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.
[INSERT SHAREHOLDER REPORT]
SMITH BARNEY
GOVERNMENT
SECURITIES FUND
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.
NOT FDIC INSURED . NOT BANK GUARANTEED . MAY LOSE VALUE
WHAT'S INSIDE
Letter from the Chairman................................................... 1
Manager Overview........................................................... 2
Fund Performance........................................................... 5
Historical Performance..................................................... 6
Schedule of Investments.................................................... 7
Statement of Assets and Liabilities........................................ 11
Statement of Operations.................................................... 12
Statements of Changes in Net Assets........................................ 13
Notes to Financial Statements.............................................. 14
Financial Highlights....................................................... 24
Tax Information............................................................ 28
Independent Auditors' Report............................................... 29
Additional Information..................................................... 30
LETTER FROM THE CHAIRMAN
[PHOTO]
R. Jay Gerken
R. JAY GERKEN, CFA
Chairman, President and Chief Executive Officer
Dear Shareholder,
Early this past summer bonds surrendered some of the gains they had generated
previously in 2003 due in part to signs of a sharp pick-up in the economy.
Despite subsequent reports of robust third-quarter economic growth, which
raised interest rate concerns, bond investors welcomed comments from the Fed
suggesting that it was likely to leave its interest rate targets at current
levels for the foreseeable future.
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 Government Securities Fund | 2003 Annual Report
MANAGER OVERVIEW
[PHOTO]
Mark Lindbloom
MARK
LINDBLOOM
Vice President and Investment Officer
[PHOTO]
Francis Mustaro
FRANCIS
MUSTARO
Vice President and Investment Officer
Performance Review
For the 12 months ended December 31, 2003, Class A shares of the Smith Barney
Government Securities Fund, excluding sales charges, returned 1.83%. These
shares outperformed the fund's Lipper general U.S. government funds category
average, which returned 1.30% for the same period./1/ In comparison, the fund's
unmanaged benchmark, the Lehman Brothers Government Bond Index/i/ ("Index"),
returned 2.36% for the same period. During the period, the fund generally
benefited from its exposure to mortgage-backed securities, which modestly
outperformed U.S. Treasuries with comparable maturities.
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 investors that gross domestic product
("GDP")/ii/ growth was stronger than expected, sparking concerns that inflation
could pick up. This led many to question whether the Fed's rate-cutting cycle
/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 181 funds in the fund's Lipper category including the reinvestment
of dividends and capital gains, if any, and excluding sales charges.
2 Smith Barney Government Securities Fund | 2003 Annual Report
PERFORMANCE SNAPSHOT
AS OF DECEMBER 31, 2003
(excluding sales charges)
6 Months 12 Months
Class A Shares -0.91% 1.83%
Lehman Brothers Government
Bond Index -1.23% 2.36%
Lipper general U.S. government
funds category average -1.16% 1.30%
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 share 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 1 shares
returned -0.75%, Class B shares returned -1.17%, Class L shares returned
-1.13% and Class Y shares returned -0.64% for the six months ended December
31, 2003. Excluding sales charges, Class 1 shares returned 1.95%, Class B
shares returned 1.30%, Class L shares returned 1.29% and Class Y shares
returned 2.17% for the 12 months ended December 31, 2003.
All index performance reflects no deduction for fees, expenses or taxes. The
Lehman Brothers Government Bond Index is a broad-based index of all public
debt obligations of the U.S. government and its agencies that have an
average maturity of roughly nine years. Please note that an investor cannot
invest directly in an index.
Lipper, Inc. is a major independent mutual-fund tracking organization.
Returns are based on the period ended December 31, 2003, calculated among
the 186 funds for the six-month period and among the 181 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.
had run its course, which resulted in rising bond yields and a sharp decline in
prices over the summer. The decline was exacerbated due to selling from certain
investors who held mortgage-backed securities in their portfolios.
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. According to estimates that were revised higher later
in the quarter, GDP increased 8.2% over the quarter./iii/ However, selling in
the Treasury markets was more contained than it was in July, as we believed
some of this economic growth was attributable to one-time factors, such as the
tax cuts and end of major combat in Iraq, and many analysts and investors felt
that the Fed appeared to be in a holding pattern.
3 Smith Barney Government Securities Fund | 2003 Annual Report
Portfolio Allocation Approach
We continued to allocate investment capital primarily between mortgage-backed
fixed-income securities and U.S. Treasuries through the end of the period,
while maintaining the ability to add exposure to other sectors when
opportunities arise. We have remained cautious in anticipation of the
possibility for a rise in rates. Therefore, we continued to underweight U.S.
Treasury bonds while allocating capital to mortgage-backed securities to seek
enhanced yields.
Thank you for your investment in the Smith Barney Government Securities Fund.
We appreciate that you have entrusted us to manage your money and value our
relationship with you.
Sincerely,
/s/ Mark Lindbloom /s/ Francis Mustaro
Mark Lindbloom Francis Mustaro
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 7 through 9 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.
/i/The Lehman Brothers Government Bond Index is a broad-based index of all
public debt obligations of the U.S. government and its agencies that have an
average maturity of roughly nine years. Please note that an investor cannot
invest directly in an index.
/ii/Gross domestic product is a market value of goods and services produced by
labor and property in a given country.
/iii/Source: Bureau of Economic Analysis.
4 Smith Barney Government Securities Fund | 2003 Annual Report
AVERAGE ANNUAL TOTAL RETURNS+ (UNAUDITED)
Without Sales Charges/(1)/
---------------------------------------
Class 1 Class A Class B Class L Class Y
--------------------------------------------------------------------
Twelve Months Ended 12/31/03 1.95% 1.83% 1.30% 1.29% 2.17%
--------------------------------------------------------------------
Five Years Ended 12/31/03 N/A 4.63 4.10 4.15 5.01
--------------------------------------------------------------------
Ten Years Ended 12/31/03 N/A 5.53 4.99 5.05 N/A
--------------------------------------------------------------------
Inception* through 12/31/03 7.01 6.15 7.14 5.31 5.98
--------------------------------------------------------------------
With Sales Charges/(2)/
-------------------------------------------
Class 1 Class A Class B Class L Class Y
------------------------------------------------------------------------
Twelve Months Ended 12/31/03 (4.93)% (2.71)% (3.11)% (0.68)% 2.17%
------------------------------------------------------------------------
Five Years Ended 12/31/03 N/A 3.67 3.93 3.94 5.01
------------------------------------------------------------------------
Ten Years Ended 12/31/03 N/A 5.05 4.99 4.95 N/A
------------------------------------------------------------------------
Inception* through 12/31/03 4.78 5.71 7.14 5.21 5.98
------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS+ (UNAUDITED)
Without Sales Charges/(1)/
- ----------------------------------------------------------------
Class 1 (Inception* through 12/31/03) 25.07%
- ----------------------------------------------------------------
Class A (12/31/93 through 12/31/03) 71.31
- ----------------------------------------------------------------
Class B (12/31/93 through 12/31/03) 62.74
- ----------------------------------------------------------------
Class L (12/31/93 through 12/31/03) 63.67
- ----------------------------------------------------------------
Class Y (Inception* through 12/31/03) 58.21
- ----------------------------------------------------------------
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect deduction of the applicable
sales charges with respect to Class 1, 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 1, A and L shares reflect the
deduction of the maximum initial sales charges of 6.75%, 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 one
year from purchase payment.
+ The returns shown do not reflect the deduction of taxes that a shareholder
would pay on fund distributions or the redemption of fund shares.
* Inception dates for Class 1, A, B, L and Y shares are September 12, 2000,
November 6, 1992, March 20, 1984, February 4, 1993 and February 7, 1996,
respectively.
5 Smith Barney Government Securities Fund | 2003 Annual Report
HISTORICAL PERFORMANCE (UNAUDITED)
Value of $10,000 Invested in Class B Shares of the Smith Barney Government
Securities Fund vs. Lehman Brothers Government Bond Index and Lipper General
U.S. Government Peer Group Average+
- --------------------------------------------------------------------------------
December 1993 -- December 2003
[CHART]
Smith Barney Lehman Brothers Lipper General U.S.
Government Securities Government Government Peer
Date Fund - Class B Shares Bond Index Group Average
- ---------------------------------------------------------------------------
12/93 $10,000 $10,000 $10,000
12/94 9,682 9,662 9,558
12/95 11,025 11,434 11,260
12/96 11,181 11,751 11,452
12/97 12,391 12,878 12,477
12/98 13,312 14,146 13,481
12/99 12,599 13,830 13,077
12/00 13,993 15,662 14,601
12/01 14,699 16,998 15,557
12/02 16,065 18,263 16,489
12/03 16,274 18,057 16,499
+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 Government Bond
Index is a broad-based index of all public debt obligations of the U.S.
Government and its agencies and has an average maturity of approximately nine
years. The Lipper General U.S. Government Peer Group Average is composed of
the Fund's peer group of 181 mutual funds investing in U.S. Government
securities as of December 31, 2003. The Index is unmanaged and is not subject
to the same management and trading expenses as a mutual fund. The performance
of the Fund's other classes may be greater or less than the Class B shares'
performance indicated on this chart, depending on whether higher or lower
sales charges and fees were incurred by shareholders investing in other
classes. The returns shown do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
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. No adjustment has been made for shareholder tax liability
on dividends or capital gains.
6 Smith Barney Government Securities Fund | 2003 Annual Report
SCHEDULE OF INVESTMENTS DECEMBER 31, 2003
FACE
AMOUNT SECURITY VALUE
- -----------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS -- 17.1%
U.S. Treasury Notes:
$ 25,000,000 2.000% due 8/31/05 (a) $ 25,168,950
30,000,000 1.625% due 10/31/05 (a) 29,962,530
19,500,000 2.625% due 11/15/06 19,678,250
U.S. Treasury Bonds:
15,000,000 7.250% due 5/15/16 (b) 18,716,610
10,500,000 8.125% due 8/15/21 14,323,071
25,100,000 7.250% due 8/15/22 (a) 31,685,813
24,850,000 5.500% due 8/15/28 (a) 25,891,588
- -----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost -- $167,179,999) 165,426,812
- -----------------------------------------------------------------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 49.3%
U.S. Government Agency Notes -- 11.4%
Department of Housing and Urban Development:
5,000,000 5.530% due 8/1/20 5,145,875
5,000,000 5.590% due 8/1/21 5,197,625
4,000,000 Federal Home Loan Bank (FHLB),
5.125% due 3/6/06 4,257,856
Federal Home Loan Mortgage Corp. (FHLMC):
38,000,000 7.000% due 7/15/05 (a) 41,071,426
7,000,000 5.250% due 1/15/06 7,449,638
Federal National Mortgage Association (FNMA):
6,000,000 5.500% due 2/15/06 6,426,504
17,000,000 4.750% due 1/2/07 17,918,340
18,200,000 5.250% due 8/1/12 18,694,039
4,000,000 4.750% due 2/21/13 3,945,296
- -----------------------------------------------------------------------
110,106,599
- -----------------------------------------------------------------------
U.S. Government Agency Mortgage Pass-Throughs -- 37.9%
Federal Home Loan Mortgage Corp. (FHLMC):
3,947,759 15 Year, 6.500% due 6/1/16 (c) 4,183,081
3,158,633 30 Year, 6.000% due 1/1/32 (c) 3,267,790
7,978,937 30 Year, 6.500% due 3/1/32 (c) 8,360,453
9,719,616 30 Year, 7.000% due 7/1/32 (c) 10,287,068
50,954,154 30 Year, 5.500% due 6/1/33 (a)(c) 51,611,687
Federal National Mortgage Association (FNMA):
133 7 Year, 6.000% due 8/1/04 135
2,844,909 15 Year, 5.500% due 12/1/16 (c) 2,952,569
28,412,460 15 Year, 6.000% due 6/1/17 (c) 29,845,488
26,000,000 15 Year, 5.500% due 1/20/19 (d)+ 26,942,500
12,000,000 15 Year, 6.000% due 1/20/19 (d)+ 12,585,000
42,566,240 20 Year, 5.500% due 9/1/23 (a)(c) 43,554,709
25,000,000 30 Year, 6.000% due 1/14/19 (d)+ 25,843,750
8,072,575 30 Year, 7.500% due 4/1/32 (c) 8,629,896
See Notes to Financial Statements.
7 Smith Barney Government Securities Fund | 2003 Annual Report
SCHEDULE OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
FACE
AMOUNT SECURITY VALUE
- ------------------------------------------------------------------------------------------
U.S. Government Agency Obligations -- 37.9% (continued)
$ 5,251,190 30 Year, 7.000% due 5/1/32 (c) $ 5,562,235
1,742,301 30 Year, 6.000% due 7/1/32 (c) 1,802,295
3,911,114 30 Year, 6.500% due 7/1/32 (c) 4,092,070
3,949,876 30 Year, 4.476% due 2/1/33 (e) 4,023,082
11,175,999 30 Year, 4.479% due 2/1/33 (e) 11,383,874
10,237,954 30 Year, 4.639% due 4/1/33 (e) 10,438,619
23,087,390 30 Year, 5.500% due 5/1/33 (c) 23,406,964
19,831,869 30 Year, 4.514% due 8/1/33 (c)(e) 20,050,505
Government National Mortgage Association (GNMA):
25,000,000 30 Year, 5.000% due 1/22/19 (d)+ 24,683,594
20,000,000 30 Year, 5.500% due 1/22/19 (d)+ 20,314,062
36,378 30 Year, 8.500% due 4/15/30 39,606
8,062,075 30 Year, 7.000% due 11/15/31 (c) 8,600,122
1,746,696 30 Year, 7.500% due 2/15/32 (c) 1,875,314
2,984,469 30 Year, 6.500% due 5/15/32 (c) 3,148,728
- ------------------------------------------------------------------------------------------
367,485,196
- ------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS
(Cost -- $474,112,698) 477,591,795
- ------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 18.2%
10,000,000 Bank of America Mortgage Securities, Series 2003-I, Class 2A7,
3.757% due 10/25/33 (e) 10,015,094
13,726,022 Countrywide Home Loan, Series 2003-HYB1, Class 1A1,
3.827% due 5/19/33 (e) 13,674,885
CS First Boston Mortgage Securities Corp.:
8,030,376 Series 2002-10, Class 2A1, 7.500% due 5/25/32 8,617,002
10,391,798 Series 2003-8, Class 5A1, 6.500% due 4/25/33 10,778,893
Fannie Mae:
5,660,416 Series 2001-81, Class HE, 6.500% due 1/25/32 5,922,822
Whole Loan:
17,500,000 Series 2002-W10, Class A4, 5.700% due 8/25/42 17,824,291
10,000,000 Series 2003-W6, Class 1A42, 4.950% due 10/25/42 9,664,736
5,578,042 Series 2003-W8, Class 1A1, 3.740% due 12/25/42 5,609,530
5,000,000 Series 2003-W10, Class 1A4, 4.505% due 6/25/43 4,604,894
15,000,000 Series 2003-W12, Class 2A7, 4.680% due 6/25/43 14,324,475
15,010,511 Federal Home Loan Mortgage Corp. (FHLMC) Structured Pass-Through
Securities, Series T-51, Class 1A, 6.500% due 9/25/43 15,972,129
Freddie Mac:
10,000,000 Series 2178, Class PB, 7.000% due 8/15/29 10,699,289
10,000,000 Series 2334, Class KB, 6.500% due 5/15/28 10,551,647
16,992,160 Series 2446, Class KL, 6.000% due 5/15/32 17,435,254
7,000,000 Government National Mortgage Association (GNMA), Series 2001-19,
Class OH, 6.500% due 5/16/31 7,396,329
4,186,663 GSR Mortgage Loan Trust, Series 2003-1, Class A11,
4.279% due 3/25/33 (e) 4,257,644
See Notes to Financial Statements.
8 Smith Barney Government Securities Fund | 2003 Annual Report
SCHEDULE OF INVESTMENTS (CONTINUED) DECEMBER 31, 2003
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 18.2% (continued)
$ 8,939,215 WaMu Pass-Through Certificates, Series 2003-AR5, Class A7,
4.210% due 6/25/33 (e) $ 8,963,282
- ---------------------------------------------------------------------------------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost -- $177,510,694) 176,312,196
- ---------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES -- 1.1%
10,000,000 Fannie Mae REMIC Trust, Series 2002-W12, Class AF3,
3.462% due 2/25/33 10,167,835
625,231 Green Tree Home Improvement Loan Trust, Series 1998-D,
Class HEM1, 6.710% due 8/15/29 643,571
- ---------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost -- $10,644,648) 10,811,406
- ---------------------------------------------------------------------------------------
CONTRACTS SECURITY VALUE
- ---------------------------------------------------------------------------------------
OPTIONS PURCHASED -- 0.0%
U.S. Treasury Bonds:
30 Put @ $111, Expire 2/20/04 30,000
30 Put @ $112, Expire 2/20/04 41,719
- ---------------------------------------------------------------------------------------
TOTAL OPTIONS PURCHASED
(Cost -- $46,766) 71,719
- ---------------------------------------------------------------------------------------
SUB-TOTAL INVESTMENTS
(Cost -- $829,494,805) 830,213,928
- ---------------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
- ---------------------------------------------------------------------------------------
REPURCHASE AGREEMENT -- 14.3%
$138,073,000 Morgan Stanley, 0.820% due 1/2/04; Proceeds at maturity --
$138,079,290; (Fully collateralized by U.S. Treasury Strips,
due 11/15/21 to 11/15/26; Market value -- $142,215,260)
(Cost -- $138,073,000) 138,073,000
- ---------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100.0%
(Cost -- $967,567,805*) $968,286,928
- ---------------------------------------------------------------------------------------
(a) All or a portion of this security is segregated for "to-be-announced"
securities, open futures contracts commitments and options written.
(b) All or a portion of this security is held as collateral for open futures
contracts commitments and options written.
(c) Date shown represents the last in range of maturity dates of mortgage
certificates owned.
(d) Security is traded on a "to-be-announced" basis (See Note 7).
(e) Variable rate security.
+ Security acquired under mortgage dollar roll agreement (See Note 8).
* Aggregate cost for Federal income tax purposes is $968,749,238.
See Notes to Financial Statements.
9 Smith Barney Government Securities Fund | 2003 Annual Report
SCHEDULE OF OPTIONS WRITTEN DECEMBER 31, 2003
STRIKE
CONTRACTS EXPIRATION PRICE VALUE
---------------------------------------------------------------------
100 U.S. Treasury Bonds
(Premiums received -- $127,519) 2/20/04 $110 $178,125
---------------------------------------------------------------------
See Notes to Financial Statements.
10 Smith Barney Government Securities Fund | 2003 Annual Report
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2003
ASSETS:
Investments, at value (Cost -- $829,494,805) $830,213,928
Repurchase agreement, at value (Cost -- $138,073,000) 138,073,000
Cash 28,222
Interest receivable 6,970,462
Receivable for Fund shares sold 1,128,186
- -----------------------------------------------------------------------------------------
Total Assets 976,413,798
- -----------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 110,144,097
Payable for Fund shares reacquired 488,957
Investment advisory fee payable 257,830
Options written, at value (Premiums received -- $127,519) 178,125
Administration fee payable 147,332
Distribution plan fees payable 72,823
Payable to broker -- variation margin 30,000
Accrued expenses 327,127
- -----------------------------------------------------------------------------------------
Total Liabilities 111,646,291
- -----------------------------------------------------------------------------------------
Total Net Assets $864,767,507
- -----------------------------------------------------------------------------------------
NET ASSETS:
Par value of capital shares $ 87,475
Capital paid in excess of par value 933,341,927
Undistributed net investment income 833,093
Accumulated net realized loss from investment transactions,
futures contracts and options (69,985,410)
Net unrealized appreciation of investments, futures contracts and options 490,422
- -----------------------------------------------------------------------------------------
Total Net Assets $864,767,507
- -----------------------------------------------------------------------------------------
Shares Outstanding:
Class 1 10,964,803
Class A 38,301,374
Class B 12,367,800
Class L 2,501,296
Class Y 23,339,861
Net Asset Value:
Class 1 (and redemption price) $9.89
Class A (and redemption price) $9.88
Class B * $9.89
Class L * $9.88
Class Y (and redemption price) $9.89
Maximum Public Offering Price Per Share:
Class 1 (net asset value plus 7.24% of net asset value per share) $10.61
Class A (net asset value plus 4.71% of net asset value per share) $10.35
Class L (net asset value plus 1.01% of net asset value per share) $9.98
- -----------------------------------------------------------------------------------------
*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.
11 Smith Barney Government Securities Fund | 2003 Annual Report
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003
INVESTMENT INCOME:
Interest $ 38,386,872
--------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 2) 3,239,211
Distribution plan fees (Note 9) 2,229,966
Administration fee (Note 2) 1,850,978
Shareholder servicing fees (Note 9) 1,002,345
Shareholder communications (Note 9) 74,276
Custody 72,871
Registration fees 50,055
Directors' fees 48,641
Audit and legal 38,452
Other 15,784
--------------------------------------------------------------------
Total Expenses 8,622,579
--------------------------------------------------------------------
Net Investment Income 29,764,293
--------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FUTURES CONTRACTS AND OPTIONS (NOTES 3, 5 AND 6):
Realized Gain (Loss) From:
Investment transactions 17,105,863
Futures contracts (1,209,541)
Options purchased 358,760
--------------------------------------------------------------------
Net Realized Gain 16,255,082
--------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments,
Futures Contracts and Options:
Beginning of year 30,228,679
End of year 490,422
--------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (29,738,257)
--------------------------------------------------------------------
Net Loss on Investments, Futures Contracts and Options (13,483,175)
--------------------------------------------------------------------
Increase in Net Assets From Operations $ 16,281,118
--------------------------------------------------------------------
See Notes to Financial Statements.
12 Smith Barney Government Securities Fund | 2003 Annual Report
STATEMENTS OF CHANGES IN NET ASSETS
For the Years
Ended December 31,
2003 2002
- -----------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 29,764,293 $ 32,874,565
Net realized gain 16,255,082 17,642,210
Increase (decrease) in net unrealized appreciation (29,738,257) 28,289,998
- ----------------------------------------------------------------------------------------------
Increase in Net Assets From Operations 16,281,118 78,806,773
- ----------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTE 10):
Net investment income (34,453,798) (32,119,609)
- ----------------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (34,453,798) (32,119,609)
- ----------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares 386,472,159 304,024,732
Net asset value of shares issued for reinvestment of dividends 25,587,043 22,216,097
Cost of shares reacquired (452,174,543) (223,716,827)
- ----------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From
Fund Share Transactions (40,115,341) 102,524,002
- ----------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (58,288,021) 149,211,166
NET ASSETS:
Beginning of year 923,055,528 773,844,362
- ----------------------------------------------------------------------------------------------
End of year* $ 864,767,507 $ 923,055,528
- ----------------------------------------------------------------------------------------------
* Includes undistributed net investment income of: $833,093 $1,959,319
- ----------------------------------------------------------------------------------------------
See Notes to Financial Statements.
13 Smith Barney Government Securities Fund | 2003 Annual Report
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
The Smith Barney Government Securities 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 Investment
Grade Bond, Smith Barney Hansberger Global Value, Smith Barney Small Cap Value,
Smith Barney Multiple Discipline Funds -- Large Cap Growth and Value (formerly
known as Smith Barney Premier Selections Large Cap), Smith Barney Multiple
Discipline Funds -- All Cap Growth and Value (formerly known as Smith Barney
Premier Selections All Cap Growth), Smith Barney Multiple Discipline
Funds -- Global All Cap Growth and Value (formerly known as Smith Barney
Premier Selections Global Growth), Smith Barney Group Spectrum and Smith Barney
Small Cap Growth Funds. 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 price was reported and U.S. government and government agency
obligations are valued at the mean between the bid and asked prices; (c)
securities maturing within 60 days are valued at cost plus accreted discount,
or minus amortized premium, which approximates value; (d) interest income,
adjusted for amortization of premium and accretion of discount, is recorded on
the accrual basis; (e) gains or losses on the sale of securities are calculated
by using the specific identification method; (f) 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; (g) class
specific expenses are charged to each class; management fees and general
expenses are allocated on the basis of the relative net assets of each class or
on another reasonable basis; (h) 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; (i) the character of
income and gains to be distributed is determined in accordance with
14 Smith Barney Government Securities Fund | 2003 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 Fund's capital accounts to reflect permanent
book/ tax differences and income and gains available for distributions under
income tax regulations. Net investment income, net realized gains and net
assets were not affected by this change; and (j) 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.
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 the following annual
rates of the Fund's average daily net assets: 0.35% up to $2 billion, 0.30% on
the next $2 billion, 0.25% on the next $2 billion, 0.20% on the next $2 billion
and then 0.15% of the Fund's remaining average daily net assets. 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.
This fee is calculated daily and paid monthly.
Citicorp Trust Bank, fsb. ("CTB"), another subsidiary of Citigroup, acts as the
Fund's transfer agent. PFPC Inc. ("PFPC") and Primerica Shareholder Services
("PSS") 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. During the year ended December
31, 2003, the Fund paid transfer agent fees of $508,881 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 6.75%, 4.50% and 1.00% for Class 1,
A and L shares, respectively. There is a contingent deferred sales charge
15 Smith Barney Government Securities Fund | 2003 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
("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 addition, 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 $111,000, $1,438,000 and $53,000 on sales of the
Fund's Class 1, A and L shares, respectively. In addition, for the year ended
December 31, 2003, CDSCs paid to CGM and its affiliates were approximately:
Class A Class B Class L
------------------------------
CDSCs $1,000 $478,000 $13,000
------------------------------
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, mortgage dollar rolls and
proceeds from paydowns) were as follows:
---------------------------------------------------------------------
Purchases $1,501,617,162
---------------------------------------------------------------------
Sales 1,327,014,685
---------------------------------------------------------------------
At December 31, 2003, aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were as follows:
--------------------------------------------------------------------
Gross unrealized appreciation $ 8,108,311
Gross unrealized depreciation (8,570,621)
--------------------------------------------------------------------
Net unrealized depreciation $ (462,310)
--------------------------------------------------------------------
16 Smith Barney Government Securities Fund | 2003 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Repurchase Agreements
The Fund purchases (and the custodian takes possession of) U.S. government
securities from 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.
5. Futures Contracts
Securities or cash equal to the initial margin amount are either deposited with
the broker or segregated by the custodian upon entering into the futures
contract. During the period the futures contract is open, changes in the value
of the contract are recognized as unrealized gains or losses by
"marking-to-market" on a daily basis to reflect the market value of the
contract at the end of each day's trading. Variation margin payments are made
or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of ) the closing transactions and
the Fund's basis in the contract. The Fund enters into such contracts typically
to hedge a portion of its portfolio. The Fund bears the market risk that arises
from changes in the value of the financial instruments and securities indices
(futures contracts).
At December 31, 2003, the Fund had the following open futures contracts:
Number of Basis Market Unrealized
Contracts Expiration Value Value Gain (Loss)
- --------------------------------------------------------------------------------
To Buy:
U.S. Treasury Bonds 100 3/22/04 $10,872,475 $10,931,250 $ 58,775
- --------------------------------------------------------------------------------
To Sell:
U.S. Treasury Notes 20 3/22/04 2,255,505 2,245,313 10,192
U.S. Treasury Notes 315 3/22/04 34,914,813 35,161,875 (247,062)
- --------------------------------------------------------------------------------
(236,870)
- --------------------------------------------------------------------------------
Net Unrealized Loss on
Open Futures Contracts $(178,095)
- --------------------------------------------------------------------------------
17 Smith Barney Government Securities Fund | 2003 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Option Contracts
Premiums paid when put or call options are purchased by the Fund represent
investments, which are marked-to-market daily and are included in the schedule
of investments. When a purchased option expires, the Fund will realize a loss
in the amount of the premium paid. When the Fund enters into a closing sales
transaction, the Fund will realize a gain or loss depending on whether the
proceeds from the closing sales transaction are greater or less than the
premium paid for the option. When the Fund exercises a put option, it will
realize a gain or loss from the sale of the underlying security and the
proceeds from such sale will be decreased by the premium originally paid. When
the Fund exercises a call option, the cost of the security which the Fund
purchases upon exercise will be increased by the premium originally paid.
At December 31, 2003, the Fund held purchased put options with a total cost of
$46,766.
When a Fund writes a covered call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a
closing purchase transaction, the Fund realizes a gain or loss depending upon
whether the cost of the closing transaction is greater or less than the premium
originally received, without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised, the cost of the security sold will be
decreased by the premium originally received. When a put option is exercised,
the amount of the premium originally received will reduce the cost of the
security which the Fund purchased upon exercise. When written index options are
exercised, settlement is made in cash.
The risk associated with purchasing options is limited to the premium
originally paid. The Fund enters into options for hedging purposes. The risk in
writing a covered call option is that the Fund gives up the opportunity to
participate in any increase in the price of the underlying security beyond the
exercise price. The risk in writing a put option is that the Fund is exposed to
the risk of a loss if the market price of the underlying security declines. The
risk in writing a call option is that the Fund is exposed to the risk that the
market price of the underlying security increases.
18 Smith Barney Government Securities Fund | 2003 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following written call option transactions occurred during the year ended
December 31, 2003:
Number of
Contracts Premiums
----------------------------------------------------------------------
Options written, outstanding at December 31, 2002 -- $ 0
Options written 760 908,998
Options closed (440) (428,752)
Options expired (220) (352,727)
----------------------------------------------------------------------
Options written, outstanding at December 31, 2003 100 $ 127,519
----------------------------------------------------------------------
7. Securities Traded on a When-Issued or To-Be-Announced Basis
The Fund may trade securities on a "to-be-announced" ("TBA") basis. In a TBA
transaction, the Fund commits to purchasing or selling securities for which
specific information is not yet known at the time of the trade, particularly
the face amount and maturity date. Securities purchased on a TBA basis are not
settled until they are delivered to the Fund, normally 15 to 45 days later.
These transactions are subject to market fluctuations and their current value
is determined in the same manner as for other portfolio securities.
At December 31, 2003, the Fund held TBA securities with a cost of $109,588,438.
8. Mortgage Dollar Rolls
The Fund may enter into mortgage dollar roll transactions. A mortgage dollar
roll transaction involves a sale by the Fund of mortgage related securities
that it holds with an agreement by the Fund to repurchase similar securities at
an agreed upon price and date. The securities purchased will bear the same
interest rate as those sold, but generally will be collateralized by pools of
mortgages with different prepayment histories than those securities sold.
Proceeds from the sale will be reinvested and the income from these
investments, together with any additional income received on the sale, is
included in investment income. Losses may arise due to changes in the value of
the securities or if the counterparty does not perform under the terms of the
agreement. If the counterparty files for bankruptcy or becomes insolvent, the
Fund's right to repurchase the securities may be limited.
During the year ended December 31, 2003, the Fund entered into mortgage dollar
roll transactions in the aggregate amount of $1,605,508,477.
19 Smith Barney Government Securities Fund | 2003 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At December 31, 2003, the Fund had outstanding mortgage dollar rolls with a
total cost of $109,588,438.
9. 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 its 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 $994,150 $1,032,481 $203,335
- ---------------------------------------------------------------------------------
For the year ended December 31, 2003, total Shareholder Servicing fees were as
follows:
Class 1 Class A Class B Class L Class Y Class Z*
- ----------------------------------------------------------------------------------
Shareholder Servicing Fees $266,706 $471,177 $228,028 $35,873 $201 $360
- ---------------------------------------------------------------------------------
For the year ended December 31, 2003, total Shareholder Communication expenses
were as follows:
Class 1 Class A Class B Class L Class Y Class Z*
- ---------------------------------------------------------------------------------
Shareholder Communication
Expenses $12,068 $38,489 $16,481 $2,283 $102 $4,853
- --------------------------------------------------------------------------------
10.Distributions Paid to Shareholders by Class
Year Ended Year Ended
December 31, 2003 December 31, 2002
---------------------------------------------------------
Net Investment Income
Class 1 $ 4,431,931 $ 4,584,619
Class A 14,748,030 13,675,803
Class B 4,400,077 3,250,858
Class L 947,821 828,530
Class Y 8,733,971 5,751,862
Class Z* 1,191,968 4,027,937
---------------------------------------------------------
Total $34,453,798 $32,119,609
---------------------------------------------------------
* As of April 21, 2003, Class Z shares were fully redeemed.
20 Smith Barney Government Securities Fund | 2003 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11.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 1
Shares sold 624,756 $ 6,278,724 1,226,438 $ 12,053,619
Shares issued on reinvestment 443,186 4,431,895 469,212 4,584,615
Shares reacquired (2,047,866) (20,482,060) (2,009,905) (19,603,208)
- -----------------------------------------------------------------------------------
Net Decrease (979,924) $ (9,771,441) (314,255) $ (2,964,974)
- -----------------------------------------------------------------------------------
Class A
Shares sold 16,082,725 $ 161,723,068 11,765,732 $115,264,496
Shares issued on reinvestment 1,158,191 11,577,361 1,045,332 10,216,610
Shares reacquired (18,146,723) (181,978,133) (8,667,068) (84,578,379)
- -----------------------------------------------------------------------------------
Net Increase (Decrease) (905,807) $ (8,677,704) 4,143,996 $ 40,902,727
- -----------------------------------------------------------------------------------
Class B
Shares sold 5,106,013 $ 51,406,875 8,212,763 $ 80,812,309
Shares issued on reinvestment 376,407 3,767,617 267,043 2,621,374
Shares reacquired (6,226,730) (62,230,421) (3,506,134) (34,284,481)
- -----------------------------------------------------------------------------------
Net Increase (Decrease) (744,310) $ (7,055,929) 4,973,672 $ 49,149,202
- -----------------------------------------------------------------------------------
Class L
Shares sold 830,786 $ 8,330,984 2,249,801 $ 22,105,224
Shares issued on reinvestment 70,241 702,670 61,236 601,116
Shares reacquired (1,541,495) (15,426,091) (1,002,339) (9,865,845)
- -----------------------------------------------------------------------------------
Net Increase (Decrease) (640,468) $ (6,392,437) 1,308,698 $ 12,840,495
- -----------------------------------------------------------------------------------
Class Y
Shares sold 14,439,017 $ 145,457,041 1,338,770 $ 13,282,642
Shares issued on reinvestment 392,218 3,915,533 16,486 164,445
Shares reacquired (4,351,255) (43,301,243) (3,900,296) (38,370,485)
- -----------------------------------------------------------------------------------
Net Increase (Decrease) 10,479,980 $ 106,071,331 (2,545,040) $(24,923,398)
- -----------------------------------------------------------------------------------
Class Z*
Shares sold 1,318,540 $ 13,275,467 6,176,133 $ 60,506,442
Shares issued on reinvestment 118,326 1,191,967 411,778 4,027,937
Shares reacquired (12,788,110) (128,756,595) (3,782,698) (37,014,429)
- -----------------------------------------------------------------------------------
Net Increase (Decrease) (11,351,244) $(114,289,161) 2,805,213 $ 27,519,950
- -----------------------------------------------------------------------------------
*As of April 21, 2003, Class Z shares were fully redeemed.
21 Smith Barney Government Securities Fund | 2003 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12.Capital Loss Carryforward
At December 31, 2003, the Fund had, for Federal income tax purposes,
approximately $68,039,000 of unused capital loss carryforwards available to
offset future capital gains. To the extent that these capital carryforward
losses are used to offset capital gains, it is probable that the gains so
offset will not be distributed.
The amount and year of expiration for each carryforward loss is indicated
below. Expiration occurs on December 31 of the year indicated:
2006 2007 2008
-----------------------------------------------------
Carryforward Amounts $784,000 $50,896,000 $16,359,000
-----------------------------------------------------
In addition, the Fund had $567,103 of capital losses realized after October 31,
2003, which were deferred for Federal income tax purposes to the first day of
the following fiscal year.
13.Income Tax Information and Distributions to Shareholders
The tax basis components of distributable earnings at December 31 were:
2003 2002
------------------------------------------------------------------
Undistributed ordinary income $ 837,388 $ 1,963,614
------------------------------------------------------------------
Accumulated capital losses (68,038,708) (82,250,304)
------------------------------------------------------------------
Unrealized appreciation (depreciation) (462,310) 30,228,638
------------------------------------------------------------------
At December 31, 2003, the difference between book basis and tax basis
unrealized appreciation and depreciation was attributable primarily to wash
sale loss deferrals, mark to market of derivative contracts and straddle loss
deferrals.
At December 31, 2002, the difference between book basis and tax basis
unrealized appreciation was attributable primarily to wash sale loss deferrals.
The tax character of distributions paid during the year ended December 31 was:
2003 2002
---------------------------------------
Ordinary income $34,453,798 $32,119,609
---------------------------------------
22 Smith Barney Government Securities Fund | 2003 Annual Report
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14.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.
15.Subsequent Event
Effective February 2, 2004, the 1.00% initial sales charge on Class L shares
will no longer be imposed.
23 Smith Barney Government Securities 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 1 Shares 2003/(1)/ 2002/(1)/ 2001/(1)/ 2000/(1)(2)/
- -------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $10.08 $ 9.53 $ 9.47 $ 9.17
- --------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.33 0.39 0.44 0.12
Net realized and unrealized gain (loss) (0.14) 0.54 0.09 0.38
- --------------------------------------------------------------------------------------------
Total Income From Operations 0.19 0.93 0.53 0.50
- --------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.38) (0.38) (0.45) (0.20)
Capital -- -- (0.02) --
- --------------------------------------------------------------------------------------------
Total Distributions (0.38) (0.38) (0.47) (0.20)
- --------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.89 $10.08 $ 9.53 $ 9.47
- --------------------------------------------------------------------------------------------
Total Return 1.95% 10.00% 5.74% 5.47%++
- --------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $108,432 $120,385 $116,855 $126,527
- --------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.81% 0.85% 0.85% 0.58%+
Net investment income 3.34 4.01 4.62 6.09+
- --------------------------------------------------------------------------------------------
Portfolio Turnover Rate 148%* 280% 447% 280%
- --------------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) For the period September 12, 2000 (inception date) to December 31, 2000.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
* Excluding mortgage dollar roll transactions. If mortgage dollar roll
transactions had been included, the portfolio turnover rate would have been
328%.
24 Smith Barney Government Securities 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 A Shares 2003/(1)/ 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $10.07 $ 9.52 $ 9.45 $ 8.99 $ 9.97
- -----------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.32 0.38 0.43 0.55 0.49
Net realized and unrealized gain (loss) (0.14) 0.54 0.09 0.46 (0.98)
- -----------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.18 0.92 0.52 1.01 (0.49)
- -----------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.37) (0.37) (0.45) (0.55) (0.49)
Capital -- -- -- -- (0.00)#
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.37) (0.37) (0.45) (0.55) (0.49)
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.88 $10.07 $ 9.52 $ 9.45 $ 8.99
- -----------------------------------------------------------------------------------------------------
Total Return 1.83% 9.88% 5.60% 11.65% (4.96)%
- -----------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $378,479 $394,928 $333,878 $331,125 $288,133
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.95% 0.91% 0.96% 0.92% 0.94%
Net investment income 3.19 3.91 4.50 6.12 5.21
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 148%* 280% 447% 280% 161%
- -----------------------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
# Amount represents less than $0.01 per share.
* Excluding mortgage dollar roll transactions. If mortgage dollar roll
transactions had been included, the portfolio turnover rate would have been
328%.
25 Smith Barney Government Securities 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 B Shares 2003/(1)/ 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/
- ------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $10.08 $ 9.53 $ 9.46 $ 9.00 $ 9.97
- -------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.27 0.33 0.37 0.50 0.45
Net realized and unrealized gain (loss) (0.14) 0.54 0.10 0.46 (0.97)
- -------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.13 0.87 0.47 0.96 (0.52)
- -------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.32) (0.32) (0.40) (0.50) (0.45)
Capital -- -- -- -- (0.00)#
- -------------------------------------------------------------------------------------------------
Total Distributions (0.32) (0.32) (0.40) (0.50) (0.45)
- -------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.89 $10.08 $ 9.53 $ 9.46 $ 9.00
- -------------------------------------------------------------------------------------------------
Total Return 1.30% 9.29% 5.05% 11.06% (5.35)%
- -------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $122,312 $132,232 $77,569 $60,863 $65,989
- -------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.51% 1.42% 1.48% 1.44% 1.42%
Net investment income 2.64 3.41 3.94 5.62 4.72
- -------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 148%* 280% 447% 280% 161%
- -------------------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
# Amount represents less than $0.01 per share.
* Excluding mortgage dollar roll transactions. If mortgage dollar roll
transactions had been included, the portfolio turnover rate would have been
328%.
26 Smith Barney Government Securities 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 $10.08 $ 9.53 $ 9.45 $ 8.99 $ 9.97
- -----------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.28 0.34 0.38 0.51 0.46
Net realized and unrealized gain (loss) (0.15) 0.54 0.10 0.46 (0.99)
- -----------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.13 0.88 0.48 0.97 (0.53)
- -----------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.33) (0.33) (0.40) (0.51) (0.45)
Capital -- -- -- -- (0.00)#
- -----------------------------------------------------------------------------------------
Total Distributions (0.33) (0.33) (0.40) (0.51) (0.45)
- -----------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.88 $10.08 $ 9.53 $ 9.45 $ 8.99
- -----------------------------------------------------------------------------------------
Total Return 1.29% 9.39% 5.22% 11.10% (5.41)%
- -----------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $24,725 $31,663 $17,468 $7,808 $6,611
- -----------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.41% 1.39% 1.42% 1.37% 1.40%
Net investment income 2.75 3.45 3.95 5.67 4.77
- -----------------------------------------------------------------------------------------
Portfolio Turnover Rate 148%* 280% 447% 280% 161%
- -----------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
# Amount represents less than $0.01 per share.
* Excluding mortgage dollar roll transactions. If mortgage dollar roll
transactions had been included, the portfolio turnover rate would have been
328%.
27 Smith Barney Government Securities 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 Y Shares 2003/(1)/ 2002/(1)/ 2001/(1)/ 2000/(1)/ 1999/(1)/
- ------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Year $10.08 $ 9.53 $ 9.45 $ 8.99 $ 9.97
- --------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.36 0.41 0.47 0.59 0.53
Net realized and unrealized gain (loss) (0.14) 0.55 0.09 0.45 (0.98)
- --------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.22 0.96 0.56 1.04 (0.45)
- --------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.41) (0.41) (0.48) (0.58) (0.53)
Capital -- -- -- -- (0.00)#
- --------------------------------------------------------------------------------------------------
Total Distributions (0.41) (0.41) (0.48) (0.58) (0.53)
- --------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.89 $10.08 $ 9.53 $ 9.45 $ 8.99
- --------------------------------------------------------------------------------------------------
Total Return 2.17% 10.25% 6.07% 12.02% (4.61)%
- --------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $230,820 $129,577 $146,734 $228,898 $213,170
- --------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.57% 0.58% 0.60% 0.58% 0.60%
Net investment income 3.54 4.25 4.94 6.47 5.57
- --------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 148%* 280% 447% 280% 161%
- --------------------------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the monthly average shares
method.
# Amount represents less than $0.01 per share.
* Excluding mortgage dollar roll transactions. If mortgage dollar roll
transactions had been included, the portfolio turnover rate would have been
328%.
TAX INFORMATION (UNAUDITED)
A total of 20.07% 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.
28 Smith Barney Government Securities 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 Government Securities 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 the broker. As to securities purchased,
but not yet received, we performed other appropriate auditing procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of 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
29 Smith Barney Government Securities Fund | 2003 Annual Report
ADDITIONAL INFORMATION (UNAUDITED)
Information about Directors and Officers
The business and affairs of the Smith Barney Government Securities Fund
("Fund") are managed under the direction of the Smith Barney Investment Funds
Inc. ("Company") Board of Directors. Information pertaining to the Directors
and certain officers of the Company is set forth below. The Statement of
Additional Information includes additional information about the Company's
Directors and is available, without charge, upon request by calling the Fund's
transfer agent (Citicorp Trust Bank, fsb. at 1-800-451-2010) or the Fund's
sub-transfer agent (Primerica Shareholder Services at 1-800-544-5445).
Number of
Portfolios
Term of in the
Office* and Principal Fund Other Board
Position(s) Length Occupation(s) Complex Memberships
Name, Address Held with of Time During Past Overseen Held by
and Age Fund Served Five Years by Director Director
- ----------------------------------------------------------------------------------------------------
Non-Interested Directors:
Paul R. Ades Director Since Law Firm of Paul R. Ades, 15 None
Paul R. Ades, PLLC 1994 PLLC (from April 2000 to
181 West Main Street Present); Partner in Law
Suite C Firm of Murov & Ades,
Babylon, NY 11702 Esqs. (from November
Age 63 1970 to March 2000)
Herbert Barg** Director Since Retired 42 None
1460 Drayton Lane 1994
Wynnewood, PA 19096
Age 80
Dwight B. Crane Director Since Professor, Harvard 49 None
Harvard Business School 1981 Business School
Soldiers Field
Morgan Hall #375
Boston, MA 02163
Age 66
Frank G. Hubbard Director Since President of Avatar 15 None
Avatar International, Inc. 1993 International (Business
87 Whittredge Road Development) (since
Summit, NJ 07901 1998); Vice President
Age 66 of 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
New York, NY 10022
Age 65
Ken Miller Director Since President of Young Stuff 15 None
Young Stuff Apparel 1994 Apparel Group, Inc.
Group, Inc.
930 Fifth Avenue
Suite 610
New York, NY 10021
Age 61
30 Smith Barney Government Securities Fund | 2003 Annual Report
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of
Portfolios
Term of in the
Office* and Principal Fund Other Board
Position(s) Length Occupation(s) Complex Memberships
Name, Address Held with of Time During Past Overseen Held by
and Age Fund Served Five Years by Director Director
- ----------------------------------------------------------------------------------------------------
Interested Director:
R. Jay Gerken, CFA*** Chairman, Since Managing Director of 221 None
CAM President 2002 Citigroup Global Markets
399 Park Avenue and Chief Inc. ("CGM"); Chairman,
4th Floor Executive President and Chief
New York, NY 10022 Officer Executive Officer of Smith
Age 52 Barney 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 N/A N/A
CAM President 2003 Vice President and Chief
125 Broad Street and Chief Administrative Officer of
10th Floor Administrative mutual funds associated
New York, NY 10004 Officer with Citigroup; Treasurer
Age 47 of 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 Since Director of CGM; Chief N/A N/A
CAM Financial 2002 Financial Officer and
125 Broad Street Officer and Treasurer of certain mutual
11th Floor Treasurer funds associated with
New York, NY 10004 Citigroup; Director and
Age 42 Head of 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)
31 Smith Barney Government Securities Fund | 2003 Annual Report
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
Number of
Portfolios
Term of in the
Office* and Principal Fund Other Board
Position(s) Length Occupation(s) Complex Memberships
Name, Address Held with of Time During Past Overseen Held by
and Age Fund Served Five Years by Director Director
- -----------------------------------------------------------------------------------------------------
Mark Lindbloom Vice Since Managing Director of N/A N/A
CAM President 2002 CGM; Investment Officer
399 Park Avenue and of SBFM
4th Floor Investment
New York, NY 10022 Officer
Age 47
Francis Mustaro Vice Since Director of CGM; N/A N/A
CAM President 2002 Investment Officer of
399 Park Avenue and SBFM
4th Floor Investment
New York, NY 10022 Officer
Age 52
Andrew Beagley Chief Anti- Since Director of CGM (since N/A N/A
CAM Money 2002 2000); Director of
399 Park Avenue, 4th Floor Laundering Compliance, North
New York, NY 10022 Compliance America, CAM (since
Age 40 Officer 2000); Chief Anti-Money
Laundering Compliance
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; N/A N/A
CAM 2002 Controller of certain
125 Broad Street mutual funds associated
11th Floor with Citigroup
New York, NY 10004
Age 38
Robert I. Frenkel Secretary Since Managing Director and N/A N/A
CAM and Chief 2003 General Counsel of Global
300 First Stamford Place Legal Mutual Funds for CAM
4th Floor Officer and its predecessor (since
Stamford, CT 06902 1994); Secretary of CFM;
Age 48 Secretary and Chief Legal
Officer of certain mutual
funds associated with
Citigroup
- --------
* Each Director and officer serves until his or her successor has been duly
elected and qualified.
**Mr. 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.
32 Smith Barney Government Securities Fund | 2003 Annual Report
SMITH BARNEY
GOVERNMENT
SECURITIES FUND
DIRECTORS OFFICERS (continued)
Paul R. Ades Kaprel Ozsolak
Herbert Barg* Controller
Dwight B. Crane
R. Jay Gerken, CFA Robert I. Frenkel
Chairman Secretary and
Frank G. Hubbard Chief Legal Officer
Jerome H. Miller
Ken Miller INVESTMENT ADVISER
AND ADMINISTRATOR
OFFICERS Smith Barney Fund
R. Jay Gerken, CFA Management LLC
President and
Chief Executive Officer DISTRIBUTORS
Citigroup Global Markets Inc.
Andrew B. Shoup PFS Distributors, Inc.
Senior Vice President
and Chief Administrative CUSTODIAN
Officer State Street Bank and
Trust Company
Richard L. Peteka
Chief Financial Officer TRANSFER AGENT
and Treasurer Citicorp Trust Bank, fsb.
125 Broad Street, 11th Floor
Mark Lindbloom New York, New York 10004
Vice President and
Investment Officer SUB-TRANSFER AGENTS
PFPC Inc.
Francis Mustaro P.O. Box 9699
Vice President and Providence, Rhode Island
Investment Officer 02940-9699
Andrew Beagley Primerica Shareholder Services
Chief Anti-Money P.O. Box 9662
Laundering Compliance Providence, Rhode Island
Officer 02940-9662
* Mr. Barg became Director Emeritus on December 31, 2003.
Smith Barney Investment Funds Inc.
Smith Barney Government
Securities 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 Government Securities
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 GOVERNMENT SECURITIES 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
FD0316 2/04 04-6108
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 Paul
Ades, the Chairman 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. Dwight 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 12/31/02 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 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 8, 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 8, 2004
By: /s/ Richard L. Peteka
Richard L. Peteka
Chief Financial Officer of
Smith Barney Investment Funds Inc.
Date: March 8, 2004