SMITH BARNEY
SMALL CAP VALUE FUND
STYLE PURE SERIES | ANNUAL REPORT | SEPTEMBER 30, 2000
LOGO: Smith Barney Mutual Funds
YOUR SERIOUS MONEY. PROFESSIONALLY MANAGED.(SM)
NOT FDIC INSURED o NOT BANK GUARANTEED o MAY LOSE VALUE
<PAGE>
Style Pure Series
Annual Report o September 30, 2000
SMITH BARNEY
SMALL CAP VALUE FUND
Photo of: PETER HABLE
PORTFOLIO MANAGER
Photo of: JOHN GOODE
PORTFOLIO MANAGER
PETER HABLE
Peter Hable has more than 17 years of securities business experience and has
managed the Fund since its inception. Education: BS in Economics from Southern
Methodist University, MBA from the University of Pennsylvania's Wharton School
of Finance.
JOHN GOODE
John Goode has more than 31 years of securities business experience and has
managed the Fund since its inception. Education: BA in Economics, MBA from
Stanford University.
FUND OBJECTIVE
The Fund seeks long-term capital growth by investing primarily in common stock
and other equity securities of smaller capitalized U.S. companies. Smaller
capitalized companies are those whose market capitalization at the time of
investment is no greater than the market capitalization of companies in the
Russell 2000 Index*.
--------------------------------------------------------------------------------
* Russell 2000 Index measures the performance of the 2,000 smallest companies
in the Russell 3000 Index, which represents approximately 8% of the total
market capitalization of the Russell 3000 Index.
FUND FACTS
FUND INCEPTION
--------------------------------------------------------------------------------
February 26, 1999
MANAGER TENURE
--------------------------------------------------------------------------------
Since Inception
MANAGER INVESTMENT
INDUSTRY EXPERIENCE
--------------------------------------------------------------------------------
17 Years (Peter Hable)
31 Years (John Goode)
CLASS A CLASS B CLASS L
--------------------------------------------------------------------------------
NASDAQ SBVAX SBVBX SBVLX
Inception 2/26/99 2/26/99 2/26/99
AVERAGE ANNUAL TOTAL RETURNS AS OF SEPTEMBER 30, 2000
WITHOUT SALES CHARGES(1)
Class A Class B Class L
--------------------------------------------------------------------------------
One-Year 24.71% 23.70% 23.70%
--------------------------------------------------------------------------------
Since Inception+ 19.22 18.31 18.31
WITH SALES CHARGES(2)
Class A Class B Class L
--------------------------------------------------------------------------------
One-Year 18.44% 18.70% 21.48%
--------------------------------------------------------------------------------
Since Inception+ 15.45 16.03 17.54
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charges of 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.
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.
+Inception date for Class A, B and L shares is February 26, 1999.
--------------------------------------------------------------------------------
What's Inside
Your Investment in the Smith Barney Small Cap Value Fund .................. 1
A Message from the Chairman ............................................... 2
Smith Barney Small Cap Value Fund at a Glance ............................. 3
Letter from the Portfolio Managers ........................................ 4
Historical Performance .................................................... 9
Growth of $10,000 ......................................................... 11
Schedule of Investments ................................................... 12
Statement of Assets and Liabilities ....................................... 15
Statement of Operations ................................................... 16
Statements of Changes in Net Assets ....................................... 17
Notes to Financial Statements ............................................. 18
Financial Highlights ...................................................... 22
Tax Information ........................................................... 23
Independent Auditors' Report .............................................. 24
LOGO: Smith Barney Mutual Funds
YOUR SERIOUS MONEY. PROFESSIONALLY MANAGED.(SM)
Investment Products: Not FDIC Insured o Not Bank Guaranteed o May Lose Value
<PAGE>
YOUR INVESTMENT IN THE SMITH BARNEY SMALL CAP
VALUE FUND
Value managers Peter Hable and John Goode pay close attention to financials to
identify what they deem to be potential turnaround candidates in the small-cap
value arena. They believe that small companies often have unique advantages over
larger-sized companies such as single-business focus, high internal ownership
and smaller, more agile managements. They also believe that these factors may
help drive rapid growth.
A HIGHLY DISCIPLINED APPROACH TO STOCK SELECTION
Peter and John use both quantitative and fundamental methods to identify those
companies they believe have the potential to perform better than their industry
peers. They look for those companies with strong track records,
shareholder-oriented management teams and sound future plans.
CAREFUL EXAMINATION OF UNDISCOVERED VALUES
One of Peter and John's goals is to find stocks presently out-of-favor with low
prices relative to their earnings, book value and cash flow. They also seek out
those companies that offer a high return on invested capital.
A SEARCH FOR DYNAMIC TRENDS
Peter and John aim to identify those companies offering top products and
services with a dominant position in a market niche. In their opinion, these
companies are generally well positioned to positively benefit from the trends
driving innovation in the 21st century.
A DISTINGUISHED HISTORY OF MANAGING YOUR SERIOUS MONEY
Founded in 1873 and 1892, respectively, the firms of Charles D. Barney and
Edward B. Smith were among the earliest providers of securities information,
research and transactions. Merged in 1937, Smith Barney & Co. offered its
clients a powerful, blue-chip investment capability able to provide timely
information, advice and insightful asset management. Today, SSB Citi Fund
Management LLC ("SSB Citi") unites the distinguished history of Smith Barney &
Co. with the unparalleled global reach of its parent, Citigroup.
At SSB Citi, you gain access to blue-chip management delivered professionally.
We are proud to offer you, the serious investor, a variety of managed solutions.
1 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
A MESSAGE FROM THE CHAIRMAN
The new millennium, so far, has been marked by the higher volatility and
concerns that the bull market in stocks may be running out of steam. At SSB Citi
Fund Management LLC ("SSB Citi"), we have instituted many positive changes, with
the ultimate goal of offering our investors a well-rounded menu of stock and
bond funds that can be tailored to a wide range of investment objectives.
We believe that your serious money demands professional management. Since 1937,
Smith Barney has managed the serious money of individuals, their families and
their businesses. Today, with over $395.5 billion in assets under management,1
SSBCiti offers choices and solutions, uniting the distinguished history of Smith
Barney with the unparalleled global reach of its parent, Citigroup.
The Smith Barney family of funds represents a complex with a 60-year history of
investment expertise. In addition, Smith Barney is currently conducting an
extensive advertising campaign, highlighting a selection of the most popular
Smith Barney mutual funds and the investment professionals who manage them.
For those of you who are new shareholders, I would like to extend a warm welcome
to you on behalf of everyone here at SSB Citi. The Smith Barney Small Cap Value
Fund ("Portfolio") seeks long-term capital growth by investing primarily in the
stocks of companies with relatively small market capitalizations2 ("small cap")
representing several industry and market sectors. The Portfolio invests in small
cap companies whose market capitalization at the time of investment is within
the market capitalization range of the Russell 2000 Value Index ("Russell 2000
Value").3 As of September 30, 2000, the largest capitalization of a company in
the Russell 2000 Value was $3.16 billion and the smallest capitalization was $20
million. Experienced managers Peter Hable and John Goode and their investment
team look for small cap stocks that they believe sell at low prices relative to
several measures of value and where some dynamic change in a company or industry
may enhance stock price performance.
When you invest with SSB Citi you can do so with the confidence that your
interests come first, your investment success is paramount and that the ultimate
in resources is being committed to your financial success.
Thank you for your confidence in our investment management approach.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
October 23, 2000
PHOTO OF: HEATH B. MCLENDON
CHAIRMAN
------------
1 As of September 30, 2000. This figure represents SSB Citi's assets under
management for retail, institutional, money and separate accounts.
2 Capitalization is a company's outstanding shares times its share price.
------------
3 Russell 2000 Value measures the performance of those Russell 2000 companies
with lower price-to-book ratios and lower forecasted growth values.
Price-to-book ratio is the price of a stock divided by its net asset value.
Please note an investor cannot invest directly in an index.
2 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
SMITH BARNEY SMALL CAP VALUE FUND AT A GLANCE (UNAUDITED)
TOP TEN HOLDINGS*
1. BUFFETS, INC ....................................................... 2.5%
2. AMBASSADORS INTERNATIONAL, INC ..................................... 2.2
3. GOLDEN STATE BANCORP INC ........................................... 2.1
4. INVESTORS FINANCIAL SERVICES CORP .................................. 1.9
5. PIER 1 IMPORTS, INC ................................................ 1.9
6. SPIEKER PROPERTIES, INC ............................................ 1.9
7. CULLEN/FROST BANKERS, INC .......................................... 1.8
8. IDACORP, INC ....................................................... 1.8
9. EASTERN ENTERPRISES ................................................ 1.7
10. HEALTH MANAGEMENT ASSOCIATES, INC., CLASS A SHARES ................ 1.7
INDUSTRY DIVERSIFICATION*+
BAR CHART:
3.7% AUTOS & TRANSPORTATION
7.9% CAPITAL GOODS
17.0% CONSUMER DISCRETIONARY
3.6% ENERGY
22.3% FINANCIAL SERVICES
4.4% HEALTH CARE
4.9% MATERIALS & PROCESSING
14.4% REAL ESTATE
10.3% TECHNOLOGY
7.9% UTILITIES
3.6% OTHER
INVESTMENT BREAKDOWN*++
PIE CHART:
13.2% REPURCHASE AGREEMENT
0.8% U.S. TREASURY OBLIGATION
86.0% COMMON STOCK
* All information is as of September 30, 2000. Please note that Portfolio
holdings are subject to change.
+ As a percentage of total common stock.
++ As a percentage of total investments.
3 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
DEAR SHAREHOLDER,
We are pleased to provide the annual report for the Smith Barney Small Cap Value
Fund ("Portfolio") for the year ended September 30, 2000. In this report, we
have summarized the period's prevailing economic conditions and briefly outlined
the Portfolio's investment strategy. The information provided in this letter
represents the opinion of the managers and is not intended to be a forecast of
future events, a guarantee of future results nor investment advice. Further,
there is no assurance that certain securities will remain in or out of the
Portfolio.
Please refer to pages 12 through 14 for a complete list and percentage breakdown
of the Portfolio's holdings. A detailed summary of the Portfolio's performance
can be found in the appropriate sections that follow. Also, please note any
discussion of the Portfolio's holdings is as of September 30, 2000 and is
subject to change. We hope you find this report to be useful and informative.
PERFORMANCE UPDATE AND INVESTMENT STRATEGY
We are pleased to report for the year ended September 30, 2000, the Portfolio's
Class A shares, without and with sales charges returned 24.71% and 18.44%,
respectively. In comparison, the Russell 2000 Value Index ("Russell 2000
Value")1 returned 15.36% for the same period.
Text in box:
OUR RESEARCH TEAM FOCUSES ON SMALL CAPITALIZATION COMPANIES BECAUSE THE PRICING
INEFFICIENCIES INHERENT IN THE SMALL CAP MARKET OFTEN ALLOW 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 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 have a significant management ownership.
MARKET UPDATE
The striking valuation disparities between small and large cap stocks has
continued so far in 2000. As of September 30, 2000, the one hundred stocks with
the largest market capitalizations carried a median valuation of 30x forecasted
2000 earnings, while the two thousand stocks with market caps from $220 million
to $2 billion had a median multiple of 13.4x. Digging further down, roughly 24%
of the small cap universe, or over 300 stocks, sold below 10x trailing 1-year
earnings. The last time that such a significant proportion of the small cap
universe sold below 10x earnings was during the severe recessions of 1973 and
1991.
1 Russell 2000 Value measures the performance of those Russell 2000 companies
with lower price-to-book ratios and lower forecasted growth values.
Price-to-book ratio is the price of a stock divided by its net asset value.
Please note an investor cannot invest directly in an index.
4 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
As the economy has slowed, one would have expected the small cap value market to
have withered. Surprisingly, small cap value has been one of the top performing
asset categories year-to-date, outperforming both large cap value and large cap
growth stocks. In our opinion, there are several important factors supporting
better relative performance of small cap value stocks such as:
o Small cap stocks are incredibly inexpensive, selling at a historic 30%
discount to large cap stocks on a price-to-cash flow basis. At their peak,
small cap stocks have sold at a 50% price-to-cash flow premium, relative to
large companies;
o Consolidation of smaller companies through mergers, acquisitions and
leveraged buyouts continues at a record rate. We think corporate buyers and
private equity funds may be placing a floor under small cap value stocks;
and
o Severe outflow of money from small cap value funds appears to have ended.
While small cap value funds have been losing over $400 million per month on
average, during August and September the data indicates slightly positive
flows.
Text in box:
IN OUR OPINION WE ARE ALSO MOVING INTO A MORE FAVORABLE INTEREST-RATE
ENVIRONMENT FOR MANY SMALL CAP COMPANIES. INVARIABLY, SMALL CAP STOCKS HAVE
UNDERPERFORMED AS THE FEDERAL RESERVE BOARD ("FED") HAS RAISED INTEREST RATES,
IN AN ATTEMPT TO SLOW THE ECONOMY. WE BELIEVE WE HAVE SEEN THE LAST FED RATE
INCREASE AND THE ECONOMY IS SLOWING. CONSEQUENTLY, THE NEXT FED INTEREST RATE
MOVE MAY BE DOWNWARD, PROVIDING WHAT WE THINK IS A POSITIVE INTEREST RATE
DYNAMIC FOR SELECT SMALL CAP STOCKS.
Some of the Portfolio's industry sectors have begun to anticipate falling
interest rates already, most notably the financial sector. Earlier this year, we
were able to purchase a number of savings and loans at 5x to 6x depressed
earnings. Many of our financial holdings are now up over 50% for the year, such
as Golden State Bancorp Inc. (a financial services company whose principal
business consists of operating retail deposit branches) and Cullen/Frost
Bankers, Inc. (a company that offers commercial, consumer, international and
correspondent banking services). In our opinion, both companies' multiples have
5 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
gone from ridiculously inexpensive to merely cheap. As the yield curve2
normalizes, we believe the best earnings growth is still ahead for the
financials. We remain overweighted in the more defensive thrifts and
underweighted in corporate and consumer banks because of our concern about their
credit quality.
Text in box:
WE HAVE ARGUED FOR SOME TIME THAT INVESTOR ENTHUSIASM FOR TECHNOLOGY STOCKS HAD
REACHED LEVELS NEVER SEEN BEFORE IN OUR CAREERS AND THAT SPECULATION IN MANY
TECHNOLOGY SHARES WAS AT EPIDEMIC PROPORTIONS. IN THE RUSH TO EMBRACE THE
MANIFEST VIRTUES OF TECHNOLOGY, ONE CRITICAL FACT SEEMS TO HAVE BEEN LOST. IT
SEEMS CLEAR TO US THAT WALL STREET HAS CREATED TOO MANY "INTELLECTUAL PROPERTY"
COMPANIES AND THERE IS NOT ENOUGH ROOM TO ACCOMMODATE ALL OF THEIR BUSINESS
PLANS.
In particular, the supply of Internet stocks reached a saturation point and the
current correction of these stocks may continue to be harsh. Given that
technology companies post a large portion of their earnings in the fourth and
first quarter of every year, we expected selling pressure for technology stocks
during the summer months. Anticipating this pressure, we harvested many of our
technology gains earlier in the year, selling most of our large holdings in
Cypress Semiconductor Corp. (a designer and developer of a broad line of
high-performance digital and mixed-signal integrated circuits) and Maxtor Corp.
(a company that develops, manufactures and markets hard disk drive products).
As most mutual funds have their fiscal year ending on October 31, 2000, we are
currently in the thick of tax loss selling season. Historically, this has
produced some of our best buying opportunities, with some of this year's most
attractive values coming from selective technology stocks.
Today, it appears that many investors are beginning to question paying lofty
price-to-earnings ("P/E")3 ratios for larger companies, regardless of their
underlying growth rates. We believe the bull market for large cap stocks may
continue to slow, with large cap returns regressing to their historical
performance average. Given their extreme undervaluation, small cap value
------------
2 The yield curve is the graphical depiction of the relationship between the
yield on bonds of the same credit quality but different maturities.
3 P/E ratio is the price of a stock divided by its earnings per share.
6 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
stocks may offer much more competitive returns. Consequently, we believe the
Portfolio may be well poised to stand out again in 2001. (Of course, past
performance is not indicative of future results.)
PORTFOLIO UPDATE
By the end of the period, the Portfolio was made up of 98 stocks, which
represented 86% of the net asset value ("NAV").4 Roughly 13% of the Portfolio is
held in Russell 2000 Index ("Russell 2000")5 futures6 to keep the Portfolio
fully invested. We expect the percentage of the Portfolio's assets held in stock
index futures to be reduced over time and we plan to take advantage of
short-term price swings to add to our targeted stocks. And while no guarantees
can be given, we also anticipate that the number of holdings in the Portfolio
should remain at this level for the foreseeable future.
During the period, sector weightings for the Portfolio versus the Russell 2000
Value were slightly underweighted in the financial sector, the largest sector in
the Russell 2000 Value, which includes real estate investment trusts ("REITs").
With our bank holdings, as previously mentioned, the Portfolio was overweighted
in the less credit sensitive savings and loans and underweighted in consumer and
commercial banks. The Portfolio's largest holdings within this sector were
Golden State Bancorp Inc. and Cullen/Frost Bankers, Inc. Within the REIT portion
of the financial sector, we were overweighted in the office sector, with the
largest holding being Spieker Properties, Inc., one of the largest owners and
operators of office and industrial properties.
During the period, the Portfolio was also underweighted in the technology and
materials and processing sectors. As of September 30, 2000, one of the
Portfolio's largest technology holdings was JDA Software Group, Inc., a leading
international provider of comprehensive enterprise-wide software solutions. In
the near future, we are seeking to increase the Portfolio's technology weighting
as the tax loss selling season passes.
One of our largest holdings in the materials and processing sector is
Cleveland-Cliffs Inc., a supplier of iron products and services to the steel
industry. Within this sector, we have avoided a painful downdraft in the
chemical stocks, where we also hope to be opportunistic buyers.
As for the remaining sector weights, we have neutral weightings in consumer
discretionary, producer durables, utilities, health care, energy and consumer
staples. The Portfolio's largest holdings in the consumer discretionary sector
are the restaurant company Buffets, Inc., which was due to be acquired by Caxton
Iseman Capital in October 2000, and the travel service company Ambassadors
International, Inc. In producer durables, the Portfolio's largest holding was
United Stationers Inc., a distributor of traditional office products, computers
and related supplies.
In the utilities sector, the Portfolio's largest holdings during the period were
IDACORP, Inc., which is engaged in the generation, transmission, distribution,
sale and purchase of electric energy in Idaho, Oregon and Nevada, and Eastern
Enterprises, a distributor of natural gases in and around Boston, Massachusetts.
The hospital company Health Management Associates and the drug distribution
company AmeriSource remained our largest health care holdings. Peoples Energy
Corp., a holding company whose principal subsidiaries that are engaged in gas
distribution power generation, retail energy services, oil and gas production,
is one of the Portfolio's largest holdings within the utilities sector.
--------------
4 NAV is calculated by subtracting the total liabilities from the closing
value of all securities held by the Portfolio (plus other assets) and
dividing the results (total net assets) by the total number of shares
outstanding. The NAV fluctuates with the changes in the value of the
securities in which the Portfolio has invested.
5 Russell 2000 measures the performance of the 2,000 smallest companies in
the Russell 3000 Index. Please note an investor cannot invest directly in
an index.
6 Futures contracts are agreements to buy or sell a specific amount of a
commodity or financial instrument at a particular price on a stipulated
date.
7 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
In closing, we would like to 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 future.
Sincerely,
/s/ Peter J. Hable /s/ John G. Goode
Peter J. Hable John G. Goode
Vice President and Vice President and
Investment Officer Investment Officer
October 23, 2000
8 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL PERFORMANCE -- CLASS A SHARES
NET ASSET VALUE
-------------------------
BEGINNING END INCOME CAPITAL GAIN TOTAL
YEAR ENDED OF YEAR OF YEAR DIVIDENDS DISTRIBUTIONS RETURNS(1)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
9/30/00 $12.10 $14.85 $0.19 $0.00 24.71%
--------------------------------------------------------------------------------------------------------------------------------
Inception*-- 9/30/99 11.40 12.10 0.00 0.00 6.14+
================================================================================================================================
TOTAL $0.19 $0.00
================================================================================================================================
<CAPTION>
HISTORICAL PERFORMANCE -- CLASS B SHARES
NET ASSET VALUE
-------------------------
BEGINNING END INCOME CAPITAL GAIN TOTAL
YEAR ENDED OF YEAR OF YEAR DIVIDENDS DISTRIBUTIONS RETURNS(1)
================================================================================================================================
<C> <C> <C> <C> <C> <C>
9/30/00 $12.05 $14.76 $0.12 $0.00 23.70%
--------------------------------------------------------------------------------------------------------------------------------
Inception*-- 9/30/99 11.40 12.05 0.00 0.00 5.70+
================================================================================================================================
TOTAL $0.12 $0.00
================================================================================================================================
<CAPTION>
HISTORICAL PERFORMANCE -- CLASS L SHARES
NET ASSET VALUE
-------------------------
BEGINNING END INCOME CAPITAL GAIN TOTAL
YEAR ENDED OF YEAR OF YEAR DIVIDENDS DISTRIBUTIONS RETURNS(1)
================================================================================================================================
<C> <C> <C> <C> <C> <C>
9/30/00 $12.05 $14.76 $0.12 $0.00 23.70%
--------------------------------------------------------------------------------------------------------------------------------
Inception*-- 9/30/99 11.40 12.05 0.00 0.00 5.70+
================================================================================================================================
TOTAL $0.12 $0.00
================================================================================================================================
IT IS THE PORTFOLIO'S POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
9 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
WITHOUT SALES CHARGES(1)
--------------------------------------------------
CLASS A CLASS B CLASS L
===============================================================================================
<S> <C> <C> <C>
Year Ended 9/30/00 24.71% 23.70% 23.70%
-----------------------------------------------------------------------------------------------
Inception* through 9/30/00 19.22 18.31 18.31
===============================================================================================
<CAPTION>
WITH SALES CHARGES(2)
---------------------------------------------------
CLASS A CLASS B CLASS L
===============================================================================================
<S> <C> <C> <C>
Year Ended 9/30/00 18.44% 18.70% 21.48%
-----------------------------------------------------------------------------------------------
Inception* through 9/30/00 15.45 16.03 17.54
===============================================================================================
CUMULATIVE TOTAL RETURNS
WITHOUT SALES CHARGES(1)
===============================================================================================
<S> <C>
Class A (Inception* through 9/30/00) 32.36%
-----------------------------------------------------------------------------------------------
Class B (Inception* through 9/30/00) 30.75
-----------------------------------------------------------------------------------------------
Class L (Inception* through 9/30/00) 30.75
===============================================================================================
</TABLE>
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to Class
B and L shares.
(2) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum initial sales charges of 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.
+ 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.
10 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
HISTORICAL PERFORMANCE (UNAUDITED)
GROWTH OF $10,000 INVESTED IN CLASS A, B AND L SHARES OF THE
SMITH BARNEY SMALL CAP VALUE FUND VS. THE RUSSELL 2000 VALUE INDEX+
--------------------------------------------------------------------------------
February 1999 -- September 2000
<TABLE>
LINE CHART:
<CAPTION>
SMITH BARNEY SMALL CAP SMITH BARNEY SMALL CAP SMITH BARNEY SMALL CAP RUSSELL 2000
FUND - CLASS A VALUE FUND - CLASS B VALUE FUND - CLASS L VALUE INDEX
<S> <C> <C> <C>
9500 10000 9896 10000
9633 10132 10026 9918
11092 11649 11528 11560
10083 10570 10460 10656
10229 10701 10590 10819
10916 11401 11282 11233
11609 12092 11966 11452
12575 13075 12939 12292
+ Hypothetical illustration of $10,000 invested in Class A, B and L shares at
inception on February 26, 1999, assuming deduction of the maximum 5.00%
sales charge at the time of investment for Class A shares, the deduction of
the maximum 5.00% CDSC for Class B shares and the deduction of the 1.00%
CDSC for Class L shares at the time of investment and reinvestment of
dividends and capital gains, if any, through September 30, 2000. The
Russell 2000 Value Index is a capitalization weighted total return index
which is comprised of 2000 of the smallest capitalized U.S. domiciled
companies with less-than-average growth orientation whose common stock is
traded in the United States on the New York Stock Exchange, American Stock
Exchange and NASDAQ. The Index is unmanaged and is not subject to the same
management and trading expenses as a mutual fund. An investor cannot invest
directly in an index.
ALL FIGURES REPRESENT PAST PERFORMANCE AND ARE NOT A GUARANTEE OF FUTURE
RESULTS. Investment returns and principal value will fluctuate, and redemption
values may be more or less than the original cost. No adjustment has been made
for shareholder tax liability on dividends or capital gains.
</TABLE>
11 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 2000
SHARES SECURITY VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK -- 86.0%
AUTOS & Transportation-- 3.2%
24,000 BorgWarner, Inc. $ 795,000
65,500 CNF Transportation Inc. 1,457,375
69,000 Kirby Corp.* 1,354,125
123,000 Wisconsin Central Transportation Corp.* 1,299,188
----------------------------------------------------------------------------------------------------------------------------------
4,905,688
----------------------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS -- 6.8%
70,000 Crane Co. 1,601,250
82,500 Federal Signal Corp. 1,639,688
59,200 IDEX Corp. 1,653,900
9,200 Innovative Solutions and Support, Inc.* 157,550
90,000 Input/Output, Inc.* 866,250
42,000 Kaydon Corp. 966,000
46,000 Precision Castparts Corp. 1,765,250
51,500 Roper Industries, Inc. 1,709,156
----------------------------------------------------------------------------------------------------------------------------------
10,359,044
----------------------------------------------------------------------------------------------------------------------------------
CONSUMER DISCRETIONARY -- 14.6%
152,000 Ambassadors International, Inc.* 2,840,500
104,500 American Greetings Corp., Class A Shares 1,828,750
32,500 Applebee's International, Inc. 747,500
239,500 Buffets, Inc.* 3,293,125
43,000 Callaway Golf Co. 661,125
43,000 Corn Products International, Inc. 978,250
31,000 Dean Foods Co. 1,030,750
45,500 Footstar, Inc.* 1,470,219
90,000 Furniture Brands International, Inc.* 1,496,250
48,500 Lancaster Colony Corp. 1,191,281
45,000 Liz Claiborne, Inc. 1,732,500
21,000 The Neiman Marcus Group, Inc., Class A Shares* 681,187
180,000 Pier 1 Imports, Inc. 2,441,250
72,000 Ross Stores, Inc. 1,035,000
15,000 Royal Caribbean Cruises Ltd. 386,100
120,000 The Stride Rite Corp. 607,500
----------------------------------------------------------------------------------------------------------------------------------
22,421,287
----------------------------------------------------------------------------------------------------------------------------------
ENERGY -- 3.1%
20,000 Barrett Resources Corp.*+ 756,250
45,000 Cross Timbers Oil Co. 863,437
20,000 Midcoast Energy Resources, Inc. 411,250
37,500 Peoples Energy Corp. 1,251,562
25,000 Tosco Corp. 779,688
30,000 Varco International, Inc.* 624,375
----------------------------------------------------------------------------------------------------------------------------------
4,686,562
----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 19.2%
45,000 21st Century Insurance Group 762,188
39,000 Bank United Corp., Class A Shares 1,976,812
92,000 Banknorth Group, Inc.+ 1,644,500
87,000 The CIT Group, Inc., Class A Shares+ 1,522,500
50,000 Countrywide Credit Industries, Inc. 1,887,500
SEE NOTES TO FINANCIAL STATEMENTS.
12 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
<CAPTION>
SCHEDULE OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 2000
SHARES SECURITY VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL SERVICES-- 19.2% (CONTINUED)
75,000 Cullen/Frost Bankers, Inc. $ 2,437,500
500 Federal Agricultural Mortgage Corp., Class C Shares* 8,813
35,000 First Republic Bank* 1,054,375
48,000 FirstMerit Corp. 1,101,000
140,000 Fremont General Corp. 481,250
115,000 Golden State Bancorp Inc. 2,716,875
49,500 GreenPoint Financial Corp. 1,466,437
40,000 Investors Financial Services Corp. 2,525,000
31,000 Radian Group Inc. 2,092,500
79,000 Sky Financial Group, Inc. 1,402,250
35,000 W.R. Berkley Corp. 1,209,687
64,800 Waddell & Reed Financial, Inc., Class A Shares 2,008,800
45,000 Webster Financial Corp. 1,212,188
35,000 Wilmington Trust Corp. 1,876,875
----------------------------------------------------------------------------------------------------------------------------------
29,387,050
----------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE -- 3.8%
45,000 AmeriSource Health Corp., Class A Shares*+ 2,115,000
85,000 Foundation Health Systems, Inc., Class A Shares* 1,413,125
110,000 Health Management Associates, Inc., Class A Shares* 2,289,375
----------------------------------------------------------------------------------------------------------------------------------
5,817,500
----------------------------------------------------------------------------------------------------------------------------------
MACHINERY -- 1.2%
160,000 AGCO Corp. 1,900,000
----------------------------------------------------------------------------------------------------------------------------------
MATERIALS & Processing -- 4.2%
17,000 AptarGroup, Inc. 406,938
40,000 CIRCOR International, Inc. 412,500
58,000 Cleveland-Cliffs Inc. 1,326,750
90,000 Engelhard Corp. 1,462,500
83,100 Lyondell Chemical Co. 981,619
65,000 RPM, Inc. 589,063
10,000 Universal Foods Corp. 203,750
75,000 Wolverine Tube, Inc.* 1,115,625
----------------------------------------------------------------------------------------------------------------------------------
6,498,745
----------------------------------------------------------------------------------------------------------------------------------
PAPER & Related Products -- 0.3%
36,800 Pope & Talbot, Inc. 526,700
----------------------------------------------------------------------------------------------------------------------------------
PRODUCER DURABLES -- 1.6%
40,000 Granite Construction Inc. 970,000
54,500 United Stationers Inc.* 1,464,687
----------------------------------------------------------------------------------------------------------------------------------
2,434,687
----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE -- 12.4%
40,000 Avalonbay Communities, Inc.+ 1,907,500
41,250 Boston Properties, Inc.+ 1,771,172
95,000 Catellus Development Corp.* 1,662,500
21,000 Centex Corp. 674,625
25,000 Clayton Homes, Inc. 250,000
44,000 Cousins Properties, Inc. 1,894,750
85,000 Duke-Weeks Realty Corp. 2,050,625
40,000 General Growth Properties, Inc. 1,287,500
65,000 Highwoods Properties, Inc. 1,535,625
SEE NOTES TO FINANCIAL STATEMENTS.
13 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
<CAPTION>
Schedule of Investments (continued) September 30, 2000
SHARES SECURITY VALUE
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
REAL ESTATE -- 12.4% (continued)
85,100 iStar Financial Inc. $ 1,909,431
35,000 Kimco Realty Corp. 1,478,750
44,500 Spieker Properties, Inc. 2,561,531
----------------------------------------------------------------------------------------------------------------------------------
18,984,009
----------------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY -- 8.8%
21,500 Alliant Techsystems Inc.*+ 1,765,687
32,800 Artesyn Technologies, Inc.*+ 955,300
74,000 Belden Inc. 1,748,250
100,000 Citizens Communications Co.* 1,343,750
20,000 Cypress Semiconductor Corp.* 831,250
65,000 Diebold, Inc. 1,726,562
18,000 Geoworks Corp.* 132,750
30,000 Glenayre Technologies, Inc.* 326,250
137,500 JDA Software Group, Inc.* 1,753,125
175,000 Maxtor Corp.* 1,837,500
29,800 Varian Semiconductor Equipment Associates, Inc.* 1,115,638
----------------------------------------------------------------------------------------------------------------------------------
13,536,062
----------------------------------------------------------------------------------------------------------------------------------
UTILITIES -- 6.8%
47,500 Avista Corp.+ 1,068,750
35,100 Eastern Enterprises 2,239,819
43,000 Energy East Corp. 972,875
52,500 IDACORP, Inc. 2,428,125
30,000 Puget Sound Energy, Inc. 761,250
57,500 Washington Gas Light Co. 1,545,313
42,500 WPS Resources Corp. 1,391,875
----------------------------------------------------------------------------------------------------------------------------------
10,408,007
----------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $109,972,375) 131,865,341
==================================================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
==================================================================================================================================
U.S. TREASURY OBLIGATION-- 0.8%
<C> <C>
$ 1,200,000 U.S. Treasury Bill, due 12/21/00+
(Cost -- $1,183,668) 1,183,668
==================================================================================================================================
SUB-TOTAL INVESTMENTS
(Cost -- $111,156,043) 133,049,009
==================================================================================================================================
REPURCHASE AGREEMENT -- 13.2%
20,353,000 Morgan Stanley Dean Witter & Co., 6.480% due 10/2/00; Proceeds at maturity -- $20,363,991;
(Fully collateralized by U.S. Treasury Notes, 5.875% to 6.500% due 11/30/01 to 10/15/06;
Market value -- $20,861,558) (Cost -- $20,353,000) 20,353,000
==================================================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $131,509,043**) $153,402,009
==================================================================================================================================
* Non-income producing security.
+ Security is segregated by the custodian for futures contracts commitments.
** Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
14 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 2000
<CAPTION>
ASSETS:
<S> <C>
Investments, at value (Cost-- $111,156,043) $ 133,049,009
Repurchase agreement, at value (Cost-- $20,353,000) 20,353,000
Cash 929
Receivable for securities sold 1,164,086
Receivable for Fund shares sold 422,449
Dividends and interest receivable 189,714
---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 155,179,187
---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 2,395,683
Payable for Fund shares purchased 414,481
Management fees payable 89,262
Payable to broker-- variation margin 64,625
Distribution fees payable 27,383
Accrued expenses 70,719
---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,062,153
---------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $152,117,034
=================================================================================================================================
NET ASSETS:
Par value of capital shares $ 10,290
Capital paid in excess of par value 120,461,828
Undistributed net investment income 673,271
Accumulated net realized gain from security transactions and futures contracts 9,355,467
Net unrealized appreciation of investments and futures contracts 21,616,178
---------------------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $152,117,034
=================================================================================================================================
SHARES OUTSTANDING:
Class A 2,741,067
----------------------------------------------------------------------------------------------------------------------------
Class B 4,412,109
----------------------------------------------------------------------------------------------------------------------------
Class L 3,136,677
----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A (and redemption price) $14.85
----------------------------------------------------------------------------------------------------------------------------
Class B * $14.76
----------------------------------------------------------------------------------------------------------------------------
Class L ** $14.76
----------------------------------------------------------------------------------------------------------------------------
MAXIMUM PUBLIC OFFERING PRICE PER SHARE:
Class A (net asset value plus 5.26% of net asset value per share) $15.63
----------------------------------------------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $14.91
=================================================================================================================================
* 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.
15 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 2000
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Dividends $ 2,906,779
Interest 571,585
---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 3,478,364
---------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Distribution fees (Note 2) 1,090,648
Management fees (Note 2) 1,019,491
Shareholder and system servicing fees 150,987
Registration fees 116,018
Shareholder communications 75,131
Audit and legal 18,245
Directors' fees 14,914
Custody 6,953
Other 7,024
---------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 2,499,411
---------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 978,953
---------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS AND FUTURES CONTRACTS (NOTES 3 AND 7):
Realized Gain From:
Security transactions (excluding short-term securities) 7,657,677
Futures contracts 1,271,230
---------------------------------------------------------------------------------------------------------------------------------
NET REALIZED GAIN 8,928,907
---------------------------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments and Futures Contracts:
Beginning of year 3,135,173
End of year 21,616,178
---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION 18,481,005
---------------------------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS AND FUTURES CONTRACTS 27,409,912
---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS $28,388,865
=================================================================================================================================
SEE NOTES TO FINANCIAL STATEMENTS.
16 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 2000
AND THE PERIOD ENDED SEPTEMBER 30, 1999
2000 1999(a)
=================================================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 978,953 $ 1,169,264
Net realized gain 8,928,907 377,787
Increase in net unrealized appreciation 18,481,005 3,135,173
---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS 28,388,865 4,682,224
---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,499,499) --
---------------------------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS (1,499,499) --
---------------------------------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 51,960,306 169,714,510
Net asset value of shares issued for reinvestment of dividends 1,430,802 --
Cost of shares reacquired (69,303,510) (33,256,664)
---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS FROM FUND SHARE TRANSACTIONS (15,912,402) 136,457,846
---------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS 10,976,964 141,140,070
NET ASSETS:
Beginning of year 141,140,070 --
---------------------------------------------------------------------------------------------------------------------------------
END OF YEAR* $152,117,034 $141,140,070
=================================================================================================================================
* Includes undistributed net investment income of: $673,271 $1,242,590
=================================================================================================================================
(a) For the period from February 26, 1999 (commencement of operations) to
September 30, 1999.
SEE NOTES TO FINANCIAL STATEMENTS.
17 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
</TABLE>
<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 nine other separate investment portfolios: Peachtree Growth Fund,
Smith Barney Investment Grade Bond Fund, Smith Barney Government Securities
Fund, Smith Barney Hansberger Global Value Fund, Smith Barney Hansberger Global
Small Cap Value Fund, Smith Barney Premier Selections Large Cap Fund, Smith
Barney Premier Selections All Cap Growth Fund, Smith Barney Premier Selections
Global Growth 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, 2000,
reclassifications were made to the Portfolio'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 (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"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc.
("Citigroup"), acts as investment manager to the Portfolio. 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.
Citi Fiduciary Trust Company ("CFTC"), another subsidiary of Citigroup, acts as
the Portfolio's transfer agent and PFPC Global Fund Services ("PFPC") acts as
the Portfolio's
18 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
sub-transfer agent. CFTC receives account fees and asset-based fees that vary
according to the size and type of account. PFPC is responsible for shareholder
recordkeeping and financial processing for all shareholder accounts and is paid
by CFTC. For the year ended September 30, 2000, the Portfolio paid transfer
agent fees of $136,481 to CFTC.
Effective June 5, 2000, Salomon Smith Barney Inc. ("SSB"), another subsidiary of
SSBH, became the Portfolio's distributor replacing CFBDS, Inc. ("CFBDS"). In
addition, SSB acts as the primary broker for the Portfolio's agency
transactions. Certain other broker-dealers, continue to sell Portfolio shares to
the public as members of the selling group. For the year ended September 30,
2000, SSB and its affiliates received brokerage commissions of $14,460.
There are maximum initial sales charges of 5.00% and 1.00% for Class A and L
shares, respectively. 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 year ended September 30, 2000, SSB and CFBDS received sales charges of
approximately $162,000 and $72,000 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 $10,000 $221,000 $30,000
================================================================================
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 year ended September 30, 2000, total Distribution Plan Fees incurred by
the Portfolio were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $89,558 $591,585 $409,505
================================================================================
All officers and one Director of the Fund are employees of SSB.
3. Investments
During the year ended September 30, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $60,122,306
--------------------------------------------------------------------------------
Sales 76,357,448
================================================================================
At September 30, 2000, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $27,472,210
Gross unrealized depreciation (5,579,244)
--------------------------------------------------------------------------------
Net unrealized appreciation $21,892,966
================================================================================
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 (plus accrued interest) 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 the premium paid. When the
Portfolio enters into a closing sales transaction, the Portfolio will realize a
gain or loss depending on whether
19 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 2000, the Portfolio had no purchased call or put option
contracts.
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 year ended September 30, 2000, the Portfolio did not write any call
or put option contracts.
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, 2000, 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 cost of) the closing
transactions and the Portfolio'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.
20 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
At September 30, 2000, the Portfolio had the following open futures contracts:
<TABLE>
<CAPTION>
# OF BASIS MARKET UNREALIZED
PURCHASED CONTRACTS CONTRACTS EXPIRATION VALUE VALUE LOSS
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Russell 2000 55 12/00 $14,780,288 $14,503,500 $(276,788)
====================================================================================================================================
</TABLE>
8. Capital Shares
At September 30, 2000, 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, 2000, 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 $31,606,666 $51,900,356 $36,965,096
====================================================================================================================================
</TABLE>
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999*
---------------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
==================================================================================================================================
<S> <C> <C> <C> <C>
CLASS A
Shares sold 2,500,130 $ 33,819,616 5,201,406 $ 62,511,206
Shares issued on reinvestment 44,645 522,797 -- --
Shares reacquired (2,887,142) (37,993,629) (2,117,972) (27,239,936)
----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (342,367) $ (3,651,216) 3,083,434 $ 35,271,270
==================================================================================================================================
CLASS B
Shares sold 741,861 $ 9,546,127 5,263,462 $ 62,189,378
Shares issued on reinvestment 45,142 528,615 -- --
Shares reacquired (1,407,054) (17,395,476) (231,302) (2,933,992)
----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (620,051) $ (7,320,734) 5,032,160 $ 59,255,386
==================================================================================================================================
CLASS L
Shares sold 654,975 $ 8,594,563 3,831,202 $ 45,013,926
Shares issued on reinvestment 32,399 379,390 -- --
Shares reacquired (1,137,853) (13,914,405) (244,046) (3,082,736)
----------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) (450,479) $ (4,940,452) 3,587,156 $ 41,931,190
==================================================================================================================================
* For the period from February 26, 1999 (commencement of operations) to
September 30, 1999.
</TABLE>
21 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
FINANCIAL HIGHLIGHTS
For a share of each class of capital stock outstanding throughout each year
ended September 30, except where noted:
<TABLE>
<CAPTION>
CLASS A SHARES 2000(1) 1999(1)(2)
===============================================================================================================================
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.10 $11.40
-------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.16 0.15
Net realized and unrealized gain 2.78 0.55
-------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 2.94 0.70
-------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.19) --
-------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.19) --
-------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $14.85 $12.10
-------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 24.71% 6.14%++
-------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $40,693 $37,308
-------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 1.28% 1.32%+
Net investment income 1.28 1.94+
-------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 48% 7%
===============================================================================================================================
<CAPTION>
CLASS B SHARES 2000(1) 1999(1)(2)
===============================================================================================================================
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.05 $11.40
-------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.07 0.09
Net realized and unrealized gain 2.76 0.56
-------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 2.83 0.65
-------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.12) --
-------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.12) --
-------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $14.76 $12.05
-------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 23.70% 5.70%++
-------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $65,125 $60,620
-------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.04% 2.08%+
Net investment income 0.52 1.19+
-------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 48% 7%
===============================================================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) For the period from February 26, 1999 (inception date) to September 30,
1999.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
22 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of each class of capital stock outstanding throughout each year
ended September 30, except where noted:
<CAPTION>
CLASS L SHARES 2000(1) 1999(1)(2)
===============================================================================================================================
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $12.05 $11.40
-------------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS:
Net investment income 0.07 0.09
Net realized and unrealized gain 2.76 0.56
-------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME FROM OPERATIONS 2.83 0.65
-------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS FROM:
Net investment income (0.12) --
-------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.12) --
-------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $14.76 $12.05
-------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 23.70% 5.70%++
-------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF YEAR (000S) $46,299 $43,212
-------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS:
Expenses 2.04% 2.08%+
Net investment income 0.52 1.20+
-------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 48% 7%
===============================================================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) For the period from February 26, 1999 (inception date) to September 30,
1999.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
</TABLE>
TAX INFORMATION (UNAUDITED)
For Federal tax purposes the Portfolio hereby designates for the fiscal year
ended September 30, 2000:
o A corporate dividends received deduction of 67.27%.
A total of 0.83% of the ordinary dividends paid by the Portfolio from net
investment income are derived from Federal obligations and may be exempt from
taxation at the state level.
23 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
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 Smith Barney Small Cap Value Fund of Smith
Barney Investment Funds Inc. as of September 30, 2000, the related statement of
operations for the year then ended, and the statements of changes in net assets
and financial highlights for the year then ended and for the period from
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 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 September 30, 2000, by correspondence with the custodian.
As to securities purchased and sold but not received and 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 of Smith Barney Investment Funds Inc. as of
September 30, 2000, the results of its operations for the year then ended, and
the changes in its net assets and financial highlights for the year then ended
and for the period from February 26, 1999 to September 30, 1999, in conformity
with accounting principles generally accepted in the United States of America.
KPMG LLP
New York, New York
November 13, 2000
24 SMITH BARNEY SMALL CAP VALUE FUND | 2000 Annual Report to Shareholders
<PAGE>
SMITH BARNEY
SMALL CAP VALUE FUND
DIRECTORS
Peter 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
John G. Goode
Vice President and
Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
INVESTMENT MANAGER
SSB Citi Asset Management LLC
DISTRIBUTOR
Salomon Smith Barney Inc.
CUSTODIAN
PFPC Trust Company
TRANSFER AGENT
Citi Fiduciary Trust Company
125 Broad Street, 11th Floor
New York, New York 10004
SUB-TRANSFER AGENT
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island
02940-9699
<PAGE>
SMITH BARNEY SMALL CAP VALUE FUND
--------------------------------------------------------------------------------
This report is submitted for the general information of the shareholders of
Smith Barney Small Cap Value Fund, but it also may 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
Portfolio. If used as sales material after December 31, 2000, this report must
be accompanied by performance information for the most recently completed
calendar quarter.
SMITH BARNEY SMALL CAP VALUE FUND
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
For complete information on any of the 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.smithbarney.com/mutualfunds
Logo: Salomon Smith Barney
A member of citigroup
Salomon Smith Barney is a registered service mark of Salomon Smith Barney Inc.
FD01745 11/00
<PAGE>
SMITH BARNEY
SMALL CAP GROWTH FUND
Style Pure Series | Annual Report | September 30, 2000
LOGO: Smith Barney
Mutual Funds
Your Serious Money, Professionally Managed. SM
--------------------------------------------------------------------------------
Not Fdic Insured o Not Bank Guaranteed o May Lose Value
--------------------------------------------------------------------------------
<PAGE>
Photo of: Timothy Woods
Timothy Woods
PORTFOLIO MANAGER
Style Pure Series
Annual Report o September 30, 2000
SMITH BARNEY
SMALL CAP GROWTH FUND
TIMOTHY WOODS
Timothy Woods, CFA has more than 15 years of securities business experience.
Education: BS in Accounting from Florida A&M, MBA in Finance from the University
of Pennsylvania's Wharton School of Finance.
FUND OBJECTIVE
The Fund seeks long-term growth of capital. The Fund invests primarily in equity
securities of high-growth companies. These companies possess a market
capitalization within the market capitalization range of companies in the
Russell 2000 Growth Index (the "Index") at the time of the Fund's investment.
The size of companies in the Index changes with market conditions and the
composition of the Index.
FUND FACTS
FUND INCEPTION
----------------------------
November 30, 1999
MANAGER TENURE
----------------------------
Since Inception
MANAGER INVESTMENT
INDUSTRY EXPERIENCE
----------------------------
15 Years
CLASS A CLASS B
------------------------------------
NASDAQ SBSGX SBYBX
------------------------------------
Inception 11/30/99 11/30/99
------------------------------------
CLASS L CLASS 1
------------------------------------
NASDAQ SBSLX SBCFX
------------------------------------
Inception 11/30/99 9/11/00
------------------------------------
Average Annual Total Returns as of September 30, 2000
WITHOUT SALES CHARGES(1)
Class A Class B Class L Class 1
---------------------------------------------------------------
Since Inception+++ 50.45% 49.48% 49.56% 2.09%
---------------------------------------------------------------
WITH SALES CHARGES(2)
Class A Class B Class L Class 1
---------------------------------------------------------------
Since Inception+++ 42.92% 44.48% 47.01% (6.60)%
---------------------------------------------------------------
(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, L and 1 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, L and 1 shares reflect the
deduction of the maximum initial sales charges of 5.00%, 1.00% and 8.50%,
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.
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.
+ Inception date for Class A, B and L shares is November 30, 1999. Inception
date for Class 1 shares is September 11, 2000.
++ Total returns are not annualized, as they may not be representative of the
total return for the year.
--------------------------------------------------------------------------------
What's Inside
Your Investment in the Smith Barney
Small Cap Growth Fund 1
A Message from the Chairman 2
Fund at a Glance 3
Letter from the Portfolio Manager 4
Historical Performance 8
Growth of $10,000 10
Schedule of Investments 11
Statement of Assets and Liabilities 15
Statement of Operations 16
Statement of Changes in Net Assets 17
Notes to Financial Statements 18
Financial Highlights 23
Independent Auditors' Report 24
LOGO: Smith Barney
Mutual Funds
Your Serious Money, Professionally Managed. SM
Investment Products: Not FDIC Insured o Not Bank Guaranteed o May Lose Value
<PAGE>
Your Investment in the SMITH BARNEY SMALL CAP
GROWTH FUND
Under the guidance of manager Tim Woods, the Smith Barney Small Cap Growth Fund
uses a "bottom-up"* approach toidentify opportunities in the small-cap growth
sector of the market. Tim generally targets relatively unknown and financially
sound companies that demonstrate the potential to become larger and more mature
mid-cap companies.
[GLOBE SYMBOL]
Participation in the Global Economy
Small-cap companies with increasing earnings and sales are often in industries
that participate in the benefits of the rapidly growing global economy. Tim's
goal is to identify those small and innovative companies that are participating
in positive and dynamic trends throughout several industries.
[CHECKMARK SYMBOL]
Entrepreneurial Management
Tim believes that success is often a function of extraordinary leadership. Tim
looks for companies with entrepreneurial, seasoned and forward-looking
management. Tim evaluates management commitment and its long-term strategy
through regular company visits.
[PILLAR SYMBOL]
A Distinguished History of Managing Your Serious Money
Founded in 1873 and 1892, respectively, the firms of Charles D. Barney and
Edward B. Smith were among the earliest providers of securities information,
research and transactions. Merged in 1937, Smith Barney & Co. offered its
clients a powerful, blue-chip investment capability able to provide timely
information, advice and insightful asset management. Today, SSB Citi Fund
Management, LLC ("SSB Citi") unites the distinguished history of Smith Barney &
Co. with the unparalleled global reach of its parent, Citigroup.
At SSB Citi, you gain access to blue-chip management delivered professionally.
We are proud to offer you, the serious investor, a variety of managed solutions.
* Bottom-up investing is a search for outstanding performance of individual
stocks before considering the impact of economic trends.
1 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
A MESSAGE FROM THE CHAIRMAN
Photo of: Heath B. McLendon
Chairman
The new millennium, so far, has been marked by higher volatility and concerns
that the bull market in stocks may be running out of steam. At SSB Citi Fund
Management LLC ("SSB Citi"), we have instituted many positive changes, with the
ultimate goal of offering our investors a well-rounded menu of stock and bond
funds that can be tailored to a wide range of investment objectives.
We believe that your serious money demands professional management. Since 1937,
Smith Barney has managed the serious money of individuals, their families and
their businesses. Today, with over $395.5 billion in assets under management,(1)
SSB Citi offers choices and solutions, uniting the distinguished history of
Smith Barney with the unparalleled global reach of its parent, Citigroup.
The Smith Barney family of funds represents a complex with a 60-year history of
investment expertise. In addition, Smith Barney is currently conducting an
extensive advertising campaign, highlighting a selection of the most popular
Smith Barney mutual funds and the investment professionals who manage them.
For those of you who are new shareholders, I would like to extend a warm welcome
to you on behalf of everyone here at SSB Citi. The Smith Barney Small Cap Growth
Fund seeks to provide investors with long-term capital growth by investing in
small innovative companies that have or have the potential to exhibit attractive
growth characteristics. The Fund invests in small cap companies whose market
capitalization(2) at the time of investment is within the market capitalization
range of the Russell 2000 Growth Index(3) Within the small capitalization
universe Portfolio manager Tim Woods looks to identify what he deems to be
cutting-edge companies with strong financials and a skilled management team that
is committed to long-term growth.
When you invest with SSB Citi you can do so with the confidence that your
interests come first, your investment success is paramount and that the ultimate
in resources is being committed to your financial success.
Thank you for your confidence in our investment management approach.
Sincerely,
/S/ Heath B. McLendon
Heath B. McLendon
Chairman
October 18, 2000
------------
1 As of September 30, 2000. This figure represents SSB Citi's assets under
management for retail, institutional, money and separate accounts.
2 Capitalization is a company's outstanding shares times its share price.
3 Russell 2000 Growth Index measures the performance of those Russell 2000
companies with higher price-to-book ratios and higher fore-casted growth
values. (Price-to-book ratio is the price of a stock divided by its net
asset value.) Please note an investor cannot invest directly in an index.
2 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
SMITH BARNEY SMALL CAP GROWTH FUND at a Glance (unaudited)
TOP TEN HOLDINGS*+
=====================================================================
1. TranSwitch Corp. ..........................................2.4%
2. Calpine Corp. .............................................2.3
3. Micromuse, Inc. ...........................................2.2
4. Tollgrade Communications, Inc. ............................2.0
5. Mercury Interactive Corp. .................................1.9
6. Biovail Corp. .............................................1.9
7. Interwoven, Inc. ..........................................1.7
8. AmeriSource Health Corp., Class A Shares ..................1.6
9. Micrel, Inc. ..............................................1.5
10. Natural MicroSystems Corp. ................................1.5
LINE CHART
INDUSTRY DIVERSIFICATION*+
18.1% Computer Software
5.0% Biotechnology
7.7% Medical Products/Supplies
8.2% Oil and Gas
6.2% Pharmaceuticals
2.7% Retail
5.3% Electronic Instruments and Equipment
11.9% Telecommunications Equipment
14.7% Semiconductors
3.6% Insurance
16.6% Other
PIE CHART
INVESTMENT BREAKDOWN*+
5.0% Repurchase Agreement
95.0% Common Stock
* All information is as of September 30, 2000. Please note that holdings are
subject to change.
+ As a percentage of total common stock.
++ As a percentage of total investments.
3 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
DEAR SHAREHOLDER,
We are pleased to provide the first annual report for the Smith Barney Small Cap
Growth Fund ("Portfolio") for the year ended September 30, 2000. In this report,
we have summarized the period's prevailing economic conditions and briefly
outlined the Portfolio's investment strategy. The information provided in this
letter represents the opinion of the manager and is not intended to be a
forecast of future events, a guarantee of future results nor investment advice.
Additionally, there is no assurance that certain securities will remain in or
out of the Portfolio. Please refer to pages 11 through 14 for a complete list
and percentage breakdown of the Portfolio's holdings. A detailed summary of the
Portfolio's performance can be found in the appropriate sections that follow.
Also, please note any discussion of the Portfolio's holdings is as September 30,
2000 and is subject to change. We hope you find this report to be useful and
informative.
Performance Update and Investment Strategy
For the period since the Portfolio's inception, November 30, 1999 through
September 30, 2000, the Portfolio's Class A shares, without and with sales
charges, returned 50.45% and 42.92%, respectively. In comparison, the Russell
2000 Growth Index ("Russell 2000 Growth")1 returned 14.34% for the same period.
We look to offer investors long-term capital growth by investing in the stocks
of companies with relatively small market capitalizations. Small-cap growth
stocks are typically issued by companies in the early stages of growth. These
companies tend to have rapidly rising revenue earnings and are believed to have
more favorable growth prospects than the broader market. However, small
capitalization growth companies are likely to be more volatile and have more
limited product lines and financial resources than larger capitalization
companies.
We utilize a bottom-up2 investment strategy to target relatively unknown and
financially sound companies that, we believe, demonstrate the potential to
possibly become large and more mature mid-cap companies. Elements of this method
include fundamental research, evaluation of key management and screening
techniques.
In selecting stocks we look for companies that exhibit the following
characteristics:
o Catalysts to bring select small-cap growth companies to the next level;
o Entrepreneurial management committed to long-term growth;
o Positive historical sales and earnings growth;
o On the cutting edge of positive and dynamic trends; and
o Products and services that may give the company a competitive
advantage.
--------
1 Russell 2000 Growth measures the performance of those Russell 2000 companies
with higher price-to-book ratios and higher forecasted growth values. (Price-
to-book ratio is the price of a stock dividend divided by its net asset
value.) Please note an investor cannot invest directly in an index.
2 Bottom-up investing is a search for outstanding performance of individual
stocks before considering the impact of economic trends.
4 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
Market Overview
For much of the past twelve months, the stock market has been influenced by two
dominant themes -- the direction of interest rates and the uncertainty of the
future of technology, especially the Internet. The Federal Reserve Board's
("Fed") decision to steadily increase short-term interest rates during the
period caused many investors to question the durability of broad economic growth
and the accompanying sustainability of the current bull market.
During the period, the Fed continued to stress its concerns over the disparity
in the growth of demand and potential supply, which may foster inflation and
jeopardize the U.S. economy's performance. In theory, higher interest rates may
potentially hurt stocks, because slower growth often hinders profits at the same
time that alternative investments become more attractive. Accordingly, many
interest-rate sensitive stocks experienced price declines after the Fed's
decisions.
Concerns about lower corporate profits especially in the technology sector,
steep energy prices, the U.S. Congressional and Presidential elections and the
possibility of higher interest rates roiled major stock indices during the third
quarter of 2000. With the close of the September 30, 2000 quarter came a string
of earnings warnings -- companies' announcements that third-quarter profits or
revenues may fall short of analysts' expectations. Although the Fed left rates
unchanged since June 2000, many policymakers have held to their longstanding
warning that prices may still accelerate into dangerous territory. With such a
volatile environment, a number of financial professionals were concerned about
the much-touted "soft landing" for the economy.
Despite the recent weakness in the small cap growth sector, the Russell 2000
Growth was down 11.05% for the second half of the period, the small-cap growth
sector of the market outperformed the majority of the stock market's major
indices during the reporting period. For the year ended September 30, 2000, the
Russell 2000 Growth returned 29.66%, while the Standard & Poor's 500 Index ("S&P
500")(3) Russell 2000 Index ("Russell 2000")(4) and the Nasdaq Composite
Index(5) returned 13.28%, 23.39% and 33.74%, respectively, for the same period.
THE TUG-OF-WAR BETWEEN SMALL-CAP GROWTH STOCKS(6) AND SMALL CAP VALUE STOCKS(7)
CONTINUED THROUGHOUT THE REPORTING PERIOD. DURING THE PERIOD, SMALL-CAP GROWTH
STOCKS CAME OUT AHEAD, OUTPERFORMING SMALL-CAP VALUE STOCKS BY ROUGHLY 16
PERCENTAGE POINTS.
---------------
3 S&P 500 is a market capitalization-weighted measure of 500 widely held common
stocks. Please note that an investor cannot invest directly in an index.
4 Russell 2000 measures the performance of the 2,000 smallest companies in the
Russell 3000 Index. Please note that an investor cannot invest directly in an
index.
5 The Nasdaq Composite Index is a market value-weighted index that measures all
domestic and non-U.S. based securities listed on the NASDAQ stock market.
Please note that an investor cannot invest directly in an index.
6 Growth stocks are shares of companies with the potential for
faster-than-average growth within their industries.
7 Value stocks are the shares of those companies whose shares are considered to
be inexpensive relative to their asset values or earning power.
5 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
WE LOOK TO PARTICIPATE IN MANY OF THE IMPORTANT ECONOMIC AND DEMOGRAPHIC TRENDS
SHAPING THE GLOBAL MARKETPLACE, SEEKING TO OWN THOSE COMPANIES THAT WE BELIEVE
CAN TAKE ADVANTAGE OF THESE TRENDS AND GENERATE LONG-TERM GROWTH.
Portfolio Update
We think the Portfolio is well diversified across several industry sectors.
During the period, we continued to focus on the technology, energy and
healthcare sectors.
Despite the recent weakness in the technology sector, we continue to believe
there are solid opportunities within the technology sector. In this sector, we
focused on semiconductors, telecommunications equipment and those companies that
are involved in high-speed broadband Internet access. In our opinion, companies
such as Tollgrade Communications, Inc. which produces test equipment for the
telecommunications industry, and TranSwitch Corp., which develops highly
integrated digital and mixed-signal semiconductor solutions, possess long-term
growth potential.
Within the energy sector, we have seen an increase in commodity prices. Oil and
natural gas prices have been rising to record levels that we believe may be
sustainable as a result of tight supply and demand. We believe that oil
companies may continue to post higher earnings. The Portfolio's largest
positions in the energy sector include BJ Services Co., a company that provides
a wide array of oil-filed services to the petroleum industry and Stone Energy
Inc., a company primarily engaged in oil and gas exploration development and
production, and in the acquisition of producing properties.
More recently, we have been adding to our holdings in health care stocks and we
are now slightly overweighted in the sector. We have maintained a positive
outlook on the biotechnology sector and we are also beginning to see improved
performance in the health care services sector, which has not been the case in
recent years. During the period, the Portfolio benefited from its positions in
Oxford Health Plans, Inc., a health care company whose product line includes
point-of-service plans, traditional HMO and Medicare plans, and Universal Health
Services Inc., an owner and operator of acute care hospitals, behavioral health
centers and ambulatory surgery centers.
The Portfolio was negatively impacted by its small position in the semiconductor
equipment sector. This sector underperformed the overall market during the
period as a result of investors' concerns that the growth cycle of the industry
was close to the end. In addition, the fear of a decrease in demand for wireless
handsets has caused many investment professionals to reduce their expectations
for the communication sector.
6 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
WE BELIEVE WITH THE GROWTH OF THE U.S. ECONOMY SLOWING AS A RESULT OF THE FED'S
SIX INTEREST RATE HIKES SINCE JUNE 1999, GLOBAL COMPETITION AND LITTLE OR NO
PRICING POWER MAY LEAD TO MORE INVESTORS FOCUSING ON SMALL-CAP STOCK
OPPORTUNITIES.
Outlook
We believe many investors may be looking towards this sector for companies that
demonstrate strong sales and earnings growth. In light of favorable growth
valuations and economic fundamentals, we remain confident that there still is
further upside potential in the small-cap growth sector of the market. In our
opinion, investors will continue to focus on those small-cap companies that
demonstrate growth at what they deem to be reasonable valuations relative to the
overall market. (Of course, there are no guarantees that our expectations will
be met.)
In closing, we would like to thank you for investing in Smith Barney Small Cap
Growth Fund. We look forward to continuing to help you pursue your financial
goals in the future.
Sincerely,
/S/ Timothy Woods, CFA
Timothy Woods, CFA
Vice President and
Investment Officer
October 18, 2000
7 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
HISTORICAL PERFORMANCE -- CLASS A SHARES
<TABLE>
<CAPTION>
NET ASSET VALUE
----------------------------
BEGINNING END INCOME CAPITAL GAIN RETURN OF TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDEND DISTRIBUTION CAPITAL RETURNS(1)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Inception*-- 9/30/00 $11.40 $17.13 $0.00 $0.00 $0.02 50.45%+
------------------------------------------------------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES
NET ASSET VALUE
----------------------------
BEGINNING END INCOME CAPITAL GAIN RETURN OF TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDEND DISTRIBUTION CAPITAL RETURNS(1)
------------------------------------------------------------------------------------------------------------------------------------
Inception*-- 9/30/00 $11.40 $17.03 $0.00 $0.00 $0.01 49.48%+
------------------------------------------------------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS L SHARES
NET ASSET VALUE
----------------------------
BEGINNING END INCOME CAPITAL GAIN RETURN OF TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDEND DISTRIBUTION CAPITAL RETURNS(1)
------------------------------------------------------------------------------------------------------------------------------------
Inception*-- 9/30/00 $11.40 $17.04 $0.00 $0.00 $0.01 49.56%+
------------------------------------------------------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS 1 SHARES
NET ASSET VALUE
----------------------------
BEGINNING END INCOME CAPITAL GAIN RETURN OF TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDEND DISTRIBUTION CAPITAL RETURNS(1)
------------------------------------------------------------------------------------------------------------------------------------
Inception*-- 9/30/00 $16.78 $17.13 $0.00 $0.00 $0.00 2.09%+
------------------------------------------------------------------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS Y SHARES
NET ASSET VALUE
----------------------------
BEGINNING END INCOME CAPITAL GAIN RETURN OF TOTAL
PERIOD ENDED OF PERIOD OF PERIOD DIVIDEND DISTRIBUTION CAPITAL RETURNS(1)
------------------------------------------------------------------------------------------------------------------------------------
Inception*-- 9/30/00 $18.59 $17.17 $0.00 $0.00 $0.00 (7.64)%+
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
8 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
WITHOUT SALES CHARGES(1)
-------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS L CLASS 1 CLASS Y
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Inception* through 9/30/00+ 50.45% 49.48% 49.56% 2.09% (7.64)%
-------------------------------------------------------------------------------------------------------------------
WITH SALES CHARGES(2)
-------------------------------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS L CLASS 1 CLASS Y
-------------------------------------------------------------------------------------------------------------------
Inception* through 9/30/00+ 42.92% 44.48% 47.01% (6.60)% (7.64)%
-------------------------------------------------------------------------------------------------------------------
</TABLE>
CUMULATIVE TOTAL RETURNS
WITHOUT SALES CHARGES(1)
--------------------------------------------------------------------------------
Class A (Inception* through 9/30/00) 50.45%
--------------------------------------------------------------------------------
Class B (Inception* through 9/30/00) 49.48
--------------------------------------------------------------------------------
Class L (Inception* through 9/30/00) 49.56
--------------------------------------------------------------------------------
Class 1 (Inception* through 9/30/00) 2.09
--------------------------------------------------------------------------------
Class Y (Inception* through 9/30/00) (7.64)
--------------------------------------------------------------------------------
(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, L and 1 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, L and 1 shares reflect the
deduction of the maximum initial sales charges of 5.00%, 1.00% and 8.50%,
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 November 30, 1999. Inception
dates for Class 1 and Y shares are September 11, 2000 and February 23, 2000,
respectively.
+ Total return is not annualized, as it may not be representative of the total
return for the year.
9 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
HISTORICAL PERFORMANCE (UNAUDITED)
LINE CHART
Growth of $10,000 Invested in Class A, B and L Shares of the
Smith Barney Small Cap Growth Fund vs. Russell 2500 Growth Index+
<TABLE>
<CAPTION>
Smith Barney Small Cap Smith Barney Small Cap Smith Barney Small Cap Russell 2500
Growth Fund - Class A Growth Fund - Class B Growth Fund - Class L Growth Index
<S> <C> <C> <C>
NOV 1999 9500 10000 9900 10000
DEC 2000 12215 12350 12616 11886
JAN 2000 12056 12174 12442 11819
FEB 2000 17296 17678 17888 14851
MAR 2000 14785 15018 15265 13685
APR 2000 13533 13702 13954 12352
MAY 2000 11856 11937 12208 11253
JUN 2000 14009 14184 14431 12741
JUL 2000 12849 12964 13224 11697
AUG 2000 14776 14966 15204 13221
SEPT 2000 14293 14448 14701 12366
</TABLE>
--------------------------------------------------------------------------------
November 1999 -- September 2000
+ Hypothetical illustration of $10,000 invested in Class A, B and L shares at
inception on November 30, 1999, assuming deduction of the maximum 5.00% and
1.00% sales charges at the time of investment for Class A and L shares,
respectively; and the deduction of the maximum 5.00% and 1.00% CDSCs for
Class B and L shares, respectively. It also assumes reinvestment of
dividends and capital gains, if any, through September 30, 2000. The Russell
2500 Growth Index measures the performance of those Russell 2500 companies
with higher price-to-book ratios and higher forecasted growth values. 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 A, B and L shares' performance indicated
on this chart, depending on whether greater or lesser sales charges and fees
were incurred by shareholders investing in other classes.
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. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
10 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS SEPTEMBER 30, 2000
SHARES SECURITY VALUE
--------------------------------------------------------------------------------------------------------------
COMMON STOCK-- 95.0%
ADVERTISING -- 1.1%
<S> <C> <C>
87,900 Catalina Marketing Corp.+ $ 3,307,238
--------------------------------------------------------------------------------------------------------------
BIOTECHNOLOGY -- 4.7%
35,600 Abgenix, Inc.+ 2,876,925
37,100 Aviron+ 2,163,394
7,000 deCODE GENETICS, INC.+ 179,813
15,200 ImClone Systems Inc.+ 1,779,350
17,500 Medarex, Inc.+ 2,052,969
22,400 Myriad Genetics, Inc.+ 1,926,400
31,700 Orchid Biosciences Inc.+ 1,077,800
20,000 Protein Design Labs, Inc.+ 2,410,000
--------------------------------------------------------------------------------------------------------------
14,466,651
--------------------------------------------------------------------------------------------------------------
CASINOS AND GAMING -- 0.5%
46,000 International Game Technology+ 1,546,750
--------------------------------------------------------------------------------------------------------------
COMPUTER HARDWARE -- 1.1%
70,000 M-Systems Flash Disk Pioneers Ltd.+ 2,673,125
18,750 Network Engines, Inc.+ 767,578
--------------------------------------------------------------------------------------------------------------
3,440,703
--------------------------------------------------------------------------------------------------------------
COMPUTER SOFTWARE -- 17.2%
49,500 Advent Software, Inc.+ 3,458,813
38,300 Agile Software Corp.+ 3,444,606
16,600 Alteon Websystems, Inc.+ 1,799,284
39,500 Art Technology Group, Inc.+ 3,742,625
46,200 Aspen Technology, Inc.+ 2,084,775
7,500 Blue Martini Software, Inc.+ 254,063
32,300 Business Objects S.A., Sponsored ADR+ 3,651,919
21,700 E.piphany, Inc.+ 1,672,256
34,700 Informatica Corp.+ 3,235,775
43,800 Interwoven, Inc.+ 4,952,138
90,000 J.D. Edwards & Co.+ 2,328,750
27,300 Manugistics Group, Inc.+ 2,678,813
36,100 Mercury Interactive Corp.+ 5,658,675
31,200 Micromuse, Inc.+ 6,269,250
33,600 NVIDIA Corp.+ 2,751,000
70,100 Peregrine Systems, Inc.+ 1,327,519
7,500 Speechworks International Inc.+ 465,000
7,500 Talarian Corp.+ 143,906
24,332 webMethods, Inc.+ 2,801,222
--------------------------------------------------------------------------------------------------------------
52,720,389
--------------------------------------------------------------------------------------------------------------
ELECTRICAL PRODUCTS AND EQUIPMENT -- 1.5%
10,000 Active Power, Inc.+ 620,000
20,400 Capstone Turbine Corp.+ 1,412,700
42,600 Power-One, Inc.+ 2,577,965
--------------------------------------------------------------------------------------------------------------
4,610,665
--------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
11 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 2000
SHARES SECURITY VALUE
--------------------------------------------------------------------------------------------------------------
ELECTRONIC INSTRUMENTS AND CONTROLS -- 5.0%
34,400 Aeroflex, Inc.+ $ 1,672,700
26,500 American Superconductor Corp.+ 1,302,641
63,300 Excel Technology, Inc.+ 2,029,556
20,000 FuelCell Energy, Inc.+ 1,924,688
39,825 Orbotech Ltd.+ 2,177,930
49,600 Plexus Corp.+ 3,496,800
88,400 Stratos Lightwave, Inc.+ 2,850,900
--------------------------------------------------------------------------------------------------------------
15,455,215
--------------------------------------------------------------------------------------------------------------
FIBER OPTICS -- 1.9%
23,600 Avanex Corp.+ 2,541,425
75,300 MRV Communications, Inc.+ 3,412,031
--------------------------------------------------------------------------------------------------------------
5,953,456
--------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 2.3%
55,700 Eaton Vance Corp. 2,840,700
56,700 Metris Cos., Inc. 2,239,650
96,300 Security Captial Group Inc.+ 1,823,681
--------------------------------------------------------------------------------------------------------------
6,904,031
--------------------------------------------------------------------------------------------------------------
HOSPITAL/HEALTHCARE FACILITIES -- 2.0%
100,400 Triad Hospitals Inc.+ 2,949,250
36,000 Universal Health Services Inc.+ 3,082,500
--------------------------------------------------------------------------------------------------------------
6,031,750
--------------------------------------------------------------------------------------------------------------
HUMAN RESOURCES -- 0.4%
15,600 Adminstaff, Inc.+ 1,180,920
--------------------------------------------------------------------------------------------------------------
INSURANCE -- 3.4%
67,200 Everest Re Group, Ltd. 3,326,400
120,200 Oxford Health Plans, Inc.+ 3,694,272
64,700 Trigon Healthcare, Inc.+ 3,400,793
--------------------------------------------------------------------------------------------------------------
10,421,465
--------------------------------------------------------------------------------------------------------------
MEDICAL PRODUCTS AND SUPPLIES -- 7.3%
100,000 AmeriSource Health Corp., Class A Shares+ 4,700,000
32,100 Andrx Group+ 2,997,338
49,000 Cytyc Corp.+ 2,113,125
28,500 Enzo Biochem, Inc.+ 1,382,250
28,500 Inhale Therapeutic Systems, Inc.+ 1,606,688
43,000 MiniMed Inc.+ 3,843,125
65,800 Novoste Corp.+ 2,796,500
34,500 Pharmacopeia, Inc.+ 879,750
28,500 Priority Healthcare Corp.+ 2,173,125
--------------------------------------------------------------------------------------------------------------
22,491,901
--------------------------------------------------------------------------------------------------------------
OIL AND GAS -- 7.8%
36,700 BJ Services Co.+ 2,243,288
26,600 Cooper Cameron Corp.+ 1,960,088
26,900 Devon Energy Corp. 1,618,035
60,000 ENSCO International Inc. 2,295,000
45,400 EOG Resources, Inc. 1,764,925
41,600 Grant Prideco, Inc.+ 912,600
48,600 Marine Drilling Cos., Inc.+ 1,388,138
SEE NOTES TO FINANCIAL STATEMENTS.
12 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 2000
SHARES SECURITY VALUE
--------------------------------------------------------------------------------------------------------------
OIL AND GAS -- 7.8% (CONTINUED)
75,000 Santa Fe International Corp. $ 3,379,688
24,100 Smith International, Inc.+ 1,965,656
40,700 Stone Energy Corp.+ 2,238,500
52,700 UTI Energy Corp.+ 2,351,738
41,900 Weatherford International, Inc.+ 1,801,700
--------------------------------------------------------------------------------------------------------------
23,919,356
--------------------------------------------------------------------------------------------------------------
PHARMACEUTICALS -- 5.9%
62,600 Alpharma, Inc., Class A Shares 3,826,425
69,100 Biovail Corp.+ 5,627,331
31,000 Celgene Corp.+ 1,844,500
84,700 Dura Pharmaceuticals, Inc. 2,996,263
21,100 QLT Phototherapeutics Inc.+ 1,495,463
46,600 Shire Pharmaceuticals Group PLC, Sponsored ADR+ 2,405,725
--------------------------------------------------------------------------------------------------------------
18,195,707
--------------------------------------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS -- 2.4%
42,200 Boston Properties, Inc. 1,811,963
58,600 Carramerica Realty Corp. 1,772,650
33,200 Essex Property Trust, Inc. 1,838,450
31,100 Spieker Properties, Inc. 1,790,194
--------------------------------------------------------------------------------------------------------------
7,213,257
--------------------------------------------------------------------------------------------------------------
RETAIL -- 2.6%
34,650 Dollar Tree Stores, Inc.+ 1,405,491
22,900 Michaels Stores, Inc.+ 916,000
41,500 Talbots, Inc. 2,749,375
84,600 Williams-Sonoma, Inc.+ 2,939,850
--------------------------------------------------------------------------------------------------------------
8,010,716
--------------------------------------------------------------------------------------------------------------
SEMICONDUCTORS -- 14.0%
13,900 Applied Micro Circuits Corp.+ 2,878,168
72,500 Axcelis Technologies, Inc.+ 860,937
35,200 Bookham Technology PLC, Sponsored ADR 1,509,200
19,400 Cree, Inc.+ 2,255,250
16,800 Exar Corp.+ 2,032,800
118,200 Galileo Technology Ltd.+ 3,752,850
19,100 GlobeSpan, Inc.+ 2,330,200
31,400 hi/fn, Inc.+ 2,139,125
37,200 Lattice Semiconductor Corp.+ 1,999,500
3,750 Marvell Technology Group Ltd.+ 289,218
66,300 Micrel, Inc.+ 4,442,100
88,600 Novellus Systems, Inc.+ 4,125,437
4,966 PMC-Sierra, Inc.+ 1,068,931
110,300 TranSwitch Corp.+ 7,031,625
70,800 TriQuint Semiconductor, Inc.+ 2,579,775
53,100 Virata Corp.+ 3,511,237
--------------------------------------------------------------------------------------------------------------
42,806,353
--------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
13 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
SCHEDULE OF INVESTMENTS (CONTINUED) SEPTEMBER 30, 2000
SHARES SECURITY VALUE
--------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS EQUIPMENT -- 11.3%
65,700 Advanced Fibre Communications, Inc.+ $ 2,488,387
23,500 Anaren Microwave, Inc.+ 3,187,187
35,500 AudioCodes Ltd.+ 3,021,937
2,375 Avici Systems Inc.+ 225,921
10,500 Cosine Communications, Inc.+ 583,406
29,700 Digital Lightwave, Inc.+ 2,156,962
46,000 DSP Group, Inc.+ 1,719,250
7,500 Exfo Electro-Optical Engineering Inc.+ 326,719
30,000 LightPath Technologies, Inc.+ 1,425,000
79,400 Natural MicroSystems Corp.+ 4,271,472
34,800 Netro Corp.+ 2,061,900
15,000 Newport Corp. 2,388,984
4,000 ONI Systems Corp.+ 345,250
42,000 Tollgrade Communications, Inc.+ 5,830,125
37,400 Turnstone Systems, Inc.+ 1,734,425
34,600 Tut Systems, Inc.+ 2,986,412
--------------------------------------------------------------------------------------------------------------
34,753,337
--------------------------------------------------------------------------------------------------------------
UTILITIES -- 2.2%
64,800 Calpine Corp.+ 6,763,500
--------------------------------------------------------------------------------------------------------------
WHOLESALE DISTRIBUTION -- 0.4%
21,200 Fastenal Co. 1,221,650
--------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost-- $225,804,188) 291,415,010
==============================================================================================================
FACE
AMOUNT SECURITY VALUE
==============================================================================================================
REPURCHASE AGREEMENT-- 5.0%
$15,385,000 Morgan Stanley Dean Witter & Co., 6.480% due 10/2/00; Proceeds at maturity--
$15,393,308; (Fully collateralized by U.S. Treasury Notes, 5.875% to 6.500% due
11/30/01 to 10/15/06; Market value-- $15, 656,815) (Cost-- $15,385,000) 15,385,000
==============================================================================================================
TOTAL INVESTMENTS-- 100%
(Cost-- $241,189,188*) $306,800,010
==============================================================================================================
</TABLE>
+ Non-income producing security.
* Aggregate cost for Federal income tax purposes is substantially the same.
SEE NOTES TO FINANCIAL STATEMENTS.
14 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES SEPTEMBER 30, 2000
ASSETS:
<S> <C>
Investments, at value (Cost-- $241,189,188) $ 306,800,010
Cash 320
Receivable for securities sold 5,644,185
Receivable for Fund shares sold 1,154,611
Interest and dividends receivable 70,429
----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 313,669,555
----------------------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for Fund shares purchased 6,514,946
Payable for securities purchased 790,254
Management fees payable 182,586
Distribution fees payable 33,282
Accrued expenses 140,852
----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 7,661,920
----------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $306,007,635
================================================================================================================
NET ASSETS:
Par value of capital shares $ 17,895
Capital paid in excess of par value 297,201,522
Accumulated net realized loss from security transactions and futures contracts (56,822,604)
Net unrealized appreciation of investments 65,610,822
----------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $306,007,635
================================================================================================================
SHARES OUTSTANDING:
Class A 3,075,020
----------------------------------------------------------------------------------------------------------------
Class B 4,507,660
----------------------------------------------------------------------------------------------------------------
Class L 3,557,254
----------------------------------------------------------------------------------------------------------------
Class 1 5
----------------------------------------------------------------------------------------------------------------
Class Y 6,754,847
----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE:
Class A (and redemption price) $17.13
----------------------------------------------------------------------------------------------------------------
Class B * $17.03
----------------------------------------------------------------------------------------------------------------
Class L ** $17.04
----------------------------------------------------------------------------------------------------------------
Class 1 (and redemption price) $17.13
----------------------------------------------------------------------------------------------------------------
Class Y (and redemption price) $17.17
----------------------------------------------------------------------------------------------------------------
MAXIMUM PUBLIC OFFERING PRICE PER SHARE:
Class A (net asset value plus 5.25% of net asset value per share) $18.03
----------------------------------------------------------------------------------------------------------------
Class L (net asset value plus 1.01% of net asset value per share) $17.21
----------------------------------------------------------------------------------------------------------------
Class 1 (net asset value plus 9.28% of net asset value per share) $18.72
================================================================================================================
</TABLE>
* 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.
15 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS FOR THE PERIOD ENDED SEPTEMBER 30, 2000(a)
INVESTMENT INCOME:
<S> <C>
Interest $ 827,431
Dividends 156,379
-------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 983,810
-------------------------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 1,340,606
Distribution fees (Note 2) 966,570
Shareholder and system servicing fees 135,000
Registration fees 103,305
Shareholder communications 60,609
Custody 30,382
Audit and legal 27,388
Directors' fees 13,513
Other 6,586
-------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 2,683,959
-------------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS (1,700,149)
-------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES
3 AND 8):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) (56,847,079)
Futures contracts 24,475
-------------------------------------------------------------------------------------------------------
NET REALIZED LOSS (56,822,604)
-------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period --
End of period 65,610,822
-------------------------------------------------------------------------------------------------------
INCREASE IN NET UNREALIZED APPRECIATION 65,610,822
-------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENTS AND FUTURES CONTRACTS 8,788,218
-------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS $ 7,088,069
=======================================================================================================
</TABLE>
(a) For the period from November 30, 1999 (commencement of operations)
to September 30, 2000.
SEE NOTES TO FINANCIAL STATEMENTS.
16 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD ENDED SEPTEMBER 30, 2000(a)
<CAPTION>
2000
-------------------------------------------------------------------------------------------------------
<S> <C>
OPERATIONS:
Net investment loss $ (1,700,149)
Net realized loss (56,822,604)
Increase in net unrealized appreciation 65,610,822
-------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM OPERATIONS 7,088,069
-------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Capital (49,896)
-------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS (49,896)
-------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net proceeds from sale of shares 408,372,912
Net asset value of shares issued for reinvestment of dividends 48,652
Cost of shares reacquired (109,452,102)
-------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS FROM FUND SHARE TRANSACTIONS 298,969,462
-------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS 306,007,635
NET ASSETS:
Beginning of period --
-------------------------------------------------------------------------------------------------------
END OF PERIOD $306,007,635
=======================================================================================================
</TABLE>
(a) For the period from November 30, 1999 (commencement of operations)
to September 30, 2000.
SEE NOTES TO FINANCIAL STATEMENTS.
17 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies
The Smith Barney Small Cap Growth 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 ten other separate investment portfolios: Peachtree Growth Fund,
Smith Barney Investment Grade Bond Fund, Smith Barney Government Securities
Fund, Smith Barney Hansberger Global Value Fund, Smith Barney Hansberger Global
Small Cap Value Fund, Smith Barney Premier Selections Large Cap Fund, Smith
Barney Premier Selections All Cap Growth Fund, Smith Barney Premier Selections
Global Growth Fund, Smith Barney Group Spectrum Allocation Fund and Smith Barney
Small Cap Value 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 the mean between the bid and asked
price; (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) short-term obligations with maturities of 60 days or less are
valued at cost plus accreted discount, or minus amortized premium, which
approximates value; (e) dividend income is recorded on ex-dividend date and
interest income is recorded on an accrual basis; (f) dividends and distributions
to shareholders are recorded on the ex-dividend date; (g) gains or losses on the
sale of securities are calculated using the specific identification method; (h)
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; (i) direct expenses are charged to each class; management fees
and general portfolio expenses are allocated on the basis of relative net
assets; (j) 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; (k) 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, 2000, reclassifications were made to the
Portfolio'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
$1,700,149 was reclassified to paid-in-capital; and (l) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
2. Management Agreement and Other Transactions
SSB Citi Fund Management LLC ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc.
("Citigroup"), acts as 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.
Citi Fiduciary Trust Company ("CFTC"), another subsidiary of Citigroup, acts as
the Fund's transfer agent and PFPC Global Fund Services ("PFPC") acts as the
Fund's sub-transfer agent. CFTC receives fees and asset-based fees that vary
according to the account size and type of account. PFPC is responsible for
shareholder recordkeeping and
18 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
financial processing for all shareholder accounts and is paid by CFTC. During
the period ended September 30, 2000, the Portfolio paid transfer agent fees of
$121,187 to CFTC.
Effective June 5, 2000, Salomon Smith Barney Inc. ("SSB"), another subsidiary of
SSBH, became the Fund's distributor replacing CFBDS, Inc. ("CFBDS"). In
addition, SSB acts as the primary broker for the Fund's portfolio agency
transactions. Certain other broker-dealers continue to sell Portfolio shares to
the public as members of the selling group. For the period ended September 30,
2000, SSB and its affiliates received $12,079 in brokerage commissions.
There are maximum initial sales charges of 5.00%, 1.00% and 8.50% for Class A, L
and 1 shares, respectively. 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, 2000, SSB and CFBDS received sales charges of
approximately $725,000 and $491,000 on sales of the Portfolio's Class A and L
shares, respectively. In addition, CDSCs paid to SSB were approximately:
Class B Class L
================================================================================
CDSCs $112,000 $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, 2000, total Distribution Plan fees incurred
by the Portfolio were:
Class A Class B Class L
================================================================================
Distribution Plan Fees $83,705 $503,276 $379,589
================================================================================
All officers and one Director of the Fund are employees of SSB.
3. Investments
During the period ended September 30, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $504,099,697
--------------------------------------------------------------------------------
Sales 221,448,429
================================================================================
At September 30, 2000, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $75,855,945
Gross unrealized depreciation (10,245,123)
--------------------------------------------------------------------------------
Net unrealized appreciation $65,610,822
================================================================================
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 (plus accrued interest) of the collateral in
amounts at least equal to the repurchase price.
5. Reverse Repurchase Agreements
The Portfolio may enter into reverse repurchase agreement transactions for
leveraging purposes. A reverse repurchase agreement involves a sale by the
Portfolio of securities that it holds with an agreement by the Portfolio to
repurchase
19 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the same securities at an agreed upon price and date. A reverse repurchase
agreement involves the risk that the market value of the securities sold by the
Portfolio may decline below the repurchase price of the securities. The
Portfolio will establish a segregated account with its custodian, in which the
Portfolio will maintain cash, U.S. government securities or other liquid high
grade debt obligations as collateral under the reverse repurchase agreement.
During the period ended September 30, 2000, the Portfolio did not enter into any
reverse repurchase agreements.
6. 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 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, 2000, the Portfolio had no open purchased call or put option
contracts.
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, 2000, the Portfolio did not write any call
or put option contracts.
7. 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, 2000, the Portfolio had no securities on loan.
20 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. 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 cost of) the closing
transactions and the Portfolio'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, 2000, the Portfolio had no open futures contracts.
9. CAPITAL SHARES
At September 30, 2000, 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, 2000, total paid-in capital amounted to the following for each
class:
AMOUNTS
==================================================================
Class A $ 46,926,253
------------------------------------------------------------------
Class B 68,728,279
------------------------------------------------------------------
Class L 56,145,463
------------------------------------------------------------------
Class 1 91
------------------------------------------------------------------
Class Y 125,419,331
==================================================================
21 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Transactions in shares of each class were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30, 2000
---------------------------------------
SHARES AMOUNT
=============================================================================================================
Class A+
<S> <C> <C>
Shares sold 8,365,016 $135,428,855
Shares issued on reinvestment 1,603 22,118
Shares reacquired (5,291,599) (88,233,372)
-------------------------------------------------------------------------------------------------------------
Net Increase 3,075,020 $ 47,217,601
=============================================================================================================
Class B+
Shares sold 5,237,555 $ 81,332,798
Shares issued on reinvestment 1,152 15,895
Shares reacquired (731,047) (12,183,054)
-------------------------------------------------------------------------------------------------------------
Net Increase 4,507,660 $ 69,165,639
=============================================================================================================
Class L+
Shares sold 4,105,195 $ 65,500,530
Shares issued on reinvestment 771 10,639
Shares reacquired (548,712) (9,035,676)
-------------------------------------------------------------------------------------------------------------
Net Increase 3,557,254 $ 56,475,493
=============================================================================================================
Class 1++
Shares sold 5 $ 91
-------------------------------------------------------------------------------------------------------------
Net Increase 5 $ 91
=============================================================================================================
Class Y*
Shares sold 6,754,847 $126,110,638
-------------------------------------------------------------------------------------------------------------
Net Increase 6,754,847 $126,110,638
=============================================================================================================
</TABLE>
+ For the period from November 30, 1999 (inception date) to September 30, 2000.
++ For the period from September 11, 2000 (inception date) to September 30,
2000.
* For the period from February 23, 2000 (inception date) to September 30,
2000.
22 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
FINANCIAL HIGHLIGHTS
For a share of each class of capital stock outstanding throughout each period
ended September 30:
<TABLE>
<CAPTION>
CLASS A(1)(2) CLASS B(1)(2) CLASS L(1)(2) CLASS 1(2)(3) CLASS Y(2)(4)
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.40 $11.40 $11.40 $16.78 $18.59
------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS:
Net investment loss (0.10) (0.20) (0.20) (0.00)* (0.03)
Net realized and unrealized gain (loss) 5.85 5.84 5.85 0.35 (1.39)
------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME (LOSS) FROM OPERATIONS 5.75 5.64 5.65 0.35 (1.42)
------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Capital (0.02) (0.01) (0.01) -- --
------------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.02) (0.01) (0.01) -- --
------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $17.13 $17.03 $17.04 $17.13 $17.17
------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN++ 50.45% 49.48% 49.56% 2.09% (7.64)%
------------------------------------------------------------------------------------------------------------------------------
NET ASSETS, END OF PERIOD (000S) $52,672 $76,784 $60,600 $0** $115,952
------------------------------------------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS+:
Expenses 1.25% 2.00% 1.99% 0.00%# 0.86%
Net investment loss (0.70) (1.45) (1.44) (0.00)# (0.31)
------------------------------------------------------------------------------------------------------------------------------
PORTFOLIO TURNOVER RATE 105% 105% 105% 105% 105%
==============================================================================================================================
(1)For the period from November 30, 1999 (inception date) to September 30, 2000.
(2)Per share amounts have been calculated using the monthly average shares method.
(3)For the period from September 11, 2000 (inception date) to September 30, 2000.
(4)For the period from February 23, 2000 (inception date) to September 30, 2000.
* Amount represents less than $0.01. ** Amount represents less than $1,000.
# Amount represents less than 0.01%.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
</TABLE>
23 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
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 Smith Barney Small Cap Growth Fund of Smith
Barney Investment Funds Inc. as of September 30, 2000, the related statements of
operations, changes in net assets and financial highlights for the period
November 30, 1999 (commencement of operations) to September 30, 2000. 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 audit.
We conducted our audit 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 at September 30, 2000 by correspondence with the Fund's
custodian. As to securities purchased or sold but not received or delivered, we
performed other appropriate auditing procedures. 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 audit provides 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 Growth Fund of Smith Barney Investment Funds Inc. as of
September 30, 2000, the results of its operations, the changes in its net
assets, and financial highlights for the period November 30, 1999 to September
30, 2000, in conformity with accounting principles generally accepted in the
United States of America.
KPMG LLP
/S/ KPMG LLP
New York, New York
November 13, 2000
24 SMITH BARNEY SMALL CAP GROWTH FUND | 2000 Annual Report to Shareholders
<PAGE>
SMITH BARNEY
SMALL CAP GROWTH FUND
DIRECTORS
Paul R. Ades
Herbert Barg
Dwight B. Crane
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
Timothy Woods, CFA
Vice President and
Investment Officer
Paul A. Brook
Controller
Christina T. Sydor
Secretary
INVESTMENT MANAGER
SSB Citi Fund Management LLC
DISTRIBUTOR
Salomon Smith Barney Inc.
CUSTODIAN
PFPC Trust Company
TRANSFER AGENT
Citi Fiduciary Trust Company
125 Broad Street, 11th Floor
New York, New York 10004
SUB-TRANSFER AGENT
PFPC Global Fund Services
P.O. Box 9699
Providence, Rhode Island
02940-9699
<PAGE>
SMITH BARNEY SMALL CAP GROWTH FUND
--------------------------------------------------------------------------------
This report is submitted for the general information of the shareholders of
Smith Barney Small Cap Growth Fund but it also may 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 December 31, 2000, this report must be
accompanied by performance information for the most recently completed calendar
quarter.
SMITH BARNEY SMALL CAP GROWTH FUND
Smith Barney Mutual Funds
388 Greenwich Street, MF-2
New York, New York 10013
For complete information on any of the above 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.smithbarney.com/mutualfunds
LOGO: SALOMON SMITH BARNEY
A member of citigroup
Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
FD02086 11/00
