SMITH BARNEY
SMALL CAP
VALUE FUND
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ANNUAL REPORT
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September 30, 1999
LOGO: SMITH BARNEY MUTUAL FUNDS
NOT FDIC INSURED O NOT BANK GUARANTEED O MAY LOSE VALUE
<PAGE>
SMITH BARNEY
SMALL CAP VALUE FUND
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The SMITH BARNEY SMALL CAP VALUE FUND ("Fund")
seeks long-term capital appreciation by investing
primarily in the common stocks of companies with
relatively small market capitalizations.
SMITH BARNEY SMALL CAP VALUE FUND
AVERAGE ANNUAL TOTAL RETURNS
SEPTEMBER 30, 1999
WITHOUT SALES CHARGES(1)
---------------------------------------
CLASS A CLASS B CLASS L
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Since Inception+++ 6.14% 5.70% 5.70%
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WITH SALES CHARGES(2)
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CLASS A CLASS B CLASS L
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Since Inception+++ 0.83% 0.70% 3.60%
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(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 charge of 5.00% and 1.00%
respectively; and Class B shares reflect the deduction of a 5.00% CDSC,
which applies if shares are redeemed within one year from purchase.
Thereafter, the CDSC declines 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. All figures represent
past performance and are not a guarantee of future results. Investment
returns and principal value will fluctuate, and redemption value may be more
or less than the original cost.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
++ Inception date for Class A, B and L shares is February 26, 1999.
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FUND HIGHLIGHT
Relative to the Russell 2000 Value Index, we believe we have constructed a
portfolio that has higher quality assets, high return potential and currently
more attractive valuations.
As to the Fund's sector weightings versus the Russell 2000 Value Index, we have
a neutral weighting in financials, the largest sector in the index. With our
bank holdings, we have generally owned well-capitalized franchises located in
major metropolitan areas because we think they offer greater potential as
takeover candidates and the convenience they offer consumers may make them less
vulnerable to the threat of Internet banking.
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NASDAQ SYMBOL
Class A SBVAX
Class B SBVBX
Class L SBVLX
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WHAT'S INSIDE
SHAREHOLDER LETTER............................................ 1
HISTORICAL PERFORMANCE ....................................... 4
SCHEDULE OF INVESTMENTS ...................................... 5
STATEMENT OF ASSETS AND LIABILITIES .......................... 8
STATEMENT OF OPERATIONS ...................................... 9
STATEMENT OF CHANGES IN NET ASSETS .......................... 10
NOTES TO FINANCIAL STATEMENTS ............................... 11
FINANCIAL HIGHLIGHTS ........................................ 15
INDEPENDENT AUDITORS' REPORT................................. 16
<PAGE>
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SHAREHOLDER LETTER
PICTURES OF
HEATH B. MCLENDON
CHAIRMAN
PETER J. HABLE
VICE PRESIDENT
DEAR SHAREHOLDER:
We are pleased to provide the annual report for the Smith Barney Small Cap Value
Fund ("Fund") for the period ended September 30, 1999. In this report we have
summarized the period's prevailing economic and market conditions and outlined
our portfolio strategy. A detailed summary of the Fund's performance can be
found in the appropriate sections that follow. We hope that you find this report
useful and informative.
PERFORMANCE UPDATE AND INVESTMENT STRATEGY
The Fund commenced operations on February 26, 1999. Since inception through
September 30, 1999, the Class A, B and L shares of the Fund returned 6.14%,
5.70% and 5.70%, respectively, without sales charges.
Our research team focuses on small-capitalization companies. We think that the
pricing inefficiencies inherent in the small-cap market enable us to find
fundamental value and significant capital appreciation potential. We look for
small-cap stocks that sell at a low price relative to several measures of value
and where we believe that some dynamic change in a company or an industry may
enhance stock price performance. We prefer to invest in companies that generate
significant free cash flow, maintain strong balance sheets, produce a high
return on equity and where there is significant management ownership.
MARKET UPDATE
In our opinion, small-cap stocks appear to have completed a cyclical bear market
where valuations have fallen to such a degree that the stage may be set for an
extended small-cap bull market. One of the quantitative research services we
utilize has taken stock market data from 1960 through 1999, a period of almost
40 years, and related the inflation-adjusted, real cash flow returns for
large-capitalization companies to those generated by smaller issues. The current
period is unique in the sense that the valuation differential in favor of
smaller companies is the most extreme it has been since 1960. (In fact, almost
all other relative small-cap stock valuation measures such as P/E ratios are at
40 year lows as well.)
The consensus thinking is that this valuation disparity between small and
large-cap stocks is a function of the realities of "new era" investing, where
large-sized mutual funds dominate and emphasize only larger, more liquid names.
In other words, the wide spread in values between large and small-cap companies
is a permanent part of the investment landscape and a manifestation of a new
business reality rather than indicative of investment opportunities.
We recognize that many factors may have changed the investment landscape in the
last few decades and that the growth of large-sized mutual funds
and concentrated pools of money are among them. However, when valuation extremes
between large-sized and small-sized companies get as wide as they are today, we
believe that there is a strong probability that some investors may arbitrage the
differences. Mutual funds are not the only source of capital to implement the
arbitrage. Other sources of capital include a high level of insider buying in
smaller-sized companies, increased share repurchase programs, the highest level
of mergers and acquisitions in small-cap companies
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Smith Barney Small Cap Value Fund 1
<PAGE>
ever recorded and a record number of leveraged buyouts (LBOs) of small-sized
companies.
Today, many investors appear willing to pay almost any P/E ratio for many
larger-sized companies, regardless of their underlying growth rates. We believe
the bull market for these large-cap issues should slow and that the returns for
large-cap stocks may go back to their lower historical averages. While no
guarantees can be made, we believe small-cap stocks may offer more competitive
returns given their undervaluations versus large-cap stocks.
PORTFOLIO UPDATE*
As of September 30, 1999, the Fund's portfolio was made up of 86 stocks, which
represent about 90% of the net asset value ("NAV"). Roughly 10% of the Fund's
portfolio is held in Russell 2000 Small Cap Index futures to keep it fully
invested. We expect the percentage of the Fund's assets held in stock index
futures to be reduced over time as we take advantage of short-term price
volatility to add to our targeted stocks. We also anticipate that the number of
holdings in the Fund's portfolio should stay at this level.
Turning to some of the investment characteristics of the Fund's portfolio, as of
October 25, 1999 the average capitalization of the stocks held in the Fund's
portfolio was $1.05 billion versus $693 million for the Russell 2000 Value
Index. What follows are some comparisons between the Fund and the Russell 2000
Value Index**:
SMITH BARNEY
SMALL CAP RUSSELL 2000
VALUE FUND VALUE INDEX
-------------- --------------
Average P/E ratio 11.9% 14.0%
Average price/cash flow 9.1 23.3
Average price/sales 1.8 11.4
Average return on equity 10.3 7.4
Relative to the Russell 2000 Value Index, we believe we have constructed a
portfolio that has higher quality assets, higher return potential and currently
more competitive valuations.
As to the Fund's sector weightings versus the Russell 2000 Value Index, we have
a neutral weighting in financials, the largest sector in the index. With our
bank holdings, we have generally owned well-capitalized franchises located in
major metropolitan areas because we think they offer greater potential as
takeover candidates and the convenience they offer consumers may make them less
vulnerable to the threat of Internet banking.
As of September 30, 1999, the Fund's largest bank and thrift holdings were City
National, Cullen/Frost and U.S. Trust. Of the real estate investment trusts
("REITs") within the Fund's financial sector holdings, we were underweighted in
shopping center and lodging stocks. Spieker Properties, TriNet Corp and
Highwoods Properties are our largest holdings. The banks and REITs have been two
of the worst performing groups so far in 1999 and we feel they have competitive
values and we may therefore overweight this sector in the near future.
We also have neutral weightings in consumer discretionary, capital goods,
utilities, basic materials, energy and transformation. In the consumer
discretionary sector, our largest holdings were Pier 1 Imports and Buffets. Both
companies have unique franchises and strong balance sheets. The Fund's largest
capital goods holdings were Roper Industries and Federal Signal. Roper designs
and manufactures industrial controls, fluid-handling products and
instrumentation products for a variety of markets, while Federal Signals
manufacturers and supplies safety, signaling and communication equipment.
In the utilities sector, our top holdings were Citizens Utilities and Eastern
Enterprises, both strategically located with the potential to be taken over. In
the
- --------
*Please note that the Fund's holdings are subject to change.
**The Russell 2000 Value Index measures the performance of those Russell 2000
companies with lower P/E ratios and forcasted growth values.
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2 1999 Annual Report to Shareholders
<PAGE>
paper and related products sector, our largest holdings -- Caraustar Industries
and Wausau-Mosinee Paper -- were tied to the recovering paper industry.
In the energy sector the Fund's largest holdings, Barrett Resources and Union
Pacific Resources, hold significant natural gas reserves. We believe that
natural gas prices should continue to recover in the months ahead and we expect
we may also overweight this sector going forward. In transportation, the Fund's
largest holdings were the railroad Wisconsin Central and the marine
transportation company Kirby Corp.
We are currently underweighted in technology and healthcare. These sectors have
been the most expensive small-cap areas and it has been difficult to identify
companies that represent compelling values. In the technology sector, the Fund's
largest holding was Cypress Semiconductor, a stellar performer for the Fund, and
the disc drive company Maxtor Corp. In healthcare, the only area that we have
found attractive values during the reporting period were in health maintenance
organizations ("HMOs") such as Foundation Health Systems.
MARKET OUTLOOK
With many small-cap stocks trading at record low valuations versus large-cap
stocks, we believe that this area of the market shows great promise over the
long term. In closing, thank you for investing in the Smith Barney Small Cap
Value Fund. We look forward to continuing to help you pursue your financial
goals in the years ahead.
Sincerely,
/S/ HEATH B. MCLENDON /S/ PETER J. HABLE
HEATH B. MCLENDON PETER J. HABLE
Chairman Vice President
October 26, 1999
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Smith Barney Small Cap Value Fund 3
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<TABLE>
<CAPTION>
HISTORICAL PERFORMANCE - CLASS A SHARES
==================================================================================================================================
NET ASSET VALUE
-------------------------
BEGINNING END INCOME CAPITAL GAIN TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDEND DISTRIBUTION RETURN(1)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Inception*-- 9/30/99 $11.40 $12.10 $0.00 $0.00 6.14%+
- ----------------------------------------------------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE - CLASS B SHARES
==================================================================================================================================
NET ASSET VALUE
-------------------------
BEGINNING END INCOME CAPITAL GAIN TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDEND DISTRIBUTION RETURN(1)
- ----------------------------------------------------------------------------------------------------------------------------------
Inception*-- 9/30/99 $11.40 $12.05 $0.00 $0.00 5.70%+
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==================================================================================================================================
NET ASSET VALUE
-------------------------
BEGINNING END INCOME CAPITAL GAIN TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDEND DISTRIBUTION RETURN(1)
- ----------------------------------------------------------------------------------------------------------------------------------
Inception*-- 9/30/99 $11.40 $12.05 $0.00 $0.00 5.70%+
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IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
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WITHOUT SALES CHARGES(1)
-------------------------
CLASS A CLASS B CLASS L
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Inception* through 9/30/99+ 6.14% 5.70% 5.70%
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WITH SALES CHARGES(2)
-------------------------
CLASS A CLASS B CLASS L
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Inception* through 9/30/99+ 0.83% 0.70% 3.60%
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CUMULATIVE TOTAL RETURNS
================================================================================
WITHOUT SALES CHARGES(1)
-------------------------
Class A (Inception* through 9/30/99) 6.14%
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Class B (Inception* through 9/30/99) 5.70
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Class L (Inception* through 9/30/99) 5.70
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(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 (") 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 charge of 5.00% and 1.00%,
respectively; Class B shares reflect the deduction of a 5.00% CDSC, which
applies if shares are redeemed within one year from purchase. Thereafter,
the CDSC declines 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 date for Class A, B and L shares is February 26, 1999.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
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4 1999 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
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SCHEDULE OF INVESTMENTS SEPTEMBER 30, 1999
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SHARES SECURITY VALUE
======================================================================================
<S> <C> <C>
COMMON STOCK -- 85.4%
AUTOS AND TRANSPORTATION -- 3.1%
9,000 Arnold Industries, Inc. $ 113,625
65,000 Covenant Transport, Inc., Class A Shares+ 991,250
86,000 Kirby Corp.+ 1,687,750
120,000 Wisconsin Central Transportation Corp.+ 1,642,500
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4,435,125
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CAPITAL GOODS -- 5.2%
88,500 Federal Signal Corp. 1,758,937
56,500 IDEX Corp. 1,599,656
51,000 Meritor Automotive, Inc. 1,064,625
34,000 Precision Castparts Corp. 1,037,000
52,500 Roper Industries, Inc. 2,008,125
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7,468,343
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CONSUMER DISCRETIONARY -- 16.2%
106,000 Ambassadors International, Inc.+ 1,424,375
69,500 American Greetings Corp., Class A Shares 1,789,625
155,000 Arctic Cat Inc. 1,482,188
163,500 Buffets, Inc.+ 1,900,687
58,500 Corn Products International, Inc. 1,780,594
43,500 Footstar, Inc.+ 1,533,375
80,500 Interstate Bakeries Corp. 1,851,500
44,500 Lancaster Colony Corp. 1,424,000
54,000 Liz Claiborne, Inc. 1,674,000
14,500 Maxwell Shoe Co. Inc.+ 127,781
43,200 The Pantry, Inc.+ 480,600
325,000 Pier 1 Imports, Inc. 2,193,750
139,000 Rexall Sundown, Inc.+ 1,711,437
113,000 Ruddick Corp. 1,793,875
92,500 Scientific Games Holdings Corp.+ 1,826,875
31,400 Sturm, Ruger & Co., Inc. 282,600
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23,277,262
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FINANCIAL SERVICES -- 15.5%
48,000 Chittenden Corp. 1,368,000
60,000 City National Corp. 2,013,750
75,000 Cullen/Frost Bankers Inc. 1,875,000
48,000 FirstMerit Corp. 1,218,000
93,000 Golden State Bancorp Inc.+ 1,668,187
49,500 GreenPoint Financial Corp. 1,314,844
55,000 InterWest Bancorp, Inc. 1,141,250
42,500 Investors Financial Services Corp. 1,460,937
65,000 Old Republic International Corp. 938,438
35,000 People's Bank 826,875
70,000 Peoples Heritage Financial Group, Inc. 1,163,750
37,500 Radian Group Inc. 1,610,156
50,000 Sky Financial Group, Inc. 1,175,000
22,000 U.S. Trust Corp. 1,768,250
SEE NOTES TO FINANCIAL STATEMENTS.
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Smith Barney Small Cap Value Fund 5
<PAGE>
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SCHEDULE OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 1999
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SHARES SECURITY VALUE
======================================================================================
<S> <C> <C>
FINANCIAL SERVICES -- 15.5% (CONTINUED)
67,500 Waddell & Reed Financial, Inc. $ 1,497,656
45,000 Webster Financial Corp. 1,147,500
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22,187,593
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HEALTHCARE -- 1.4%
170,000 Foundation Health Systems, Inc., Class A Shares+ 1,604,375
115,000 Omega Protein Corp.+ 352,188
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1,956,563
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INTEGRATED OIL -- 4.2%
60,000 Barrett Resources Corp.+ 2,216,250
200,000 Santa Fe Snyder Corp.+ 1,800,000
125,000 Union Pacific Resources Group Inc. 2,007,813
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6,024,063
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MACHINERY - FARM -- 1.7%
165,000 AGCO Corp. 2,145,000
40,000 CTB International Corp.+ 272,500
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2,417,500
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MATERIALS AND PROCESSING -- 4.1%
48,000 Cleveland-Cliffs Inc. 1,494,000
90,000 Engelhard Corp. 1,636,875
70,000 Hawk Corp., Class A Shares+ 367,500
118,200 Oregon Steel Mills, Inc. 1,322,363
67,500 Wolverine Tube, Inc.+ 1,046,250
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5,866,988
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OTHER ENERGY -- 0.9%
37,500 Peoples Energy Corp. 1,319,531
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PAPER AND RELATED PRODUCTS -- 2.8%
77,000 Caraustar Industries, Inc. 1,963,500
26,400 Pope & Talbot, Inc. 326,700
142,000 Wausau-Mosinee Paper Corp. 1,721,750
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4,011,950
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PRODUCER DURABLES -- 1.3%
103,000 Cooper Tire & Rubber Co. 1,815,375
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REAL ESTATE -- 15.2%
58,500 Arden Realty, Inc. 1,272,375
40,000 Avalonbay Communities, Inc. 1,355,000
41,250 Boston Properties Inc. 1,265,859
95,000 Catellus Development Corp.+ 1,116,250
44,000 Cousins Properties Inc. 1,493,250
85,000 Duke - Weeks Realty Corp. 1,657,500
55,000 FelCor Lodging Trust Inc. 962,500
40,000 General Growth Properties, Inc. 1,260,000
65,000 Highwoods Properties, Inc. 1,681,875
62,500 Kilroy Realty Corp. 1,320,313
35,000 Kimco Realty Corp. 1,251,250
57,500 The Rouse Co. 1,322,500
49,500 Spieker Properties, Inc. 1,717,031
77,500 Trammell Crow Co.+ 1,026,875
SEE NOTES TO FINANCIAL STATEMENTS.
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6 1999 Annual Report to Shareholders
<PAGE>
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SCHEDULE OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------------
SHARES SECURITY VALUE
======================================================================================
<S> <C> <C>
REAL ESTATE -- 15.2% (CONTINUED)
74,000 TriNet Corporate Realty Trust, Inc. $ 1,762,125
62,500 Del E. Webb Corp.+ 1,375,000
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21,839,703
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TECHNOLOGY -- 6.9%
81,000 Belden Inc. 1,660,500
61,200 Carpenter Technology Corp. 1,499,400
141,250 Cypress Semiconductor Corp.+ 3,036,875
100,000 JDA Software Group, Inc.+ 1,168,750
382,500 Maxtor Corp.+ 2,522,109
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9,887,634
- --------------------------------------------------------------------------------------
UTILITIES -- 6.9%
77,500 Avista Corp. 1,361,094
157,500 Citizens Utilities Co., Class B Shares+ 1,781,719
35,100 Eastern Enterprises 1,629,956
42,500 IDACORP, Inc. 1,280,312
50,000 Sierra Pacific Resources 1,112,500
42,500 WPS Resources Corp. 1,192,656
57,500 Washington Gas Light Co. 1,559,688
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9,917,925
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TOTAL COMMON STOCK
(Cost-- $118,548,145) 122,425,555
======================================================================================
FACE
AMOUNT SECURITY VALUE
======================================================================================
U.S. TREASURY BILLS -- 0.9%
U.S. Treasury Bills:
$1,000,000 due 10/14/99 998,415
200,000 due 12/16/99 198,066
50,000 due 12/30/99 49,409
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TOTAL U.S. TREASURY BILLS
(Cost-- $1,245,865) 1,245,890
======================================================================================
SUB-TOTAL INVESTMENTS
(Cost-- $119,794,010) 123,671,445
======================================================================================
REPURCHASE AGREEMENT -- 13.7%
19,635,000 Goldman, Sachs & Co., 5.280% due 10/1/99;
Proceeds at maturity -- $19,637,890; (Fully collateralized
by U.S. Treasury Bonds and Notes, 4.000% to 8.500%
due 10/31/00 to 11/15/27; Market value -- $20,027,720)
(Cost-- $19,635,000) 19,635,000
======================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $139,429,010*) $143,306,445
======================================================================================
</TABLE>
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
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Smith Barney Small Cap Value Fund 7
<PAGE>
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STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 1999
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $119,794,010) $123,671,445
Repurchase agreement, at value (Cost-- $19,635,000) 19,635,000
Cash 900
Receivable for Fund shares sold 336,664
Receivable for securities sold 1,510,854
Receivable from broker - variation margin 231,088
Dividends and interest receivable 252,407
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TOTAL ASSETS $145,638,358
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LIABILITIES:
Payable for securities purchased 4,221,824
Management fees payable 90,142
Distribution fees payable 43,682
Payable for Fund shares purchased 32,910
Accrued expenses 109,730
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TOTAL LIABILITIES $ 4,498,288
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TOTAL NET ASSETS $141,140,070
================================================================================
NET ASSETS:
Par value of capital shares $ 11,703
Capital paid in excess of par value 136,372,817
Undistributed net investment income 1,242,590
Accumulated net realized gain from securities
transactions and future contracts 377,787
Net unrealized appreciation of
investments and futures contracts 3,135,173
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TOTAL NET ASSETS $141,140,070
================================================================================
SHARES OUTSTANDING:
Class A 3,083,434
- --------------------------------------------------------------------------------
Class B 5,032,160
- --------------------------------------------------------------------------------
Class L 3,587,156
- --------------------------------------------------------------------------------
NET ASSET VALUE:
Class A (and redemption price) $12.10
- --------------------------------------------------------------------------------
Class B* $12.05
- --------------------------------------------------------------------------------
Class L** $12.05
- --------------------------------------------------------------------------------
MAXIMUM PUBLIC OFFERING PRICE PER SHARE:
Class A (net asset value plus 5.26% of net asset value per share) $12.74
- --------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $12.17
- --------------------------------------------------------------------------------
* Redemption price is NAV of Class B shares reduced by a 5.00% CDSC if shares
are redeemed within one year from purchase (See Note 2).
** Redemption price is NAV of Class L shares reduced by a 1.00% CDSC if shares
are redeemed within the first year of purchase.
SEE NOTES TO FINANCIAL STATEMENTS.
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8 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 1999(A)
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends $1,661,369
Interest 1,036,405
- --------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 2,697,774
- --------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 636,757
Management fees (Note 2) 616,315
Registration fees 80,735
Shareholder and system servicing fees 80,508
Shareholder communications 52,787
Audit and legal 44,136
Directors' fees 7,943
Custody 6,551
Other 2,778
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TOTAL EXPENSES $1,528,510
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 1,169,264
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 3 AND 7):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 708,514
Futures contracts (330,727)
- --------------------------------------------------------------------------------
NET REALIZED GAIN 377,787
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments and Futures Contracts:
Beginning of period --
End of period 3,135,173
- --------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION 3,135,173
- --------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS AND FUTURES CONTRACTS 3,512,960
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS $4,682,224
- --------------------------------------------------------------------------------
(a) For the period from February 26, 1999 (commencement of operations) to
September 30, 1999.
SEE NOTES TO FINANCIAL STATEMENTS.
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Smith Barney Small Cap Value Fund 9
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET FOR THE PERIOD ENDED SEPTEMBER 30, 1999(A)
- --------------------------------------------------------------------------------
OPERATIONS:
Net investment income $ 1,169,264
Net realized gain 377,787
Increase in net unrealized appreciation 3,135,173
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS 4,682,224
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income --
- --------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 169,714,510
Cost of shares reacquired (33,256,664)
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE TRANSAACTIONS 136,457,846
- --------------------------------------------------------------------------------
INCREASE IN NET ASSETS 141,140,070
NET ASSETS:
Beginning of period --
- --------------------------------------------------------------------------------
END OF PERIOD* $141,140,070
================================================================================
* Includes undistributed net investment income of: $1,242,590
================================================================================
(a) For the period from February 26, 1999 (commencement of operations) to
September 30, 1999.
SEE NOTES TO FINANCIAL STATEMENTS.
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10 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Small Cap Value Fund ("Portfolio"), a separate investment fund
of the Smith Barney Investment Funds Inc. ("Fund"), a Maryland Corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Fund consists of this
Portfolio and eight other separate investment portfolios: Concert Peachtree
Growth Fund, Smith Barney Investment Grade Bond Fund, Smith Barney Contrarian
Fund, Smith Barney Government Securities Fund, Smith Barney Hansberger Global
Value Fund, Smith Barney Hansberger Global Small Cap Value Fund, Smith Barney
Premier Selections Fund and Smith Barney Small Cap Growth Fund. The financial
statements and financial highlights for the other portfolios are presented in
separate shareholder reports.
The significant accounting policies consistently followed by the Portfolio 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 bid price, or in the absence of a
recent bid price, at the bid equivalent obtained from one or more of the major
market makers; (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 is recorded
on an accrual basis; (g) dividends and distributions to shareholders are
recorded on the ex-dividend date; (h) gains or losses on the sale of securities
are calculated using the specific identification method; (i) the accounting
records are maintained in U.S. dollars. All assets and liabilities denominated
in foreign currencies are translated into U.S. dollars on the date of valuation.
Purchases and sales of securities and income and expenses are translated at the
rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income or expense amounts recorded and collected
or paid are adjusted when reported by the custodian bank (j) direct expenses are
charged to each class; management fees and general portfolio expenses are
allocated on the basis of relative net assets; (k) the Portfolio 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; (l) the character of income and gains distributed is
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At September 30, 1999,
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. Accordingly, a portion of accumulated net investment
loss amounting to $73,326 was reclassified to paid-in capital. Net investment
income, net realized gains and net assets were not affected by this change and
(m) 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. MANAGEMENT AGREEMENT AND
OTHER TRANSACTIONS
SSB Citi Fund Management LLC ("SSBC"), formerly known as SSBC Fund Management
Inc., a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), acts as
- --------------------------------------------------------------------------------
Smith Barney Small Cap Value Fund 11
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
investment manager to the Fund. The Portfolio pays SSBC a management fee
calculated at an annual rate of 0.75% of the average daily net assets. This fee
is calculated daily and paid monthly.
CFBDS, Inc. ("CFBDS") acts as the Fund's distributor. Salomon Smith Barney Inc.
("SSB"), another subsidiary of SSBH, as well as certain other broker-dealers,
continues to sell Fund shares to the public as a member of the selling group.
SSB acts as the primary broker for its portfolio agency transactions. For the
period ended September 30, 1999 SSB received total brokerage commissions of
$11,490.
There is a contingent deferred sales charge ("CDSC") of 5.00% on Class B shares,
which applies if redemption occurs within one year from purchase. This CDSC
declines 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 the first year
of purchase. In certain cases, Class A shares have a 1.00% CDSC, which applies
if redemption occurs within the first year of purchase. 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 period ended September 30, 1999, CFBDS and SSB received sales charges of
approximately $883,000 and $407,000 on sales of the Portfolio's Class A and L
shares, respectively. In addition, CDSCs paid to SSB were approximately:
CLASS A CLASS B CLASS L
================================================================================
CDSCs $15,000 $55,000 $21,000
================================================================================
Pursuant to a Distribution Plan, the Portfolio pays a service fee with respect
to Class A, B and L shares calculated at the annual rate of 0.25% of the average
daily net assets for each respective class. The Portfolio also pays a
distribution fee with respect to Class B and L shares calculated at an annual
rate of 0.75% of the average daily net assets of each class.
For the period ended September 30, 1999, total Distribution Plan fees incurred
by the Portfolio were:
CLASS A CLASS B CLASS L
================================================================================
Distribution Plan Fees $61,665 $331,551 $243,541
================================================================================
All officers and one Director of the Fund are employees of SSB.
3. INVESTMENTS
During the period ended September 30, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
PURCHASE $124,809,349
- --------------------------------------------------------------------------------
SALES 6,969,718
================================================================================
At September 30, 1999, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $10,573,337
- --------------------------------------------------------------------------------
Gross unrealized appreciation (6,695,902)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 3,877,435
================================================================================
4. REPURCHASE AGREEMENTS
The Portfolio purchases (and its 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 Portfolio requires continual
maintenance of the market value of the collateral in amounts at least equal to
the repurchase price.
5. OPTION CONTRACTS
Premiums paid when put or call options are purchased by the Portfolio, represent
investments, which are marked-to-market daily. When a purchased option expires,
the Portfolio will realize a loss in the amount of
- --------------------------------------------------------------------------------
12 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
the premium paid. When the Portfolio enters into a closing sales transaction,
the Portfolio will realize a gain or loss depending on whether the sales
proceeds from the closing sales transaction are greater or less than the premium
paid for the option. When the Portfolio 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 Portfolio
exercises a call option, the cost of the security which the Portfolio purchases
upon exercise will be increased by the premium originally paid.
At September 30, 1999, the Portfolio had no purchased call or put options.
When a Portfolio writes a covered call or put option, an amount equal to the
premium received by the Portfolio is recorded as a liability, the value of which
is marked-to-market daily. When a written option expires, the Portfolio realizes
a gain equal to the amount of the premium received. When the Portfolio enters
into a closing purchase transaction, the Portfolio 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 written put
option is exercised, the amount of the premium originally received will reduce
the cost of the security which the Portfolio purchased upon exercise. When a
written index option is exercised, settlement is made in cash. The risk
associated with purchasing options is limited to the premium originally paid.
The Portfolio enters into options for hedging purposes. The risk in writing a
covered call option is that the Portfolio 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 Portfolio is
exposed to the risk of loss if the market price of the underlying security
declines. During the period ended September 30, 1999, the Portfolio did not
write any call or put options.
6. LENDING OF PORTFOLIO SECURITIES
The Portfolio has an agreement with its custodian whereby the custodian may lend
securities owned by the Portfolio to brokers, dealers and other financial
organizations. Fees earned by the Portfolio on securities lending are recorded
as interest income. Loans of securities by the Portfolio are collateralized by
cash, U.S. government securities or high quality money market instruments that
are maintained at all times in an amount at least equal to the current market
value of the loaned securities, plus a margin which may vary depending on the
type of securities loaned. The custodian establishes and maintains the
collateral in a segregated account. The Portfolio maintains exposure for the
risk of any losses in the investment of amounts received as collateral.
At September 30, 1999, the Portfolio had no securities on loan.
7. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are recognized
as assets. Securities equal to the initial margin amount are segregated by
custodian in the name of the broker. Additional securities are also segregated
up to the current market value of futures contracts. 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 Portfolio records a realized gain or
loss equal to the difference between the proceeds from (or
- --------------------------------------------------------------------------------
Smith Barney Small Cap Value Fund 13
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
cost of) the closing transactions and the Fund's basis in the contract. The
Portfolio enters into such contracts to hedge a portion of its portfolio. The
Portfolio bears the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts) and the credit
risk should a counterparty fail to perform under such contracts.
At September 30, 1999, the Portfolio had the following open futures contracts:
<TABLE>
<CAPTION>
EXPIRATION # 0F BASIS MARKET UNREALIZED
MONTH/YEAR CONTRACTS VALUE VALUE LOSS
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
FUTURES CONTRACTS TO BUY:
Russell 2000 Index 12/99 85 $18,996,012 $18,253,750 $(742,262)
==================================================================================================================================
</TABLE>
8. CAPITAL SHARES
At September 30, 1999, the Fund had ten billion shares of capital stock
authorized with a par value of $0.001 per share. The Portfolio 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.
At September 30, 1999, total paid-in capital amounted to the following for each
class:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS L
==================================================================================================================================
<S> <C> <C> <C>
Total Paid-in Capital $35,257,882 $59,211,090 $41,905,548
==================================================================================================================================
Transactions in shares of each class were as follows:
</TABLE>
PERIOD ENDED
SEPTEMBER 30, 1999*
---------------------------------
SHARES AMOUNT
================================================================================
CLASS A
Shares sold 5,201,406 $62,511,206
Shares reacquired (2,117,972) (27,239,936)
- --------------------------------------------------------------------------------
Net Increase 3,093,434 $35,271,270
================================================================================
CLASS B
Shares sold 5,263,462 $62,189,378
Shares reacquired (231,302) (2,933,992)
- --------------------------------------------------------------------------------
Net Increase 5,032,160 $59,255,386
================================================================================
CLASS L
Shares sold 3,831,202 $45,013,926
Shares reacquired (244,046) (3,082,736)
- --------------------------------------------------------------------------------
Net Increase 3,587,156 $41,931,190
================================================================================
* For the period from February 26, 1999 (commencement of operations) to
September 30, 1999.
- --------------------------------------------------------------------------------
14 1999 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
For a share of each class of capital stock outstanding
throughout the period:
<TABLE>
<CAPTION>
1999(1)(2) CLASS A CLASS B CLASS L
===========================================================================================
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.40 $11.40 $11.40
- -------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.15 0.09 0.09
Net realized and unrealized gain 0.55 0.56 0.56
- -------------------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 0.70 0.65 0.65
- -------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income -- -- --
- -------------------------------------------------------------------------------------------
Total Distributions -- -- --
- -------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.10 $12.05 $12.05
- -------------------------------------------------------------------------------------------
TOTAL RETURN++ 6.14% 5.70% 5.70%
- -------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $37,308 $60,620 $43,212
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses 1.32% 2.08% 2.08%
Net investment income 1.94 1.19 1.20
- -------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 7% 7% 7%
===========================================================================================
</TABLE>
(1) For the period from February 26, 1999 (inception date) to September 30,
1999.
(2) Per share amounts have been calculated using the monthly average
shares method.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
Smith Barney Small Cap Value Fund 15
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
SMITH BARNEY SMALL CAP VALUE FUND:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Smith Barney Small Cap Value Fund as of
September 30, 1999, the related statements of operations, changes in net assets,
and financial highlights for the period February 26, 1999 (commencement of
operations) to September 30, 1999. 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 generally accepted auditing
standards. 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 at
September 30, 1999 by correspondence with the Fund's custodian. As to securities
purchased or sold but not yet received or delivered, 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 Smith
Barney Small Cap Value Fund as of September 30, 1999, the results of its
operations, the changes in its net assets, and financial highlights for the
period February 26, 1999 (commencement of operations) to September 30, 1999, in
conformity with generally accepted accounting principles.
KPMG LLP
New York, New York
November 16, 1999
- --------------------------------------------------------------------------------
16 1999 Annual Report to Shareholders
<PAGE>
SMITH BARNEY
SMALL CAP VALUE FUND
DIRECTORS
Paul R. Ades
Herbert Barg
Dwight B. Crane
Frank G. Hubbard
Heath B. McLendon, Chairman
Jerome Miller
Ken Miller
OFFICERS
Heath B. McLendon
President and Chief Executive Officer
LEWIS E. DAIDONE
Senior Vice President and Treasurer
PETER J. HABLE
Vice President and Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
INVESTMENT MANAGER
SSB Citi Fund Management LLC
DISTRIBUTOR
CFBDS, Inc.
CUSTODIAN
PNC BANK, N.A.
SHAREHOLDER SERVICING AGENT
Smith Barney Private Trust
388 Greenwich Street, 22nd Floor
New York, New York 10013
Sub-Shareholder Servicing Agent
First Data Investor Services Group, Inc.
P.O. Box 9699
Providence, Rhode Island 02940-9699
This report is submitted for the general information of shareholders of Smith
Barney Small Cap Value Fund. It is not for distribution to prospective investors
unless accompanied by a current Prospectus for the Fund, which contains
information concerning the Fund's investment policies and expenses as well as
other pertinent information.
LOGO: SALOMON SMITH BARNEY
A MEMBER OF CITIGROUP
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
SMITH BARNEY
SMALL CAP VALUE FUND
388 Greenwich Street, MF-2
New York, New York 10013
WWW.SMITHBARNEY.COM/MUTUALFUNDS
FD01745 11/99
