the third quarter.(iv) Over the 12
months, corporate bonds (as well as mortgage-backed securities to a lesser
extent) generally outperformed U.S. Treasuries with similar maturities.
Portfolio Allocation Approach
Given our recent view of the economic environment, as of the period's close, we
maintained an overall shorter duration versus the benchmark index, as our goal
in this environment is to structure the portfolio focusing on sector allocation
and security selection while monitoring the movement in interest rates. We
continued to allocate investment capital primarily between corporate and
mortgage-backed fixed-income securities, as well as U.S. Treasuries, while
maintaining the ability to add exposure to other sectors when opportunities
arise.
Thank you for your investment in the Smith Barney Investment Grade Bond Fund. We
appreciate that you have entrusted us to manage your money and value our
relationship with you.
Sincerely,
/s/ Gerald J. Culmone /s/ David A. Torchia
Gerald J. Culmone David A. Torchia
Vice President and Vice President and
Investment Officer Investment Officer
January 12, 2004
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.
Portfolio holdings and breakdowns are as of December 31, 2003 and are subject to
change. Please refer to pages 6 through 10 for a list and percentage breakdown
of the fund's holdings.
All index performance reflects no deduction for fees, expenses or taxes.
RISK: The fund may invest in derivatives, such as options and futures, which can
be illiquid and harder to value, especially in declining markets. A small
investment in certain derivatives may have a potentially large impact on the
fund's performance. Derivatives can disproportionately increase losses as stated
in the prospectus. Foreign securities are subject to certain risks of overseas
investing including currency fluctuations and changes in political and economic
conditions, which could result in significant market fluctuations.
(i) The Lehman Brothers Long-Term Credit Bond Index is a broad-based unmanaged
index of investment-grade corporate bonds. Please note that an investor
cannot directly invest in an index.
(ii) The Citigroup Credit Index 10+ is a broad-based unmanaged index of
investment-grade corporate bonds with maturities of 10 years or more that
is compiled by an affiliate of the fund's manager. Please note than an
investor cannot directly invest in an index.
(iii) Gross domestic product is a market value of goods and services produced by
labor and property in a given country.
(iv) Source: Bureau of Economic Analysis.
3 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
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Average Annual Total Returns+ (unaudited)
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Without Sales Charges(1)
---------------------------------------------
Class A Class B Class L Class Y
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Twelve Months Ended 12/31/03 5.22% 4.65% 4.80% 5.62%
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Five Years Ended 12/31/03 5.61 5.09 5.16 5.99
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Ten Years Ended 12/31/03 7.40 6.87 6.93 N/A
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Inception* through 12/31/03 8.56 10.34 7.34 7.14
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With Sales Charges(2)
---------------------------------------------
Class A Class B Class L Class Y
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Twelve Months Ended 12/31/03 0.46% 0.15% 2.75% 5.62%
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Five Years Ended 12/31/03 4.64 4.93 4.95 5.99
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Ten Years Ended 12/31/03 6.91 6.87 6.82 N/A
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Inception* through 12/31/03 8.11 10.34 7.24 7.14
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================================================================================
Cumulative Total Returns+ (unaudited)
================================================================================
Without Sales Charges(1)
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Class A (12/31/93 through 12/31/03) 104.24%
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Class B (12/31/93 through 12/31/03) 94.26
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Class L (12/31/93 through 12/31/03) 95.36
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Class Y (Inception* through 12/31/03) 72.44
================================================================================
+ The returns shown do not reflect the deduction of taxes that a shareholder
would pay or fund distributions on the redemption of fund shares.
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charges of 4.50% and 1.00%,
respectively; Class B shares reflect the deduction of a 4.50% CDSC, which
applies if shares are redeemed within one year from purchase payment. This
CDSC declines by 0.50% the first year after purchase and thereafter by
1.00% per year until no CDSC is incurred. Class L shares also reflect the
deduction of a 1.00% CDSC, which applies if shares are redeemed within the
first year of purchase.
* Inception dates for Class A, B, L and Y shares are November 6, 1992,
January 4, 1982, February 26, 1993 and February 7, 1996, respectively.
4 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
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Historical Performance (unaudited)
================================================================================
Value of $10,000 Invested in Class B Shares of the Smith Barney Investment Grade
Bond Fund vs. the Lehman Brothers Long Term Credit Bond Index, the Citigroup
Credit Index 10+ and Lipper Corporate Debt Funds A-Rated Average+
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December 1993 -- December 2003
[GRAPHIC OMITTED]
[The following table was depicted as a line chart in the printed material.]
Smith Barney
Investment Grade Lehman Brothers Citigroup Lipper Corporate
Bond Fund -- Long Term Credit Credit Debt A-Rated
Class B sares Bond Index Index 10+ Average
---------------- ---------------- --------- ----------------
12/93 10000 10000 10000 10000
12/94 9057 9618 9433 9424
12/95 12193 11442 12074 12056
12/96 12085 13346 12315 12115
12/97 14071 14467 13973 13226
12/98 15157 15772 15245 14497
12/99 13726 14860 14363 14115
12/00 15199 16228 15664 15494
12/01 16592 18216 17744 16647
12/02 18564 20238 19553 18046
12/03 19426 22426 21671 18954
+ Hypothetical illustration of $10,000 invested in Class B shares on
December 31, 1993, assuming reinvestment of dividends and capital gains,
if any, at net asset value through December 31, 2003. The Lehman Brothers
Long Term Credit Bond Index is a broad-based unmanaged index of
investment-grade corporate bonds. The Citigroup Credit Index 10+ (formerly
known as Salomon Smith Barney Credit Index 10+), is a broad-based
unmanaged index of investment-grade corporate bonds with maturities of ten
years or more. The Indexes are unmanaged and are not subject to the same
management and trading expenses as a mutual fund. Please note that an
investor cannot invest directly in an index. The Lipper Corporate Debt
Funds A-Rated Average is composed of the Fund's peer group of 200 mutual
funds as of December 31, 2003. The performance of the Fund's other classes
may be greater or less than the performance of Class B shares indicated on
this chart, depending on whether higher or lower sales charges and fees
were incurred by shareholders investing in the other classes.
All figures represent past performance and are not a guarantee of future
results. The performance data represents past performance including the
investment return and principal value of an investment, which 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.
5 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
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Schedule of Investments December 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
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CORPORATE NOTES AND BONDS -- 84.9%
Aerospace and Defense -- 2.7%
$ 6,500,000 A The Boeing Co., Debentures, 6.875% due 10/15/43 $ 6,888,258
1,000,000 A Honeywell International, Debentures, 6.625% due 6/15/28 1,099,371
4,000,000 BBB Northrop-Grumman Corp., Debentures, 7.750% due 2/15/31 4,879,348
5,000,000 BBB- Raytheon Co., Debentures, 7.200% due 8/15/27 5,483,625
5,250,000 A United Technologies Corp., Debentures, 7.500% due 9/15/29 6,448,523
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24,799,125
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Agricultural Equipment -- 0.7%
5,000,000 A- Deere & Co., Debentures, 8.100% due 5/15/30 6,416,890
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Airlines -- 0.3%
2,600,000 A Southwest Airlines Co., Debentures, 7.375% due 3/1/27 2,870,096
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Automotive -- 3.0%
6,500,000 A3* DaimlerChrysler Corp., Debentures, 7.450% due 3/1/27 6,936,956
5,000,000 Baa1* Ford Motor Co., Notes, 7.450% due 7/16/31 5,067,425
10,000,000 Baa1* General Motors Corp., Sr. Debentures, 8.375% due 7/15/33 11,643,030
3,750,000 BBB- Lear Corp., Sr. Notes, Series B, 8.110% due 5/15/09 4,429,688
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28,077,099
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Banking -- 8.9%
10,000,000 A+ Abbey National PLC, Sub. Debentures, 7.950% due 10/26/29 12,461,470
4,000,000 BBB- Astoria Financial Corp., Notes, 5.750% due 10/15/12 4,073,952
5,000,000 Aa3* Bank of America Corp., Sub. Notes, 7.400% due 1/15/11 5,872,375
6,250,000 A1* Bank of New York Co., Inc., Sr. Sub. Notes, 3.400% due 3/15/13 (b) 6,131,169
5,000,000 A1* Bank One Corp., Sub. Notes, 6.375% due 1/30/09 5,574,875
5,750,000 A2* BB&T Corp., Sub. Notes, 6.375% due 6/30/05 (b) 6,121,864
4,975,000 BBB Independence Community Bank, Notes, 3.500% due 6/20/13 (b) 4,806,288
5,000,000 AAA Landesbank Baden-Wuerttemberg, Sub. Notes, 7.625% due 2/1/23 6,135,415
10,000,000 Aa2* The Royal Bank of Scotland Group plc, Sub. Notes, 5.000% due 11/12/13 10,054,740
5,750,000 A- Standard Chartered Bank, Sub. Notes, 8.000% due 5/30/31 (c) 6,969,742
5,000,000 BBB- Sovereign Bank, Sub. Notes, 4.375% due 8/1/13 (b) 5,042,540
5,000,000 Aa2* Wachovia Bank NA, Notes, 4.850% due 7/30/07 5,395,200
4,000,000 BBB- Webster Bank, Sub. Notes, 5.875% due 1/15/13 4,139,160
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82,778,790
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Basic Materials -- 1.4%
6,000,000 A2* Alcoa Inc., Notes, 6.000% due 1/15/12 6,531,000
2,000,000 BBB- Phelps Dodge Corp., Sr. Notes, 8.750% due 6/1/11 2,445,146
4,700,000 BBB+ Potash Corp. of Saskatchewan Inc., Notes, 4.875% due 3/1/13 4,601,939
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-- 13,578,085
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Beverages -- 3.0%
7,058,000 A+ Anheuser Busch Cos., Inc., Debentures, 6.500% due 5/1/42 7,703,412
5,950,000 A Coca-Cola Enterprises, Inc., Debentures, 6.700% due 10/15/36 6,594,141
7,125,000 A Diageo Capital PLC, Notes, 4.850% due 5/15/18 6,818,953
6,375,000 A The Pepsi Bottling Group, Inc., Sr. Notes, Series B, 7.000% due 3/1/29 7,329,025
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28,445,531
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Building/Construction -- 0.4%
4,000,000 BBB+ Masco Corp., Notes, 6.500% due 8/15/32 4,212,148
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Chemicals -- 0.5%
3,715,000 A3* Rohm & Haas Co., Debentures, 7.850% due 7/15/29 4,581,587
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See Notes to Financial Statements.
6 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Schedule of Investments (continued) December 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
Consumer Sundries -- 0.6%
$ 5,000,000 AA- The Procter & Gamble Co., Debentures, 6.450% due 1/15/26 $ 5,472,290
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Drugs -- 2.7%
3,435,000 AA Eli Lilly & Co., Notes, 7.125% due 6/1/25 4,072,533
5,000,000 AAA Merck & Co. Inc., Debentures, 5.950% due 12/1/28 5,196,550
6,253,000 A Wyeth, Notes, 6.950% due 3/15/11 7,072,080
7,500,000 AA+ Zeneca Wilmington, Inc., Debentures, 7.000% due 11/15/23 8,713,418
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25,054,581
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Electric -- 5.4%
5,750,000 A Alabama Power Co., Sr. Notes, Series S, 5.875% due 12/1/22 5,878,627
6,250,000 BBB Appalachian Power Co., Sr. Notes, Series H, 5.950% due 5/15/33 6,011,881
4,500,000 A3* Carolina Power & Light Co., First Mortgage Bonds, 6.125% due 9/15/33 4,641,106
5,000,000 A- Commonwealth Edison Co., First Mortgage Bonds, 5.875% due 2/1/33 5,019,350
4,500,000 A1* Consolidated Edison Co. of New York, Debentures, 3.850% due 6/15/13 4,183,240
6,000,000 BBB+ Duke Energy Corp., Bonds, Sr. Notes, 6.450% due 10/15/32 6,206,034
2,875,000 BBB- Entergy Gulf States, Inc., First Mortgage Bonds, 6.200% due 7/1/33 (c) 2,742,917
7,000,000 Aa3* Florida Power & Light Co., First Mortgage Bonds, 5.625% due 4/1/34 6,867,161
8,410,000 BBB NiSource Finance Corp., Exchange Notes, 7.625% due 11/15/05 9,191,928
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50,742,244
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Electronics/Computers -- 1.9%
5,000,000 A- Dell Inc., Debentures, 7.100% due 4/15/28 5,800,610
6,075,000 A+ International Business Machines Corp., Debentures, 7.000% due 10/30/25 7,007,385
5,000,000 BBB Motorola, Inc., Debentures, 6.500% due 9/1/25 5,356,125
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18,164,120
- ----------------------------------------------------------------------------------------------------------------------------------
Finance -- 13.8%
6,552,000 A2* Amvescap PLC, Sr. Notes, 6.600% due 5/15/05 6,938,869
6,325,000 A+ American Express Co., Notes, 4.875% due 7/15/13 6,350,313
7,000,000 A CIT Group, Inc., Sr. Notes, 4.750% due 12/15/10 7,054,145
7,090,000 A Countrywide Home Loans, Inc., Medium-Term Notes, Series K, 5.625% due 5/15/07 7,660,227
6,000,000 Aa3* Credit Suisse First Boston USA Inc., Notes, 6.125% due 11/15/11 6,542,652
5,000,000 A3* Ford Motor Credit Co., Notes, 7.375% due 10/28/09 5,497,340
9,300,000 AAA General Electric Capital Corp., Notes, 3.500% due 5/1/08 9,318,712
5,000,000 Aa3* Goldman Sachs Group, Inc., Notes, 7.350% due 10/1/09 5,838,330
7,000,000 A1* Household Finance Corp., Notes, 4.750% due 7/15/13 6,821,024
7,000,000 AA- International Lease Finance Corp., Medium-Term Notes, Series O, 4.375% due 11/1/09 7,060,865
7,000,000 A+ J.P. Morgan Chase & Co., Sr. Notes, 5.350% due 3/1/07 7,497,518
5,000,000 A1* Lehman Brothers Holdings, Inc., Sr. Notes, 8.800% due 3/1/15 6,345,435
5,000,000 BBB MBNA Corp., Sr. Medium-Term Notes, 6.250% due 1/17/07 5,447,240
5,000,000 Aa3* Merrill Lynch & Co., Inc., Notes, 6.750% due 6/1/28 5,504,820
5,000,000 Aa3* Morgan Stanley, Notes, 7.250% due 4/1/32 5,879,275
5,000,000 Baa1* PEMEX Project, Notes, 9.125% due 10/13/10 5,962,500
6,800,000 A SLM Corp., Medium-Term Notes, Series A, 5.625% due 8/1/33 6,473,355
4,530,000 AA- State Street Corp., Notes, 7.350% due 6/15/26 5,371,561
5,111,000 AA- Washington Mutual Financial Corp., Sr. Notes, 6.875% due 5/15/11 5,876,464
5,000,000 BBB WMC Finance USA Ltd., Notes, 5.125% due 5/15/13 4,938,290
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128,378,935
- ----------------------------------------------------------------------------------------------------------------------------------
Food Chains -- 0.7%
6,150,000 A McDonald's Corp., Debentures, 6.375% due 1/8/28 6,526,583
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See Notes to Financial Statements.
7 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Schedule of Investments (continued) December 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
Foods -- 6.7%
$ 1,275,000 A+ Archer-Daniels-Midland Co., Debentures, 6.625% due 5/1/29 $ 1,401,846
5,700,000 A Campbell Soup Co., Debentures, 8.875% due 5/1/21 7,670,849
5,000,000 BBB+ ConAgra Foods, Inc., Sr. Notes, 6.700% due 8/1/27 5,646,020
5,000,000 BBB+ General Mills Inc., Notes, 6.000% due 2/15/12 5,355,455
5,000,000 BBB Kellogg Co., Debentures, Series B, 7.450% due 4/1/31 5,924,345
8,525,000 A3* Kraft Foods Inc., Notes, 5.250% due 10/1/13 8,618,127
Safeway Inc., Notes:
1,750,000 BBB 4.800% due 7/16/07 1,817,849
5,000,000 BBB 5.800% due 8/15/12 5,178,565
5,000,000 A+ Sara Lee Corp., Notes, 6.250% due 9/15/11 5,560,620
5,000,000 AA- Sysco Corp., Notes, 4.750% due 7/30/05 5,224,920
5,000,000 BBB Tyson Foods Inc., Notes, 7.000% due 1/15/28 4,979,705
5,000,000 A+ Unilever Capital Corp., Sr. Notes, 5.900% due 11/15/32 5,032,820
- ----------------------------------------------------------------------------------------------------------------------------------
62,411,121
- ----------------------------------------------------------------------------------------------------------------------------------
Forestry Products -- 1.1%
4,490,000 BBB- Domtar Inc., Notes, 5.375% due 12/1/13 4,453,065
5,000,000 BBB Willamette Industries, Inc., Debentures, 7.350% due 7/1/26 5,643,195
- ----------------------------------------------------------------------------------------------------------------------------------
10,096,260
- ----------------------------------------------------------------------------------------------------------------------------------
Insurance -- 4.1%
8,000,000 AAA AIG SunAmerica Global Financing X, Bonds, 6.900% due 3/15/32 (c) 9,146,280
5,000,000 AA Allstate Financial Global Funding, Notes, 5.250% due 2/1/07 (c) 5,378,230
MetLife, Inc., Sr. Notes:
1,000,000 A 6.125% due 12/1/11 1,092,319
7,000,000 A 5.000% due 11/24/13 6,964,034
1,500,000 AA Principal Life Global Funding, Bonds, 6.125% due 10/15/33 (c) 1,506,408
5,000,000 A+ Progressive Corp., Sr. Notes, 6.625% due 3/1/29 5,440,360
7,567,000 A- Wellpoint Health Networks Inc., Notes, 6.375% due 1/15/12 8,344,971
- ----------------------------------------------------------------------------------------------------------------------------------
37,872,602
- ----------------------------------------------------------------------------------------------------------------------------------
Manufacturing -- 2.6%
5,000,000 AA- Illinois Tool Works Inc., Notes, 5.750% due 3/1/09 5,520,195
5,850,000 A+ Nucor Corp., Sr. Notes, 4.875% due 10/1/12 5,895,127
5,000,000 A PPG Industries, Inc., Debentures, 9.000% due 5/1/21 6,436,250
5,000,000 BBB+ USX Corp., Debentures, 9.125% due 1/15/13 6,426,430
- ----------------------------------------------------------------------------------------------------------------------------------
24,278,002
- ----------------------------------------------------------------------------------------------------------------------------------
Multimedia -- 4.7%
4,675,000 BBB- Clear Channel Communications, Inc., Sr. Notes, 5.000% due 3/15/12 4,701,199
4,000,000 BBB Comcast Corp., Notes, 7.050% due 3/15/33 4,368,192
3,861,000 BBB Cox Communications Inc., Notes, 7.750% due 11/1/10 4,605,714
5,000,000 BBB- News America Holdings Inc., Sr. Debentures, 8.500% due 2/23/25 6,273,235
5,000,000 BBB+ Time Warner Cos., Inc., Sr. Debentures, 7.570% due 2/1/24 5,672,745
Viacom Inc.:
5,000,000 A- Debentures, 8.625% due 8/1/12 6,209,015
5,825,000 A- Sr. Notes, 7.700% due 7/30/10 6,971,273
4,275,000 BBB+ The Walt Disney Co., Medium-Term Notes, Series B, 6.200% due 6/20/14 4,604,248
- ----------------------------------------------------------------------------------------------------------------------------------
43,405,621
- ----------------------------------------------------------------------------------------------------------------------------------
Oil and Gas -- 6.0%
5,000,000 BBB Amerada Hess Corp., Notes, 7.125% due 3/15/33 5,092,275
5,000,000 BBB+ Anadarko Petroleum Corp., Notes, 3.250% due 5/1/08 4,914,750
4,150,000 BBB+ Burlington Resources Finance Co., Notes, 6.500% due 12/1/11 4,642,049
See Notes to Financial Statements.
8 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Schedule of Investments (continued) December 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
Oil and Gas -- 6.0% (continued)
$ 6,000,000 A- Conoco Inc., Sr. Notes, 6.950% due 4/15/29 $ 6,825,762
4,925,000 A3* Consolidated Natural Gas Co., Debentures, 6.800% due 12/15/27 5,353,687
5,000,000 BBB Devon Energy Corp., Debentures, 7.950% due 4/15/32 6,047,750
4,000,000 BBB Nexen Inc., Notes, 5.050% due 11/20/13 3,952,968
6,000,000 A Norsk Hydro A/S, Debentures, 6.800% due 1/15/28 6,695,370
6,350,000 A2* TransCanada PipeLines Ltd., Medium-Term Notes, 7.700% due 6/15/29 7,775,854
5,000,000 BBB Valero Energy Corp., Notes, 4.750% due 6/15/13 4,746,860
- ----------------------------------------------------------------------------------------------------------------------------------
56,047,325
- ----------------------------------------------------------------------------------------------------------------------------------
Publishing -- 0.7%
5,900,000 A Knight-Ridder Inc., Debentures, 6.875% due 3/15/29 6,602,944
- ----------------------------------------------------------------------------------------------------------------------------------
Real Estate -- 0.8%
2,370,000 BBB Boston Properties Inc., Sr. Notes, 6.250% due 1/15/13 2,547,525
4,150,000 BBB+ EOP Operating L.P., Notes, 7.500% due 4/19/29 4,658,383
- ----------------------------------------------------------------------------------------------------------------------------------
7,205,908
- ----------------------------------------------------------------------------------------------------------------------------------
Retail -- 2.8%
3,750,000 BBB Kroger Co., Sr. Notes, 6.750% due 4/15/12 4,161,746
4,305,000 BBB+ Limited Inc., Debentures, 6.950% due 3/1/33 4,697,276
6,300,000 A Lowe's Cos., Inc., Debentures, 6.875 due 2/15/28 7,123,977
4,275,000 A+ Target Corp., Sr. Debentures, 7.000% due 7/15/31 4,862,736
4,500,000 AA Wal-Mart Stores, Inc., Notes, 7.550% due 2/15/30 5,555,705
- ----------------------------------------------------------------------------------------------------------------------------------
26,401,440
- ----------------------------------------------------------------------------------------------------------------------------------
Retirement/Aged Care -- 0.6%
5,000,000 AA AARP, Bonds, 7.500% due 5/1/31 (c) 5,846,300
- ----------------------------------------------------------------------------------------------------------------------------------
Telecommunications -- 2.7%
5,956,000 A+ Ameritech Capital Funding, Debentures, 6.450% due 1/15/18 6,456,310
7,000,000 Aa3* BellSouth Telecommunications, Inc., Debentures, 5.850% due 11/15/45 6,583,479
5,000,000 BBB- Sprint Capital Corp., Notes, 6.900% due 5/1/19 5,122,190
6,000,000 Aa3* Verizon New England Inc., Sr. Notes, 6.500% due 9/15/11 6,623,484
- ----------------------------------------------------------------------------------------------------------------------------------
24,785,463
- ----------------------------------------------------------------------------------------------------------------------------------
Transportation -- 4.4%
6,000,000 BBB+ Burlington Northern Santa Fe Corp., Sr. Notes, 5.900% due 7/1/12 6,431,814
5,000,000 BBB CSX Corp., Notes, 6.250% due 10/15/08 5,485,375
7,453,566 A1* Federal Express Corp., Pass-Through Certificates, Series 981, Class B, 6.845% due 1/15/19 8,234,215
5,000,000 Baa1* Norfolk Southern Corp., Sr. Notes, 7.250% due 2/15/31 5,680,010
Union Pacific Corp.:
4,000,000 BBB Debentures, 7.125% due 2/1/28 4,528,824
4,000,000 Aa3* Pass-Through Certificates, 4.698% due 1/2/24 3,854,060
5,000,000 AAA United Parcel Service, Inc. Debentures, Series B, 8.375% due 4/1/20 6,463,150
- ----------------------------------------------------------------------------------------------------------------------------------
40,677,448
- ----------------------------------------------------------------------------------------------------------------------------------
Wireless Communications -- 1.7%
4,000,000 BBB AT&T Wireless Services Inc., Sr. Notes, 8.750% due 3/1/31 4,952,772
5,000,000 A+ Cingular Wireless LLC, Sr. Notes, 7.125% due 12/15/31 5,410,210
5,000,000 A Vodafone Group plc, Notes, 6.250% due 11/30/32 5,120,180
- ----------------------------------------------------------------------------------------------------------------------------------
15,483,162
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE NOTES AND BONDS
(Cost -- $754,135,910) 791,211,700
==================================================================================================================================
See Notes to Financial Statements.
9 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Schedule of Investments (continued) December 31, 2003
================================================================================
FACE
AMOUNT RATING(a) SECURITY VALUE
==================================================================================================================================
ASSET-BACKED SECURITIES -- 2.6%
$ 5,250,000 AAA Atlantic City Electric Transition Funding LLC, Series 2002-1, Class A4, 5.550% due 10/20/23 $ 5,348,501
17,700,000 AAA Capital One Master Trust, Series 2001-8A, Class A, 4.600% due 8/17/09 18,589,308
==================================================================================================================================
TOTAL ASSET-BACKED SECURITIES
(Cost -- $23,667,386) 23,937,809
==================================================================================================================================
U.S. GOVERNMENT SECTOR -- 7.9%
U.S. Treasury Obligations -- 2.8%
20,000,000 U.S. Treasury Notes, 4.375% due 8/15/12 20,403,140
5,000,000 U.S. Treasury Bonds, 5.375% due 2/15/31 5,215,825
- ----------------------------------------------------------------------------------------------------------------------------------
25,618,965
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government Agencies -- 5.1%
35,000,000 Fannie Mae, Benchmark Notes, 6.625% due 11/15/30 39,924,010
275,407 Federal National Mortgage Association (FNMA), 6.500% due 9/1/28 - 1/1/29 288,360
7,177,364 Government National Mortgage Association (GNMA), 6.500% due 3/15/28 - 3/15/29 7,578,427
- ----------------------------------------------------------------------------------------------------------------------------------
47,790,797
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECTOR
(Cost -- $69,456,463) 73,409,762
==================================================================================================================================
SOVEREIGN DEBT -- 4.1%
Canada -- 2.7%
5,600,000 A- Province of Nova Scotia, Debentures, 7.250% due 7/27/13 6,711,645
Province of Quebec, Debentures:
5,000,000 A+ 7.500% due 7/15/23 6,152,005
5,000,000 A+ 7.500% due 9/15/29 6,251,705
5,000,000 Aa3* Province of Saskatchewan, Debentures, 8.000% due 2/1/13 6,213,895
- ----------------------------------------------------------------------------------------------------------------------------------
25,329,250
- ----------------------------------------------------------------------------------------------------------------------------------
Italy -- 0.8%
7,500,000 Aa1* Region of Lombardy, Notes, 5.804% due 10/25/32 7,714,650
- ----------------------------------------------------------------------------------------------------------------------------------
Supranational -- 0.6%
4,725,000 A Corporacion Andina de Fomento, Notes, 6.875% due 3/15/12 5,252,664
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SOVEREIGN DEBT
(Cost -- $35,677,983) 38,296,564
==================================================================================================================================
REPURCHASE AGREEMENT -- 0.5%
4,681,000 Merrill Lynch & Co., Inc., 0.820% due 1/2/04; Proceeds at maturity -- $4,681,213;
(Fully collateralized by U.S. Treasury Notes and Bonds, 6.125% to 8.125%
due 8/15/07 to 2/15/23; Market value -- $4,774,633) (Cost -- $4,681,000) 4,681,000
==================================================================================================================================
TOTAL INVESTMENTS -- 100.0%
(Cost -- $887,618,742**) $931,536,835
==================================================================================================================================
(a) All ratings are by Standard & Poor's Rating Services, except for those
which are identified by an asterisk (*), are rated by Moody's Investors
Service.
(b) Variable rate security.
(c) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
** Aggregate cost for Federal income tax purposes is $890,550,904.
See page 11 for definitions of ratings.
See Notes to Financial Statements.
10 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Bond Ratings (unaudited)
================================================================================
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("Standard & Poor's") -- Ratings from "AA" to
"BB" may be modified by the addition of a plus (+) or minus (-) sign to show
relative standings within the major rating categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small
degree.
A -- Bonds rated "A" have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in
higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
BB -- Bonds rated "BB" have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments.
Moody's Investors Service ("Moody's") -- Numerical modifiers 1, 2, and 3 may be
applied to each generic rating from "Aa" to "Baa", where 1 is the highest and 3
the lowest rating within its generic category.
Aaa -- Bonds rated "Aaa" are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa -- Bonds rated "Aa" are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or there
may be other elements present which make the long-term risks appear
somewhat larger than in "Aaa" securities.
A -- Bonds rated "A" possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the
future.
Baa -- Bonds rated "Baa" are considered as medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
11 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Statement of Assets and Liabilities December 31, 2003
================================================================================
ASSETS:
Investments, at value (Cost -- $887,618,742) $ 931,536,835
Cash 91
Interest receivable 14,371,924
Receivable for Fund shares sold 7,674,513
Prepaid expenses 15,014
- ---------------------------------------------------------------------------------------
Total Assets 953,598,377
- ---------------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares reacquired 1,322,424
Investment advisory fee payable 347,710
Administration fee payable 152,051
Distribution plan fees payable 106,926
Accrued expenses 228,224
- ---------------------------------------------------------------------------------------
Total Liabilities 2,157,335
- ---------------------------------------------------------------------------------------
Total Net Assets $ 951,441,042
=======================================================================================
NET ASSETS:
Par value of capital shares $ 73,715
Capital paid in excess of par value 902,778,426
Overdistributed net investment income (1,743,415)
Accumulated net realized gain from investment transactions 6,414,223
Net unrealized appreciation of investments 43,918,093
- ---------------------------------------------------------------------------------------
Total Net Assets $ 951,441,042
=======================================================================================
Shares Outstanding:
Class A 32,525,255
----------------------------------------------------------------------------------
Class B 16,104,566
----------------------------------------------------------------------------------
Class L 4,219,080
----------------------------------------------------------------------------------
Class Y 20,866,082
----------------------------------------------------------------------------------
Net Asset Value:
Class A (and redemption price) $ 12.92
----------------------------------------------------------------------------------
Class B * $ 12.89
----------------------------------------------------------------------------------
Class L * $ 12.87
----------------------------------------------------------------------------------
Class Y (and redemption price) $ 12.91
----------------------------------------------------------------------------------
Maximum Public Offering Price Per Share:
Class A (net asset value plus 4.71% of net asset value per share) $ 13.53
----------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $ 13.00
=======================================================================================
* Redemption price is NAV of Class B and L shares reduced by a 4.50% and
1.00% CDSC, respectively, if shares are redeemed within one year from
purchase payment (See Note 2).
See Notes to Financial Statements.
12 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Statement of Operations For the Year Ended December 31, 2003
================================================================================
INVESTMENT INCOME:
Interest $ 50,340,293
- ----------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 2) 4,013,709
Distribution plan fees (Note 5) 3,123,422
Administration fee (Note 2) 1,755,875
Shareholder servicing fees (Note 5) 816,216
Shareholder communications (Note 5) 79,548
Custody 58,821
Directors' fees 44,385
Audit and legal 34,705
Registration fees 7,597
Other 10,280
- ----------------------------------------------------------------------------------------------------
Total Expenses 9,944,558
- ----------------------------------------------------------------------------------------------------
Net Investment Income 40,395,735
- ----------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTE 3):
Realized Gain From Investment Transactions (excluding short-term investments):
Proceeds from sales 476,910,995
Cost of securities sold 442,437,094
- ----------------------------------------------------------------------------------------------------
Net Realized Gain 34,473,901
- ----------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 74,247,000
End of year 43,918,093
- ----------------------------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (30,328,907)
- ----------------------------------------------------------------------------------------------------
Net Gain on Investments 4,144,994
- ----------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 44,540,729
====================================================================================================
See Notes to Financial Statements.
13 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Statements of Changes in Net Assets For the Years Ended December 31,
================================================================================
2003 2002
=====================================================================================================
OPERATIONS:
Net investment income $ 40,395,735 $ 35,934,113
Net realized gain (loss) 34,473,901 (8,364,307)
Increase (decrease) in net unrealized appreciation (30,328,907) 59,763,740
- -----------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 44,540,729 87,333,546
- -----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 6):
Net investment income (42,122,063) (37,207,660)
Net realized gains (1,642,342) --
Capital -- (1,537,830)
- -----------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (43,764,405) (38,745,490)
- -----------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 7):
Net proceeds from sale of shares 349,381,122 321,780,013
Net asset value of shares issued for reinvestment of dividends 25,499,084 21,799,825
Cost of shares reacquired (267,444,138) (186,409,575)
- -----------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 107,436,068 157,170,263
- -----------------------------------------------------------------------------------------------------
Increase in Net Assets 108,212,392 205,758,319
NET ASSETS:
Beginning of year 843,228,650 637,470,331
- -----------------------------------------------------------------------------------------------------
End of year* $ 951,441,042 $ 843,228,650
=====================================================================================================
* Includes overdistributed net investment income of: $ (1,743,415) $ (1,179,535)
=====================================================================================================
See Notes to Financial Statements.
14 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Notes to Financial Statements
================================================================================
1. Significant Accounting Policies
Smith Barney Investment Grade Bond Fund ("Fund"), a separate investment fund of
Smith Barney Investment Funds Inc. ("Company"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Company consists of
this Fund and eight other separate investment funds: Smith Barney Government
Securities Fund, Smith Barney Hansberger Global Value Fund, Smith Barney Small
Cap Value Fund, Smith Barney Small Cap Growth Fund, Smith Barney Group Spectrum
Fund, Smith Barney Multiple Discipline Funds -- Large Cap Growth and Value Fund
(formerly known as Smith Barney Premier Selections Large Cap Fund), Smith Barney
Multiple Discipline Funds -- All Cap Growth and Value Fund (formerly known as
Smith Barney Premier Selections All Cap Growth Fund) and Smith Barney Multiple
Discipline Funds -- Global All Cap Growth and Value Fund (formerly known as
Smith Barney Premier Selections Global Growth Fund). The financial statements
and financial highlights for the other funds are presented in separate
shareholder reports.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing price on such markets;
securities traded in the over-the-counter market and listed securities for which
no sales prices were reported are valued at the mean between the bid and asked
prices; (c) securities for which market quotations are not available will be
valued in good faith at fair value by or under the direction of the Board of
Directors; (d) securities that have a maturity of more than 60 days are valued
at prices based on market quotations for securities of similar type, yield and
maturity; (e) securities maturing within 60 days are valued at cost plus
accreted discount, or minus amortized premium, which approximates value; (f)
dividend income is recorded on ex-dividend date and interest income, adjusted
for amortization of premium and accretion of discount, is recorded on an accrual
basis; (g) gains or losses on the sale of securities are calculated by using the
specific identification method; (h) dividends and distributions to shareholders
are recorded on the ex-dividend date; the Fund distributes dividends monthly and
capital gains, if any, at least annually; (i) class specific expenses are
charged to each class; management fees and general fund expenses are allocated
on the basis of relative net assets of each class or on another reasonable
basis; (j) the character of income and gains to be distributed is determined in
accordance with income tax regulations which may differ from accounting
principles generally accepted in the United States of America. At December 31,
2003, reclassifications were made to the capital accounts of the Fund to reflect
permanent book/tax differences and income and gains available for distributions
under income tax regulations. Net investment income, net realized loss and net
assets were not affected by this change; (k) the Fund intends to comply with the
applicable provisions of the Internal Revenue Code of 1986, as amended,
pertaining to regulated investment companies and to make distributions of
taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; and (l) 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.
2. Investment Advisory Agreement, Administration Agreement and Other
Transactions
Smith Barney Fund Management LLC ("SBFM"), an indirect wholly-owned subsidiary
of Citigroup Inc. ("Citigroup"), acts as investment adviser to the Fund. The
Fund pays SBFM an investment advisory fee calculated at an annual rate of 0.45%
of the Fund's average daily net assets up to $500 million and 0.42% of the
Fund's average daily net assets thereafter. This fee is calculated daily and
paid monthly.
SBFM also acts as the Fund's administrator for which the Fund pays a fee
calculated at an annual rate of 0.20% of the Fund's average daily net assets up
to $500 million and 0.18% of the Fund's average daily net assets thereafter.
This fee is calculated daily and paid monthly.
15 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Notes to Financial Statements (continued)
================================================================================
Citicorp Trust Bank, fsb. ("CTB"), another subsidiary of Citigroup, acts as the
Fund's transfer agent. PFPC Inc. ("PFPC") and Primerica Shareholder Services
("PSS"), another subsidiary of Citigroup, act as the Fund's sub-transfer agents.
CTB receives account fees and asset-based fees that vary according to the size
and type of account. PFPC and PSS are responsible for shareholder recordkeeping
and financial processing for all shareholder accounts and are paid by CTB. For
the year ended December 31, 2003, the Fund paid transfer agent fees of $351,009
to CTB.
Citigroup Global Markets Inc. ("CGM") (formerly known as Salomon Smith Barney
Inc.) and PFS Distributors, Inc., both of which are subsidiaries of Citigroup,
act as the Fund's distributors.
There are maximum initial sales charges of 4.50% and 1.00% for Class A and L
shares, respectively. There is a contingent deferred sales charge ("CDSC") of
4.50% on Class B shares, which applies if redemption occurs within one year from
purchase payment. This CDSC declines by 0.50% the first year after purchase
payment and thereafter by 1.00% per year until no CDSC is incurred. Class L
shares also 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 $500,000 in the
aggregate. These purchases do not incur an initial sales charge.
For the year ended December 31, 2003, CGM and its affiliates received sales
charges of approximately $1,625,000 and $225,000 on sales of the Fund's Class A
and L shares, respectively. In addition, CDSCs paid to CGM and its affiliates
were approximately:
Class A Class B Class L
================================================================================
CDSCs $2,000 $580,000 $14,000
================================================================================
All officers and one Director of the Company are employees of Citigroup or its
affiliates.
3. Investments
During the year ended December 31, 2003, the aggregate cost of purchases and
proceeds from sales of investments (including maturities of long-term
investments, but excluding short-term investments) were as follows:
================================================================================
Purchases $613,570,311
- --------------------------------------------------------------------------------
Sales 476,910,995
================================================================================
At December 31, 2003, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
================================================================================
Gross unrealized appreciation $ 51,519,584
Gross unrealized depreciation (10,533,653)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 40,985,931
================================================================================
4. Repurchase Agreements
The Fund purchases (and the custodian takes possession of) U.S. government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date (generally, the next business day),
at an agreed-upon higher repurchase price. The Fund requires continual
maintenance of the market value (plus accrued interest) of the collateral in
amounts at least equal to the repurchase price.
16 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Notes to Financial Statements (continued)
================================================================================
5. Class Specific Expenses
Pursuant to a Rule 12b-1 Distribution Plan, the Fund pays a service fee with
respect to its Class A, B and L 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 Class B and L shares calculated at the annual
rate of 0.50% and 0.45% of the average daily net assets of each class,
respectively. For the year ended December 31, 2003, total Rule 12b-1
Distribution Plan fees, which are accrued daily and paid monthly, were as
follows:
Class A Class B Class L
================================================================================
Rule 12b-1 Distribution Plan Fees $1,039,327 $1,664,890 $419,205
================================================================================
For the year ended December 31, 2003, total Shareholder Servicing fees were as
follows:
Class A Class B Class L Class Y
================================================================================
Shareholder Servicing Fees $514,440 $252,025 $49,409 $342
================================================================================
For the year ended December 31, 2003, total Shareholder Communication expenses
were as follows:
Class A Class B Class L Class Y
================================================================================
Shareholder Communication Expenses $35,104 $36,913 $7,283 $248
================================================================================
6. Distributions Paid to Shareholders by Class
Year Ended Year Ended
December 31, 2003 December 31, 2002
================================================================================
Class A
Net investment income $19,212,224 $17,108,612
Net realized gains 731,262 --
Capital -- 699,241
- --------------------------------------------------------------------------------
Total $19,943,486 $17,807,853
================================================================================
Class B
Net investment income $ 9,209,024 $ 8,545,132
Net realized gains 363,854 --
Capital -- 384,905
- --------------------------------------------------------------------------------
Total $ 9,572,878 $ 8,930,037
================================================================================
Class L
Net investment income $ 2,485,535 $ 2,311,383
Net realized gains 94,620 --
Capital -- 102,193
- --------------------------------------------------------------------------------
Total $ 2,580,155 $ 2,413,576
================================================================================
Class Y
Net investment income $11,215,280 $ 9,242,533
Net realized gains 452,606 --
Capital -- 351,491
- --------------------------------------------------------------------------------
Total $11,667,886 $ 9,594,024
================================================================================
17 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Notes to Financial Statements (continued)
================================================================================
7. Capital Shares
At December 31, 2003, the Company had ten billion shares of capital stock
authorized with a par value of $0.001 per share. The Fund has the ability to
issue multiple classes of shares. Each share of a class represents an identical
interest and has the same rights, except that each class bears certain direct
expenses, including those specifically related to the distribution of its
shares.
Transactions in shares of each class were as follows:
Year Ended Year Ended
December 31, 2003 December 31, 2002
------------------------------- -------------------------------
Shares Amount Shares Amount
========================================================================================================
Class A
Shares sold 11,051,132 $ 143,605,947 10,349,458 $127,238,156
Shares issued on reinvestment 1,257,495 16,352,332 1,137,455 13,942,457
Shares reacquired (9,549,007) (123,662,971) (5,513,199) (67,758,278)
- --------------------------------------------------------------------------------------------------------
Net Increase 2,759,620 $ 36,295,308 5,973,714 $ 73,422,335
========================================================================================================
Class B
Shares sold 5,453,250 $ 70,851,471 7,078,315 $ 86,876,715
Shares issued on reinvestment 555,999 7,218,512 510,873 6,251,944
Shares reacquired (6,335,181) (81,797,129) (4,533,304) (55,448,620)
- --------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (325,932) $ (3,727,146) 3,055,884 $ 37,680,039
========================================================================================================
Class L
Shares sold 2,630,357 $ 34,651,279 3,085,676 $ 38,237,146
Shares issued on reinvestment 140,107 1,816,581 131,387 1,605,424
Shares reacquired (4,004,633) (52,309,840) (1,010,298) (12,408,613)
- --------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (1,234,169) $ (15,841,980) 2,206,765 $ 27,433,957
========================================================================================================
Class Y
Shares sold 7,755,527 $ 100,272,425 5,699,931 $ 69,427,996
Shares issued on reinvestment 8,490 111,659 -- --
Shares reacquired (759,980) (9,674,198) (4,134,373) (50,794,064)
- --------------------------------------------------------------------------------------------------------
Net Increase 7,004,037 $ 90,709,886 1,565,558 $ 18,633,932
========================================================================================================
8. Income Tax Information and Distributions to Shareholders
The tax basis components of distributable earnings at December 31 were:
2003 2002
================================================================================
Undistributed ordinary income $ 711,830 --
- --------------------------------------------------------------------------------
Accumulated capital gain (loss) 6,891,140 $(25,254,888)
- --------------------------------------------------------------------------------
Unrealized appreciation 40,985,931 73,072,991
================================================================================
At December 31, 2003, the difference between book basis and tax basis unrealized
appreciation and depreciation was attributable primarily to wash sale loss
deferrals and the treatment of accretion of discounts and amortization of
premiums.
At December 31, 2002, the difference between book basis and tax basis unrealized
appreciation and depreciation was attributable primarily to the treatment of
accretion of discounts and amortization of premiums.
18 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Notes to Financial Statements (continued)
================================================================================
The tax character of distributions paid during the years ended December 31 were:
2003 2002
================================================================================
Ordinary income $42,122,063 $37,207,660
Long-term capital gains 1,642,342 --
Capital -- 1,537,830
- --------------------------------------------------------------------------------
Total $43,764,405 $38,745,490
================================================================================
9. Additional Information
The Fund has received the following information from Citigroup Asset Management
("CAM"), the Citigroup business unit which includes the Fund's Investment
Manager and other investment advisory companies, all of which are indirect,
wholly-owned subsidiaries of Citigroup. CAM is reviewing its entry, through an
affiliate, into the transfer agent business in the period 1997-1999. As CAM
currently understands the facts, at the time CAM decided to enter the transfer
agent business, CAM sub-contracted for a period of five years certain of the
transfer agency services to a third party and also concluded a revenue guarantee
agreement with this sub-contractor providing that the sub-contractor would
guarantee certain benefits to CAM or its affiliates (the "Revenue Guarantee
Agreement"). In connection with the subsequent purchase of the sub-contractor's
business by an affiliate of the current sub-transfer agent (PFPC Inc.) used by
CAM on many of the funds it manages, this Revenue Guarantee Agreement was
amended eliminating those benefits in exchange for arrangements that included a
one-time payment from the sub-contractor.
The Boards of CAM-managed funds (the "Boards") were not informed of the Revenue
Guarantee Agreement with the sub-contractor at the time the Boards considered
and approved the transfer agent arrangements. Nor were the Boards informed of
the subsequent amendment to the Revenue Guarantee Agreement when that occurred.
CAM has begun to take corrective actions. CAM will pay to the applicable funds
approximately $17 million (plus interest) that CAM and its affiliates received
from the Revenue Guarantee Agreement and its amendment. CAM also plans an
independent review to verify that the transfer agency fees charged by CAM were
fairly priced as compared to competitive alternatives. CAM is instituting new
procedures and making changes designed to ensure no similar arrangements are
entered into in the future.
CAM has briefed the SEC, the New York State Attorney General and other
regulators with respect to this matter, as well as the U.S. Attorney who is
investigating the matter. CAM is cooperating with governmental authorities on
this matter, the ultimate outcome of which is not yet determinable.
10. Subsequent Event
Effective February 2, 2004, the 1.00% initial sales charge on Class L shares
will no longer be imposed.
19 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Financial Highlights
================================================================================
For a share of each class of capital stock outstanding throughout each year
ended December 31, unless otherwise noted:
Class A Shares 2003(1) 2002(1) 2001(1) 2000(1) 1999(1)
=====================================================================================================================
Net Asset Value, Beginning of Year $ 12.88 $ 12.10 $ 11.73 $ 11.22 $ 13.12
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.58 0.62 0.74 0.73 0.72
Net realized and unrealized gain (loss)(2) 0.08 0.83 0.37 0.50 (1.88)
- ---------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.66 1.45 1.11 1.23 (1.16)
- ---------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.60) (0.64) (0.74) (0.72) (0.73)
Net realized gains (0.02) -- -- -- --
Capital -- (0.03) -- -- (0.01)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.62) (0.67) (0.74) (0.72) (0.74)
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.92 $ 12.88 $ 12.10 $ 11.73 $ 11.22
- ---------------------------------------------------------------------------------------------------------------------
Total Return 5.22% 12.43% 9.70% 11.36% (9.09)%
- ---------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 420 $ 384 $ 288 $ 218 $ 211
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.03% 1.03% 1.00% 1.03% 1.03%
Net investment income(2) 4.45 5.06 6.10 6.44 5.94
- ---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 53% 52% 39% 77% 147%
=====================================================================================================================
Class B Shares 2003(1) 2002(1) 2001(1) 2000(1) 1999(1)
=====================================================================================================================
Net Asset Value, Beginning of Year $ 12.86 $ 12.08 $ 11.71 $ 11.21 $ 13.09
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.51 0.56 0.67 0.66 0.66
Net realized and unrealized gain (loss)(2) 0.08 0.83 0.38 0.50 (1.87)
- ---------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.59 1.39 1.05 1.16 (1.21)
- ---------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.54) (0.58) (0.68) (0.66) (0.66)
Net realized gains (0.02) -- -- -- --
Capital -- (0.03) -- -- (0.01)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.61) (0.68) (0.66) (0.67)
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.89 $ 12.86 $ 12.08 $ 11.71 $ 11.21
- ---------------------------------------------------------------------------------------------------------------------
Total Return 4.65% 11.88% 9.17% 10.73% (9.44)%
- ---------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 208 $ 211 $ 161 $ 151 $ 192
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.52% 1.54% 1.51% 1.54% 1.52%
Net investment income(2) 3.94 4.56 5.59 5.93 5.44
- ---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 53% 52% 39% 77% 147%
=====================================================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Effective January 1, 2001, the Fund adopted a change in the accounting
method that requires the Fund to amortize premiums and accrete all
discounts. Without the adoption of this change, for the year ended
December 31, 2001, the net investment income, net realized and unrealized
gain and ratio of net investment income to average net assets for Class A
shares would have been $0.75, $0.36 and 6.15%, respectively. In addition,
for Class B shares, the net investment income, net realized and unrealized
gain and ratio of net investment income to average net assets would have
been $0.68, $0.37 and 5.65%, respectively. Per share information, ratios
and supplemental data for the periods prior to January 1, 2001 have not
been restated to reflect this change in presentation.
20 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Financial Highlights (continued)
================================================================================
For a share of each class of capital stock outstanding throughout each year
ended December 31, unless otherwise noted:
Class L Shares 2003(1) 2002(1) 2001(1) 2000(1) 1999(1)
=====================================================================================================================
Net Asset Value, Beginning of Year $ 12.83 $ 12.06 $ 11.69 $ 11.19 $ 13.07
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.52 0.56 0.68 0.67 0.67
Net realized and unrealized gain (loss)(2) 0.08 0.83 0.38 0.50 (1.88)
- ---------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.60 1.39 1.06 1.17 (1.21)
- ---------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.54) (0.59) (0.69) (0.67) (0.66)
Net realized gains (0.02) -- -- -- --
Capital -- (0.03) -- -- (0.01)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.56) (0.62) (0.69) (0.67) (0.67)
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.87 $ 12.83 $ 12.06 $ 11.69 $ 11.19
- ---------------------------------------------------------------------------------------------------------------------
Total Return 4.80% 11.91% 9.28% 10.81% (9.44)%
- ---------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 54 $ 70 $ 39 $ 20 $ 19
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.44% 1.47% 1.41% 1.47% 1.46%
Net investment income(2) 4.02 4.61 5.60 6.00 5.52
- ---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 53% 52% 39% 77% 147%
=====================================================================================================================
Class Y Shares 2003(1) 2002(1) 2001(1) 2000(1) 1999(1)
=====================================================================================================================
Net Asset Value, Beginning of Year $ 12.87 $ 12.09 $ 11.72 $ 11.22 $ 13.11
- ---------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.63 0.67 0.78 0.77 0.76
Net realized and unrealized gain (loss)(2) 0.08 0.82 0.37 0.49 (1.87)
- ---------------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.71 1.49 1.15 1.26 (1.11)
- ---------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.65) (0.68) (0.78) (0.76) (0.77)
Net realized gains (0.02) -- -- -- --
Capital -- (0.03) -- -- (0.01)
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.67) (0.71) (0.78) (0.76) (0.78)
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 12.91 $ 12.87 $ 12.09 $ 11.72 $ 11.22
- ---------------------------------------------------------------------------------------------------------------------
Total Return 5.62% 12.84% 10.07% 11.66% (8.68)%
- ---------------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 269 $ 178 $ 149 $ 135 $ 109
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.64% 0.67% 0.68% 0.69% 0.68%
Net investment income(2) 4.84 5.44 6.43 6.78 6.31
- ---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 53% 52% 39% 77% 147%
=====================================================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Effective January 1, 2001, the Fund adopted a change in the accounting
method that requires the Fund to amortize premiums and accrete all
discounts. Without the adoption of this change, for the year ended
December 31, 2001, the net investment income, net realized and unrealized
gain and ratio of net investment income to average net assets for Class L
shares would have been $0.69, $0.37 and 5.65%, respectively. For Class Y
shares, ratio of net investment income to average net assets would have
been 6.49%. In addition, for Class Y shares, the impact of this change to
net investment income and net realized and unrealized gain per share was
less than $0.01. Per share information, ratios and supplemental data for
the periods prior to January 1, 2001 have not been restated to reflect
this change in presentation.
21 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Independent Auditors' Report
================================================================================
The Shareholders and Board of Directors of
Smith Barney Investment Funds Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Smith Barney Investment Grade Bond Fund of
Smith Barney Investment Funds Inc. ("Fund") as of December 31, 2003, 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 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 auditing standards generally accepted
in the United States of America. 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 December 31, 2003, by correspondence with the custodian
and broker. 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 the
Fund as of December 31, 2003, 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 its financial highlights for each of the years in the
five-year period then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
New York, New York
February 13, 2004
22 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Additional Information (unaudited)
================================================================================
Information about Directors and Officers
The business and affairs of the Smith Barney Investment Grade Bond Fund ("Fund")
are managed under the direction of the Board of Directors of Smith Barney
Investment Funds Inc. ("Company"). 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 Directors and is
available, without charge, upon request by calling the Fund's transfer agent
(Citicorp Trust Bank, fsb. at 1-800-451-2010) or (Primerica Shareholder Services
at 1-800-544-5445).
Number of
Term of Portfolios Other
Office* and Principal in the Fund Board
Position(s) Length of Occupation(s) Complex Memberships
Held with Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
- ------------------------------------------------------------------------------------------------------------------------------------
Non-Interested Directors:
Paul Ades Director Since Law Firm of Paul R. Ades, PLLC 15 None
Paul R. Ades, PLLC 1994 (April 2000 to present); Partner
181 West Main Street, Suite C in Law Firm of Murov & Ades, Esq.
Babylon, NY 11702 (from November 1970 to March 2000)
Age 63
Herbert Barg** Director Since Retired 42 None
1460 Drayton Lane 1994
Wynewood, PA 19096
Age 80
Dwight B. Crane Director Since Professor, Harvard Business School 49 None
Harvard Business School 1981
Soldiers Field
Morgan Hall #375
Boston, MA 02163
Age 66
Frank G. Hubbard Director Since President of Avatar International, 15 None
87 Whittredge Road 1993 Inc. (business development)
Summit, NJ 07901 (since 1998) Vice Presdient of
Age 66 S&S Industries (chemical
distribution) (from 1995 to 1998)
Jerome H. Miller Director Since Retired 15 None
c/o R. Jay Gerken 1998
Citigroup Asset Management
("CAM")
399 Park Avenue, 4th Floor
New York, NY 10022
Age 65
Ken Miller Director Since President of Young Stuff Apparel 15 None
Young Stuff Apparel Group, Inc. 1994 Group Inc. (since 1963)
930 Fifth Avenue
Suite 610
New York, NY 10021
Age 62
23 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Additional Information (unaudited) (continued)
================================================================================
Number of
Term of Portfolios Other
Office* and Principal in the Fund Board
Position(s) Length of Occupation(s) Complex Memberships
Held with Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
- ------------------------------------------------------------------------------------------------------------------------------------
Interested Director:
R. Jay Gerken*** Chairman, Since Managing Director of Citigroup 221 None
CAM President 2002 Global Markets Inc. ("CGM");
399 Park Avenue, 4th Floor and Chief Chairman, President and Chief
New York, NY 10022 Executive Executive Officer of Smith Barney
Age 52 Officer Fund Management LLC ("SBFM"),
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, 11th Floor and Chief Officer of mutual funds associated
New York, NY 10004 Administrative with Citigroup; Treasurer of
Age 47 Officer certain mutual funds associated
with Citigroup; Head of
International Funds Administration
of CAM (from 2001 to 2003);
Director of Global Funds
Administration of CAM (from 2000
to 2001); Head of U.S. Citibank
Funds Administration of CAM (from
1998 to 2000)
Richard L. Peteka Chief Financial Since Director of CGM; Chief Financial N/A N/A
CAM Officer and 2002 Officer and Treasurer of certain
125 Broad Street, 11th Floor Treasurer mutual funds affiliated with
New York, NY 10004 Citigroup; Director and Head of
Age 42 Internal Control for CAM U.S.
Mutual Fund Administration (from
1999 to 2002); Vice President,
Head of Mutual Fund Administration
and Treasurer at Oppenheimer
Capital (from 1996 to 1999)
David Torchia Vice President Since Managing Director of CGM N/A N/A
CAM and Investment 2002
399 Park Avenue Officer
New York, NY 10022
Age 43
Gerald J. Culmone Vice President Since Director of CGM N/A N/A
CAM and Investment 2002
399 Park Avenue Officer
New York, NY 10022
Age 39
24 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Additional Information (unaudited) (continued)
================================================================================
Number of
Term of Portfolios Other
Office* and Principal in the Fund Board
Position(s) Length of Occupation(s) Complex Memberships
Held with Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
- ------------------------------------------------------------------------------------------------------------------------------------
Andrew Beagley Chief Since Director of CGM (since 2000); N/A N/A
CAM Anti-Money 2002 Director of Compliance, North
399 Park Avenue, 4th Floor Laundering America, CAM (since 2000); Chief
New York, NY 10022 Compliance Anti-Money Laundering Compliance
Age 40 Officer Officer and Vice President of
certain 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)
Kaprel Ozsolak Controller Since Vice President of CGM; Controller N/A N/A
CAM 2002 of certain mutual funds
125 Broad Street, 11th Floor associated with Citigroup
New York, NY 10004
Age 38
Robert I. Frenkel Secretary and Since Managing Director and General N/A N/A
CAM Chief Legal 2003 Counsel of Global Mutual Funds for
300 First Stamford Place Officer CAM and its predecessor (since
4th Floor 1994); Secretary of CFM; Secretary
Stamford, CT 06902 and Chief Legal Officer of mutual
Age 48 funds associated with Citigroup
- ------------
* Each Director and officer serves until his or her respective successor had
been duly elected and qualified.
** Mr. Barg became Director Emeritus on December 31, 2003.
*** Mr. Gerken is an "interested person" of the Fund as defined in the
Investment Company Act of 1940, as amended, because Mr. Gerken is an
officer of SBFM and certain of its affiliates.
25 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
================================================================================
Tax Information (unaudited)
================================================================================
For Federal tax purposes the Fund hereby designates for the fiscal year ended
December 31, 2003:
o Total long-term capital gain distributions paid of $1,642,342.
o A total of 5.86% of the ordinary dividends paid by the Fund from net
investment income are derived from Federal obligations and may be
exempt from taxation at the state level.
26 Smith Barney Investment Grade Bond Fund | 2003 Annual Report
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(This page intentionally left blank.)
- --------------------------------------------------------------------------------
SMITH BARNEY
INVESTMENT GRADE
BOND FUND
- --------------------------------------------------------------------------------
DIRECTORS
Paul R. Ades
Herbert Barg*
Dwight B. Crane
R. Jay Gerken, CFA
Chairman
Frank G. Hubbard
Jerome Miller
Ken Miller
OFFICERS
R. Jay Gerken, CFA
President and Chief
Executive Officer
Andrew B. Shoup
Senior Vice President and
Chief Administrative Officer
Richard L. Peteka
Chief Financial Officer
and Treasurer
David A. Torchia
Vice President and
Investment Officer
Gerald J. Culmone
Vice President and
Investment Officer
Andrew Beagley
Chief Anti-Money
Laundering
Compliance Officer
OFFICERS (continued)
Kaprel Ozsolak
Controller
Robert I. Frenkel
Secretary and
Chief Legal Officer
INVESTMENT ADVISER
AND ADMINISTRATOR
Smith Barney Fund
Management LLC
DISTRIBUTORS
Citigroup Global Markets Inc.
PFS Distributors, Inc.
CUSTODIAN
State Street Bank and
Trust Company
TRANSFER AGENT
Citicorp Trust Bank, fsb.
125 Broad Street, 11th Floor
New York, New York 10004
SUB-TRANSFER AGENTS
PFPC Inc.
P.O. Box 9699
Providence, Rhode Island
02940-9699
Primerica Shareholder Services
P.O. Box 9662
Providence, Rhode Island
02940-9662
* Mr. Barg became Director Emeritus on December 31, 2003.
Smith Barney Investment Funds Inc.
================================================================================
Smith Barney Investment Grade Bond Fund
The Fund is a separate investment fund of the Smith Barney Investment Funds
Inc., a Maryland corporation.
This report is submitted for the general information of the shareholders of
Smith Barney Investment Funds Inc. -- Smith Barney Investment Grade Bond Fund,
but it may also be used as sales literature when preceded or accompanied by the
current Prospectus, which gives details about charges, expenses, investment
objectives and operating policies of the Fund. If used as sales material after
March 31, 2004, this report must be accompanied by performance information for
the most recently completed calendar quarter.
SMITH BARNEY INVESTMENT
GRADE BOND FUND
Smith Barney Mutual Funds
125 Broad Street
10th Floor, MF-2
New York, New York 10004
For complete information on any Smith Barney Mutual Funds, including management
fees and expenses, call or write your financial professional for a free
prospectus. Read it carefully before you invest or send money.
www.smithbarneymutualfunds.com
(C)2003 Citigroup Global Markets Inc.
Member NASD, SIPC
FD00317 2/04 04-6085
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
attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to
qualify as an "audit committee financial expert," and has designated
Mr. 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 for Smith Barney Investment Funds Inc. of $55,000 and
$78,000 for the years ended 12/31/03 and 12/31/02.
(b) Audit-Related Fees for Smith Barney Investment Funds Inc. of $0 and
$0 for the years ended 12/31/03 and 12/31/02.
(c) Tax Fees for Smith Barney Investment Funds Inc. of $4,700 and $4,500
for the years ended 12/31/03 and 12/31/02. These amounts represent
aggregate fees paid for tax compliance, tax advice and tax planning
services, which include (the filing and amendment of federal, state
and local income tax returns, timely RIC qualification review and
tax distribution and analysis planning) rendered by the Accountant
to Smith Barney Investment Funds Inc.
(d) There were no all other fees for Smith Barney Investment Funds Inc.
for the years ended 12/31/03 and 12/31/02.
(e) (1) Audit Committee's pre-approval policies and procedures described
in paragraph (c) (7) of Rule 2-01 of Regulation S-X. 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)
(f) N/A
(g) Non-audit fees billed - $100,000 and $1.2 million for the years
ended 12/31/2003 and 12/31/2002.
(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 Accountant
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. 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 10. 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: March 11, 2004
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: March 11, 2004
By: /s/ Richard L. Peteka
Richard L. Peteka
Chief Financial Officer of
Smith Barney Investment Funds Inc.
Date: March 11, 2004