UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM N-CSR

 

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

 

 

Investment Company Act file number 811-5034

 

 

Salomon Funds Trust

(Exact name of registrant as specified in charter)

 

 

125 Broad Street, New York, NY 10004

(Address of principal executive offices) (Zip code)

 

 

Robert I. Frenkel, Esq.

Legg Mason & Co., LLC

300 First Stamford Place, 4^th Floor

Stamford, CT 06902

(Name and address of agent for service)

 

 

Registrant’s telephone number, including area code: (800) 451-2010

 

 

Date of fiscal year end: December 31

 

 

Date of reporting period: December 31, 2005

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ITEM 1. REPORT TO STOCKHOLDERS.

 

The Annual Report to Stockholders is filed herewith.

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EXPERIENCE

ANNUAL REPORT

December 31, 2005

 

 

 

Salomon Funds Trust

 

National Tax Free Bond Fund

California Tax Free Bond Fund

New York Tax Free Bond Fund

Mid Cap Fund

 

 

 

INVESTMENT PRODUCTS: NOT FDIC INSURED Ÿ NO BANK GUARANTEE Ÿ MAY LOSE VALUE

 

 

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Salomon Funds Trust

 

Annual Report  •  December 31, 2005

What’s

Inside

 

Under a licensing agreement between Citigroup and Legg Mason, the names of funds, the names of any classes of shares of funds, and the names of investment advisers of funds, as well as all logos, trademarks and service marks related to Citigroup or any of its affiliates (“Citi Marks”) are licensed for use by Legg Mason. Citi Marks include, but are not limited to, “Smith Barney,” “Salomon Brothers,” “Citi,” and “Citigroup Asset Management”. Legg Mason and its affiliates, as well as the Funds’ investment manager, are not affiliated with Citigroup.

 

All Citi Marks are owned by Citigroup, and are licensed for use until no later than one year after the date of the licensing agreement.

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Letter from the Chairman

 

 

 

R. JAY GERKEN, CFA

Chairman, President and Chief Executive Officer

Dear Shareholder,

 

Despite numerous obstacles, including rising short-term interest rates, surging oil prices, a destructive hurricane season and geopolitical issues, the U.S. economy continued to expand at a healthy pace during the reporting period. After a 3.8% advance in the first quarter of 2005, gross domestic product (“GDP”)ⁱ growth was 3.3% during the second quarter and 4.1% in the third quarter. While fourth quarter figures have not yet been released, another slight gain is anticipated.

Given the strength of the economy and inflationary pressures, the Federal Reserve Board (“Fed”)ⁱⁱ continued to raise interest rates throughout the period. After raising rates five times from June 2004 through December 2004, the Fed increased its target for the federal funds rateⁱⁱⁱ in 0.25% increments eight additional times over the reporting period. This represents the longest sustained Fed tightening cycle since the 1970s. All told, the Fed’s thirteen rate hikes have brought the target for the federal funds rate from 1.00% to 4.25%. After the end of the Funds’ reporting period, at its January meeting, the Fed once again raised its target for the federal funds rate by 0.25% to 4.50%.

For the one-year period ended December 31, 2005, the U.S. stock market generated positive results, with the S&P 500 Index^iv returning 4.91%. While corporate profits remained strong during the year, they were often overshadowed by rising interest rates and higher oil prices. Looking at the fiscal year as a whole, mid-cap stocks outperformed their large- and small-cap counterparts, with the Russell Midcap^v, Russell 1000^vi, and Russell 2000^vii Indexes returning 12.65%, 6.27%, and 4.55%, respectively. From an investment style perspective, value stocks outperformed growth stocks for the sixth consecutive calendar year, with the Russell 3000 Value^viii and Russell 3000 Growth^ix Indexes returning 6.85% and 5.17%, respectively, in 2005.

 

Salomon Brothers Funds Trust         I

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As the year began, it was widely expected that both short- and long-term yields would rise. This panned out with short-term rates, as two-year Treasury yields rose from 3.08% to 4.41% over the 12-month period ended December 31, 2005. However, while there were periods of volatility, over the same period long-term yields experienced only a modest increase, moving from 4.24% to 4.37%. In late December, the yield curve inverted, as the yield on two-year Treasuries surpassed that of 10-year Treasuries. This anomaly has historically foreshadowed an economic slowdown or recession. Looking at the municipal market, its yield curve flattened during the reporting period but it did not invert.

Please read on for a more detailed look at prevailing economic and market conditions during the Funds’ fiscal year and to learn how those conditions have affected each Fund’s performance.

 

Special Shareholder Notices

Salomon Brothers National Tax Free Bond Fund, Salomon Brothers New York Tax Free Bond Fund and Salomon Brothers Mid Cap Fund

On December 1, 2005, Citigroup Inc. (“Citigroup”) completed the sale of substantially all of its asset management business, Citigroup Asset Management (“CAM”), to Legg Mason, Inc. (“Legg Mason”). As a result, the Funds’ investment adviser (the “Manager”), previously an indirect wholly-owned subsidiary of Citigroup, has become a wholly-owned subsidiary of Legg Mason. Completion of the sale caused each Fund’s existing investment management contract to terminate. Each Fund’s shareholders approved a new investment management contract between each Fund and the Manager, which became effective on December 1, 2005.

 

Salomon Brothers California Tax Free Bond Fund

On December 1, 2005, Citigroup Inc. (“Citigroup”) completed the sale of substantially all of its asset management business, Citigroup Asset Management (“CAM”), to Legg Mason, Inc. (“Legg Mason”). As a result, the Fund’s investment adviser (the “Manager”), previously an indirect wholly-owned subsidiary of Citigroup, has become a wholly-owned subsidiary of Legg Mason. Completion of the sale caused the Fund’s existing investment management contract

 

II         Salomon Brothers Funds Trust

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to terminate. The Fund’s shareholders approved a new investment management contract between the Fund and the Manager which became effective on December 19, 2005.

 

Information About Your Fund

As you may be aware, several issues in the mutual fund industry have recently come under the scrutiny of federal and state regulators. The Funds’ Manager and some of its affiliates have received requests for information from various government regulators regarding market timing, late trading, fees, and other mutual fund issues in connection with various investigations. The regulators appear to be examining, among other things, the Funds’ response to market timing and shareholder exchange activity, including compliance with prospectus disclosure related to these subjects. The Funds have been informed that the Manager and its affiliates are responding to those information requests, but are not in a position to predict the outcome of these requests and investigations.

Important information concerning the Funds and their Manager with regard to recent regulatory developments is contained in the Notes to Financial Statements included in this report.

As always, thank you for your confidence in our stewardship of your assets. We look forward to helping you continue to meet your financial goals.

 

Sincerely,

 

R. Jay Gerken, CFA

Chairman, President and Chief Executive Officer

 

February 2, 2006

 

Salomon Brothers Funds Trust          III

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All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

 

 

 

 

 

 

 

 

 

 

IV         Salomon Brothers Funds Trust

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Manager’s Overview

 

Salomon Brothers National Tax Free Bond Fund

 

Q. What were the overall market conditions during the Fund’s reporting period?

A. In many ways, the bond market in 2005 was similar to that in 2004. Steadily rising short-term interest rates, higher oil prices, and a strong economy all posed threats to bond prices. However, when all was said and done, the overall bond market, as measured by the Lehman Brothers Aggregate Bond Index,ⁱ returned 2.43% during the one-year period ended December 31, 2005. Municipal bonds generated even better returns, with the Lehman Brothers Municipal Bond Indexⁱⁱ gaining 3.51% over the same period.

As anticipated, the Federal Reserve Board (“Fed”)ⁱⁱⁱ continued to raise short-term interest rates at a measured pace during the reporting period. Since the Fed began its tightening cycle in June 2004, it has raised the federal funds rate^iv thirteen times, bringing it from 1.00% to 4.25% at the end of 2005. This caused short-term yields to rise sharply. However, as was the case in 2004, longer-term yields were relatively stable or fell modestly during the reporting period. This was due to relatively benign inflation and continued strong demand by foreign investors. Given this dynamic, both longer-term Treasuries and municipal securities significantly outperformed shorter-term bonds in 2005. From a credit quality perspective, lower quality municipals again outperformed their higher quality counterparts during the reporting period.

New municipal bond issuance from state and local governments was roughly $408 billion in 2005, a new calendar year record. This beat the previous high of $383 billion set in 2003. Overall, new supply was met with solid demand, in particular by property and casualty insurers and professional investors. In contrast, there was mixed demand from mutual fund shareholders.

 

Performance Review

For the 12 months ended December 31, 2005, Class A shares of the Salomon Brothers National Tax Fee Bond Fund, excluding sales charges, returned 2.63%. The Fund’s unmanaged benchmarks, the Lehman Brothers Municipal 4 Years Plus Bond Index^v

and the Lehman Brothers Municipal Bond Index, returned 3.94% and 3.51%, respectively, for the same period. The Lipper General Municipal Debt Funds Category Average¹ increased 3.00% over the same time frame.

Certain investors may be subject to the Federal Alternative Minimum Tax, and state and local taxes may apply. Capital gains, if any, are fully taxable. Please consult your personal tax or legal adviser.

 

 

Salomon Brothers Funds Trust 2005 Annual Report         1

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Q. What were the most significant factors affecting Fund performance?

What were the leading contributors to performance?

A. The Fund benefited from its neutral duration posture during the reporting period. This positively contributed to returns, as securities that offered higher coupons were more often subject to being refunded by their issuers prior to their maturity date.

 

What were the leading detractors from performance?

A. Given the tight credit spread environment, the Fund was underweight lower quality, more speculative issues during the year. In particular, we did not own riskier tobacco settlement bonds. This positioning hurt the Fund’s performance as lower-quality securities outperformed their higher quality counterparts. In addition, tobacco securities performed very well in 2005 as a result of favorable litigation trends. Based on our expectations for higher interest rates amid continued Fed tightening, the Fund did not have as large an exposure to the long end of the curve as its benchmark. This detracted from results as the yield curve flattened over the period, as short-term rates rose while longer-term rates were relatively stable or declined during the year.

 

2         Salomon Brothers Funds Trust 2005 Annual Report

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Q. Were there any significant changes to the Fund during the reporting period?

A. There were no significant changes to the Fund’s portfolio.

 

Thank you for your investment in the Salomon Brothers National Tax Free Bond Fund. As ever, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.

 

Sincerely,

 

 

February 2, 2006

 

 

The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.

 

RISKS: The Fund is a non-diversified mutual fund. This means that the Fund may invest a relatively high percentage of its assets in the obligations of a limited number of issuers. Investments in bonds are subject to interest rate and credit risks. As interest rates rise, bond prices fall, reducing the value of the Fund’s share price. Investors should consider the greater risk inherent in these policies when compared with a more diversified mutual fund. A portion of the income may be subject to the federal alternative minimum tax; capital gains, if any, are subject to federal, state and local income taxes. While it is expected that a substantial portion of the dividends paid to shareholders of the Fund will be exempt from federal personal income taxes, portions of such dividends from time to time may be taxable. Salomon Brothers Asset Management does not provide tax or legal advice. Please consult with your tax or legal adviser. The Fund may invest in derivatives, which can be illiquid and harder to value, especially in declining markets. A small investment in certain derivatives may have a potentially large impact on the Fund’s performance. Derivatives can disproportionately increase losses as stated in the prospectus. The Fund’s objectives may be changed without shareholder approval. Please see the Fund’s prospectus for more information on these and other risks.

 

All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

 

 

 

 

 

 

Salomon Brothers Funds Trust 2005 Annual Report         3

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Manager’s Overview

 

Salomon Brothers California Tax Free Bond Fund

 

Q. What were the overall market conditions during the Fund’s reporting period?

A. In many ways, the bond market in 2005 was similar to that in 2004. Steadily rising short-term interest rates, higher oil prices, and a strong economy all posed threats to bond prices. However, when all was said and done, the overall bond market, as measured by the Lehman Brothers Aggregate Bond Index,ⁱ returned 2.43% during the one-year period ended December 31, 2005. Municipal bonds generated even better returns, with the Lehman Brothers Municipal Bond Indexⁱⁱ gaining 3.51% over the same period.

As anticipated, the Federal Reserve Board (“Fed”)ⁱⁱⁱ continued to raise short-term interest rates at a measured pace during the reporting period. Since the Fed began its tightening cycle in June 2004, it has raised the federal funds rate^iv thirteen times, bringing it from 1.00% to 4.25% at the end of 2005. This caused short-term yields to rise sharply. However, as was the case in 2004, longer-term yields were relatively stable or fell modestly during the reporting period. This was due to relatively benign inflation and continued strong demand by foreign investors. Given this dynamic, both longer-term Treasuries and municipal securities significantly outperformed shorter-term bonds in 2005. From a credit quality perspective, lower quality municipals again outperformed their higher quality counterparts during the reporting period.

New municipal bond issuance from state and local governments was roughly $408 billion in 2005, a new calendar year record. This beat the previous high of $383 billion set in 2003. Overall, new supply was met with solid demand, in particular by property and casualty insurers and professional investors. In contrast, there was mixed demand from mutual fund shareholders.

 

Performance Review

For the 12 months ended December 31, 2005, Class A shares of the Salomon Brothers California Tax Fee Bond Fund, excluding sales charges, returned 1.29%. The Fund’s unmanaged benchmarks, the Lehman Brothers Municipal California 4 Years Plus Bond Index^v and the Lehman Brothers Municipal Bond Index, returned 4.64% and 3.51%, respectively, for the same period. The Lipper California Municipal Debt Funds Category Average¹ increased 3.84% over the same time frame.

Certain investors may be subject to the Federal Alternative Minimum Tax, and state and local taxes may apply. Capital gains, if any, are fully taxable. Please consult your personal tax or legal adviser.

 

 

4         Salomon Brothers Funds Trust 2005 Annual Report

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Q. What were the most significant factors affecting Fund performance?

What were the leading contributors to performance?

A. The Fund benefited from its neutral duration posture during the reporting period. This positively contributed to returns, as securities that offered higher coupons were more often subject to being refunded by their issuers prior to their maturity date.

 

What were the leading detractors from performance?

A. Given the tight credit spread environment, the Fund was underweight lower quality, more speculative issues during the year. In particular, we did not own riskier tobacco settlement bonds. This positioning hurt the Fund’s performance as lower-quality securities outperformed their higher quality counterparts. In addition, tobacco securities performed very well in 2005 as a result of favorable litigation trends. Based on our expectations for higher interest rates amid continued Fed tightening, the Fund did not have as large an exposure to the long end of the curve as its benchmark. This detracted from results as the yield curve flattened over the period, as short-term rates rose while longer-term rates were relatively stable or declined during the year.

 

Salomon Brothers Funds Trust 2005 Annual Report         5

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Q. Were there any significant changes to the Fund during the reporting period?

A. There were no significant changes to the Fund’s portfolio.

 

Thank you for your investment in the Salomon Brothers California Tax Free Bond Fund. As ever, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.

 

Sincerely,

 

 

February 2, 2006

 

The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.

 

RISKS: The Fund is not diversified, which means that it is permitted to invest a higher percentage of its assets in any one issuer than a diversified fund. This may magnify the Fund’s losses from events affecting a particular issuer. Investment in bonds are subject to interest rate and credit risks. As interest rates rise, bond prices fall, reducing the value of the Fund’s share price. Certain investors may be subject to the Federal Alternative Minimum Tax (“AMT”) and state and local taxes may apply. Capital gains, if any, are fully taxable. Fund income earned by non-California residents may be subject to certain taxes. While it is expected that a substantial portion of the dividends paid to shareholders of the Fund will be exempt from federal, state and local personal income taxes, portions of such dividends from time to time may be taxable. Salomon Brothers Asset Management does not provide tax or legal advice. Please consult with your tax or legal adviser. The Fund may invest in derivatives, which can be illiquid and harder to value, especially in declining markets. A small investment in certain derivatives may have a potentially large impact on the Fund’s performance. Derivatives can disproportionately increase losses as stated in the prospectus. The Fund’s objectives may be changed without shareholder approval. Please see the Fund’s prospectus for more information on these and other risks.

 

All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

 

 

 

 

 

 

6         Salomon Brothers Funds Trust 2005 Annual Report

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Manager’s Overview

 

Salomon Brothers New York Tax Free Bond Fund

 

Q. What were the overall market conditions during the Fund’s reporting period?

A. In many ways, the bond market in 2005 was similar to that in 2004. Steadily rising short-term interest rates, higher oil prices, and a strong economy all posed threats to bond prices. However, when all was said and done, the overall bond market, as measured by the Lehman Brothers Aggregate Bond Index,ⁱ returned 2.43% during the one-year period ended December 31, 2005. Municipal bonds generated even better returns, with the Lehman Brothers Municipal Bond Indexⁱⁱ gaining 3.51% over the same period.

As anticipated, the Federal Reserve Board (“Fed”)ⁱⁱⁱ continued to raise short-term interest rates at a measured pace during the reporting period. Since the Fed began its tightening cycle in June 2004, it has raised the federal funds rate^iv thirteen times, bringing it from 1.00% to 4.25% at the end of 2005. This caused short-term yields to rise sharply. However, as was the case in 2004, longer-term yields were relatively stable or fell modestly during the reporting period. This was due to relatively benign inflation and continued strong demand by foreign investors. Given this dynamic, both longer-term Treasuries and municipal securities significantly outperformed shorter-term bonds in 2005. From a credit quality perspective, lower quality municipals again outperformed their higher quality counterparts during the reporting period.

New municipal bond issuance from state and local governments was roughly $408 billion in 2005, a new calendar year record. This beat the previous high of $383 billion set in 2003. Overall, new supply was met with solid demand, in particular by property and casualty insurers and professional investors. In contrast, there was mixed demand from mutual fund shareholders.

 

Performance Review

For the 12 months ended December 31, 2005, Class A shares of the Salomon Brothers New York Tax Fee Bond Fund, excluding sales charges, returned 1.94%. The Fund’s unmanaged benchmark, the Lehman Brothers Municipal Bond Index returned 3.51% for the same period. The Lipper New York Municipal Debt Funds Category Average¹ increased 3.06% over the same time frame.

Certain investors may be subject to the Federal Alternative Minimum Tax, and state and local taxes may apply. Capital gains, if any, are fully taxable. Please consult your personal tax or legal adviser.

 

 

Salomon Brothers Funds Trust 2005 Annual Report         7

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Q. What were the most significant factors affecting Fund performance?

What were the leading contributors to performance?

A. The Fund benefited from its neutral duration posture during the reporting period. This positively contributed to returns, as securities that offered higher coupons were more often subject to being refunded by their issuers prior to their maturity date.

 

What were the leading detractors from performance?

A. Given the tight credit spread environment, the Fund was underweight lower quality, more speculative issues during the year. In particular, we did not own riskier tobacco settlement bonds. This positioning hurt the Fund’s performance as lower-quality securities outperformed their higher quality counterparts. In addition, tobacco securities performed very well in 2005 as a result of favorable litigation trends. Based on our expectations for higher interest rates amid continued Fed tightening, the Fund did not have as large an exposure to the long end of the curve as its benchmark. This detracted from results as the yield curve flattened over the period, as short-term rates rose while longer-term rates were relatively stable or declined during the year.

 

8         Salomon Brothers Funds Trust 2005 Annual Report

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Q. Were there any significant changes to the Fund during the reporting period?

A. There were no significant changes to the Fund’s portfolio.

 

Thank you for your investment in the Salomon Brothers New York Tax Free Bond Fund. As ever, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.

 

Sincerely,

 

 

February 2, 2006

 

The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.

 

RISKS: The Fund is a non-diversified mutual fund. This means that the Fund may invest a relatively high percentage of its assets in the obligations of a limited number of issuers. Investments in bonds are subject to interest rate and credit risks. As interest rates rise, bond prices fall, reducing the value of the Fund’s share price. Investors should consider the greater risk inherent in these policies when compared with a more diversified mutual fund. A portion of the income may be subject to federal alternative minimum tax; capital gains, if any, are subject to federal, state and local income taxes. Fund income earned by non-New York residents may be subject to certain taxes. While it is expected that a substantial portion of the dividends paid to shareholders of the Fund will be exempt from federal personal income taxes, portions of such dividends from time to time may be taxable. Salomon Brothers Asset Management does not provide tax or legal advice. Please consult with your tax or legal adviser. The Fund may invest in derivatives, which can be illiquid and harder to value, especially in declining markets. A small investment in certain derivatives may have a potentially large impact on the Fund’s performance. Derivatives can disproportionately increase losses as stated in the prospectus. The Fund’s objectives may be changed without shareholder approval. Please see the Fund’s prospectus for more information on these and other risks.

 

All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

 

 

 

 

 

Salomon Brothers Funds Trust 2005 Annual Report         9

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Manager’s Overview

 

Salomon Brothers Mid Cap Fund

 

Q. What were the overall market conditions during the Fund’s reporting period?

A. There was no shortage of problems for the U.S. economy to overcome during the reporting period. These included record high oil prices, rising short-term interest rates, the devastation inflicted by Hurricanes Katrina and Rita, geopolitical issues, and falling consumer confidence. A resilient U.S. economy provided a positive backdrop for the stock market in 2005. Businesses across America did their part, as corporate profit growth was expected to exceed 10% for the third consecutive year. However, this did not translate into strong stock market returns, as the S&P 500 Indexⁱ gained a modest 4.91% in 2005.

After trading in a fairly narrow range for much of the period, there were hopes that a year-end rally, similar to what occurred in 2003 and 2004, would propel stocks higher. However, after strong gains in November, the market treaded water in December as investor sentiment weakened due to fears of continued rate hikes by the Federal Reserve Board (“Fed”).ⁱⁱ

Looking at the year as a whole, mid- and large-cap stocks generated the best returns, with the Russell Midcap,ⁱⁱⁱ Russell 1000,^iv and Russell 2000^v Indexes returning 12.65%, 6.27%, and 4.55%, respectively. From an investment style perspective, value-oriented stocks outperformed their growth counterparts, with the Russell 3000 Value^vi and Russell 3000 Growth^vii Indexes returning 6.85% and 5.17%, respectively. Within the Russell 3000 Index,^viii the strongest performing sectors were energy and utilities and the weakest performing sectors were consumer discretionary and telecommunication services.

 

Performance Review

For the 12 months ended December 31, 2005, Class A shares of the Salomon Brothers Mid Cap Fund, excluding sales charges, returned 8.50%. The Fund’s unmanaged benchmark, the S&P MidCap 400 Index,^ix returned 12.56% for the same period. The Lipper Mid-Cap Core Funds Category Average¹ increased 10.27% over the same time frame.

 

 

10         Salomon Brothers Funds Trust 2005 Annual Report

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Q. What were the most significant factors affecting Fund performance?

A. The Fund’s underperformance relative to the S&P Midcap 400 Index was attributable to both sector allocation and security selection. Security selection was strongest in the consumer discretionary and financials sectors and weakest in the information technology and healthcare sectors. Underweight positions in utilities and consumer discretionary had a positive impact on performance; however this benefit was more than offset by an underweight position in information technology and a slight overweight in materials, which held back performance.

 

What were the leading contributors to performance?

A. The securities that contributed most to the Fund’s performance during the period included Southwestern Energy Co., Legg Mason Inc., Ann Taylor Stores Corp., Patterson-UTI Energy Inc. and Precision Drilling Trust. With the exception of Legg Mason Inc., which was sold off during the period, the Fund maintained its positions in all of these stocks at the close of the period.

 

What were the leading detractors from performance?

A. The securities that detracted most from the Fund’s performance during the period were Tibco Software, Inc., Tecumseh Products Co., Carrier Access Corp., Pet Smart Inc. and Inspire Pharmaceuticals. We continue to maintain a position in Tibco Software and sold all of the other positions mentioned above during the period.

 

Salomon Brothers Funds Trust 2005 Annual Report         11

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Q. Were there any significant changes to the Fund during the reporting period?

A. There were no significant changes made to the Fund during the reporting period.

 

Thank you for your investment in the Salomon Brothers Mid Cap Fund. As ever, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.

 

Sincerely,

 

Kevin Caliendo

Portfolio Manager

 

February 2, 2006

 

The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.

 

Portfolio holdings and breakdowns are as of December 31, 2005 and are subject to change and may not be representative of the portfolio manager’s current or future investments. The Fund’s top ten holdings (as a percentage of net assets) as of this date were: DST Systems Inc. (3.1%), Assurant Inc. (2.8%), Ann Taylor Stores Corp. (2.5%), Carlisle Cos. Inc. (2.2%), Outback Steakhouse Inc. (2.1%), TIBCO Software Inc. (2.1%), Station Casinos Inc. (2.0%), Protein Design Labs Inc. (2.0%), Southwestern Energy Co. (2.0%) and DJ Orthopedics Inc. (1.9%). Please refer to pages 43 through 47 for a list and percentage breakdown of the Fund’s holdings.

 

The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. Portfolio holdings are subject to change at any time and may not be representative of the portfolio manager’s current or future investments. The Fund’s top five sector holdings (as a percentage of net assets) as of December 31, 2005 were: Industrials (16.0%), Consumer Discretionary (15.7%), Health Care (13.3%), Financials (12.7%) and Information Technology (12.4%). The Fund’s portfolio composition is subject to change at any time.

 

RISKS: Investments in mid-cap stocks may involve a higher degree of risk and volatility than large-cap stocks. Compared to large-cap companies, medium-sized companies are more likely to have more limited product lines, capital resources and management depth and experience sharper swings in market values. The Fund may invest in derivatives, which can be illiquid and harder to value especially in declining markets. A small investment in certain derivatives may have a potentially large impact on the Fund’s performance. Derivatives can disproportionately increase losses as stated in the prospectus. Please see the Fund’s prospectus for more information on these and other risks.

 

All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

 

 

 

 

 

 

 

 

 

 

12         Salomon Brothers Funds Trust 2005 Annual Report

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Fund at a Glance (unaudited)

 

Salomon Brothers National Tax Free Bond Fund

 

 

Salomon Brothers Funds Trust 2005 Annual Report         13

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Fund at a Glance (unaudited)

 

Salomon Brothers California Tax Free Bond Fund

 

 

14         Salomon Brothers Funds Trust 2005 Annual Report

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Fund at a Glance (unaudited)

 

Salomon Brothers New York Tax Free Bond Fund

 

 

Salomon Brothers Funds Trust 2005 Annual Report         15

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Fund at a Glance (unaudited)

 

Salomon Brothers Mid Cap Fund

 

 

16         Salomon Brothers Funds Trust 2005 Annual Report

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Fund Expenses (unaudited)

 

Salomon Brothers National Tax Free Bond Fund

 

Example

As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including front-end and back-end sales charges (loads) on purchase payments and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

This example is based on an investment of $1,000 invested on July 1, 2005 and held for the six months ended December 31, 2005.

 

Actual Expenses

The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid During the Period”.

 

 

Salomon Brothers Funds Trust 2005 Annual Report         17

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Fund Expenses (unaudited) (continued)

 

Hypothetical Example for Comparison Purposes

The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other funds. To do so, compare the 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front-end or back-end sales charges (loads). Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.

 

 

18         Salomon Brothers Funds Trust 2005 Annual Report

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Fund Expenses (unaudited)

 

Salomon Brothers California Tax Free Bond Fund

 

Example

As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including front-end and back-end sales charges (loads) on purchase payments and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

This example is based on an investment of $1,000 invested on July 1, 2005 and held for the six months ended December 31, 2005.

 

Actual Expenses

The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid During the Period”.

 

 

Salomon Brothers Funds Trust 2005 Annual Report         19

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Fund Expenses (unaudited) (continued)

 

Hypothetical Example for Comparison Purposes

The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other funds. To do so, compare the 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front-end or back-end sales charges (loads). Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.

 

 

20         Salomon Brothers Funds Trust 2005 Annual Report

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Fund Expenses (unaudited)

 

Salomon Brothers New York Tax Free Bond Fund

 

Example

As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including front-end and back-end sales charges (loads) on purchase payments and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

This example is based on an investment of $1,000 invested on July 1, 2005 and held for the six months ended December 31, 2005.

 

Actual Expenses

The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid During the Period”.

 

 

Salomon Brothers Funds Trust 2005 Annual Report         21

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Fund Expenses (unaudited) (continued)

 

Hypothetical Example for Comparison Purposes

The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other funds. To do so, compare the 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front-end or back-end sales charges (loads). Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.

 

 

22         Salomon Brothers Funds Trust 2005 Annual Report

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Fund Expenses (unaudited)

 

Salomon Brothers Mid Cap Fund

 

Example

As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs, including front-end and back-end sales charges (loads) on purchase payments and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.

This example is based on an investment of $1,000 invested on July 1, 2005 and held for the six months ended December 31, 2005.

 

Actual Expenses

The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid During the Period”.

 

 

Salomon Brothers Funds Trust 2005 Annual Report         23

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Fund Expenses (unaudited) (continued)

 

Hypothetical Example for Comparison Purposes

The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other funds. To do so, compare the 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.

Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as front-end or back-end sales charges (loads). Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.

 

 

24         Salomon Brothers Funds Trust 2005 Annual Report

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Fund Performance

 

Salomon Brothers National Tax Free Bond Fund

 

 

 

Salomon Brothers Funds Trust 2005 Annual Report         25

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Fund Performance

 

Salomon Brothers California Tax Free Bond Fund

 

 

 

26         Salomon Brothers Funds Trust 2005 Annual Report

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Fund Performance

 

Salomon Brothers New York Tax Free Bond Fund

 

 

 

Salomon Brothers Funds Trust 2005 Annual Report         27

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Fund Performance

 

Salomon Brothers Mid Cap Fund

 

 

 

28         Salomon Brothers Funds Trust 2005 Annual Report

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Historical Performance (unaudited)

 

Value of $10,000 Invested in Class A Shares of the Salomon Brothers National Tax Free Bond Fund vs. Lehman Brothers Municipal 4 Years Plus Bond Index^† (December 1995 —December 2005)

 

 

 

 

All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Performance figures may reflect voluntary fee waivers and/or expense reimbursements. In the absence of voluntary fee waivers and/or expense reimbursements, the total return would have been lower.

 

Salomon Brothers Funds Trust 2005 Annual Report         29

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Historical Performance (unaudited)

 

Value of $10,000 Invested in Class A Shares of the Salomon Brothers California Tax Free Bond Fund vs. Lehman Brothers California 4 Years Plus Bond Index^† (November 1998 — December 2005)

 

 

 

 

All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Performance figures may reflect voluntary fee waivers and/or expense reimbursements. In the absence of voluntary fee waivers and/or expense reimbursements, the total return would have been lower.

 

30         Salomon Brothers Funds Trust 2005 Annual Report

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Historical Performance (unaudited)

 

Value of $10,000 Invested in Class A Shares of the Salomon Brothers New York Tax Free Bond Fund vs. Lehman Brothers Municipal Bond Index^† (December 1995 — December 2005)

 

 

 

 

All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Performance figures may reflect voluntary fee waivers and/or expense reimbursements. In the absence of voluntary fee waivers and/or expense reimbursements, the total return would have been lower.

 

Salomon Brothers Funds Trust 2005 Annual Report         31

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Historical Performance (unaudited)

 

Value of $10,000 Invested in Class O Shares of the Salomon Brothers Mid Cap Fund vs. S&P MidCap 400 Index^† (September 2001 — December 2005)

 

 

 

 

All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. Performance figures may reflect voluntary fee waivers and/or expense reimbursements. In the absence of voluntary fee waivers and/or expense reimbursements, the total return would have been lower.

 

32         Salomon Brothers Funds Trust 2005 Annual Report

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Schedules of Investments (December 31, 2005)

 

SALOMON BROTHERS NATIONAL TAX FREE BOND FUND

---

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         33

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Schedules of Investments (December 31, 2005) (continued)

 

 

See Notes to Financial Statements.

 

34         Salomon Brothers Funds Trust 2005 Annual Report

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Schedules of Investments (December 31, 2005) (continued)

 

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         35

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Schedules of Investments (December 31, 2005) (continued)

 

 

 

 

See Notes to Financial Statements.

 

36         Salomon Brothers Funds Trust 2005 Annual Report

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Schedules of Investments (December 31, 2005) (continued)

 

SALOMON BROTHERS CALIFORNIA TAX FREE BOND FUND

---

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         37

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Schedules of Investments (December 31, 2005) (continued)

 

 

See Notes to Financial Statements.

 

38         Salomon Brothers Funds Trust 2005 Annual Report

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Schedules of Investments (December 31, 2005) (continued)

 

SALOMON BROTHERS NEW YORK TAX FREE BOND FUND

---

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         39

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Schedules of Investments (December 31, 2005) (continued)

 

 

See Notes to Financial Statements.

 

40         Salomon Brothers Funds Trust 2005 Annual Report

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Schedules of Investments (December 31, 2005) (continued)

 

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         41

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Schedules of Investments (December 31, 2005) (continued)

 

 

See Notes to Financial Statements.

 

42         Salomon Brothers Funds Trust 2005 Annual Report

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Schedules of Investments (December 31, 2005) (continued)

 

SALOMON BROTHERS MID CAP FUND

---

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         43

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Schedules of Investments (December 31, 2005) (continued)

 

 

See Notes to Financial Statements.

 

44         Salomon Brothers Funds Trust 2005 Annual Report

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Schedules of Investments (December 31, 2005) (continued)

 

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         45

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Schedules of Investments (December 31, 2005) (continued)

 

 

See Notes to Financial Statements.

 

46         Salomon Brothers Funds Trust 2005 Annual Report

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Schedules of Investments (December 31, 2005) (continued)

 

 

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         47

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Bond Ratings (unaudited)

 

The definitions of the applicable rating symbols are set forth below:

 

Standard & Poor’s Ratings Service (“Standard & Poor’s”) — Ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or a minus (-) sign to show relative standings within the major rating categories.

 

Moody’s Investors Service (“Moody’s”) — Numerical modifiers 1, 2 and 3 may be applied to each generic rating from “Aa” to “CC,” where 1 is the highest and 3 the lowest ranking within its generic category.

 

48         Salomon Brothers Funds Trust 2005 Annual Report

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Bond Ratings (unaudited) (continued)

 

 

Short-Term Security Ratings (unaudited)

 

 

Salomon Brothers Funds Trust 2005 Annual Report         49

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Statements of Assets and Liabilities (December 31, 2005)

 

 

See Notes to Financial Statements.

 

50         Salomon Brothers Funds Trust 2005 Annual Report

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Statements of Assets and Liabilities (December 31, 2005) (continued)

 

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         51

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Statements of Operations (For the year ended December 31, 2005)

 

 

See Notes to Financial Statements.

 

52         Salomon Brothers Funds Trust 2005 Annual Report

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Statements of Changes in Net Assets (For the years ended December 31,)

 

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         53

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Statements of Changes in Net Assets (For the years ended December 31,) (continued)

 

 

See Notes to Financial Statements.

 

54         Salomon Brothers Funds Trust 2005 Annual Report

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Statements of Changes in Net Assets (For the years ended December 31, ) (continued)

 

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         55

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Statements of Changes in Net Assets (For the years ended December 31,) (continued)

 

 

See Notes to Financial Statements.

 

56         Salomon Brothers Funds Trust 2005 Annual Report

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Salomon Brothers National Tax Free Bond Fund

 

 

Financial Highlights

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31:

 

---

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         57

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Salomon Brothers National Tax Free Bond Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31 unless otherwise noted:

 

---

 

See Notes to Financial Statements.

 

58         Salomon Brothers Funds Trust 2005 Annual Report

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Salomon Brothers National Tax Free Bond Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:

 

---

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         59

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Salomon Brothers National Tax Free Bond Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:

 

---

 

See Notes to Financial Statements.

 

60         Salomon Brothers Funds Trust 2005 Annual Report

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Salomon Brothers California Tax Free Bond Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31:

 

---

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         61

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Salomon Brothers California Tax Free Bond Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:

 

---

 

See Notes to Financial Statements.

 

62         Salomon Brothers Funds Trust 2005 Annual Report

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Salomon Brothers California Tax Free Bond Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:

 

---

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         63

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Salomon Brothers California Tax Free Bond Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:

 

---

 

See Notes to Financial Statements.

 

64         Salomon Brothers Funds Trust 2005 Annual Report

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Salomon Brothers New York Tax Free Bond Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31:

 

---

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         65

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Salomon Brothers New York Tax Free Bond Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:

 

---

 

See Notes to Financial Statements.

 

66         Salomon Brothers Funds Trust 2005 Annual Report

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Salomon Brothers New York Tax Free Bond Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:

 

---

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         67

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Salomon Brothers New York Tax Free Bond Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:

 

---

 

See Notes to Financial Statements.

 

68         Salomon Brothers Funds Trust 2005 Annual Report

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Salomon Brothers Mid Cap Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:

 

---

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         69

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Salomon Brothers Mid Cap Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:

 

---

 

See Notes to Financial Statements.

 

70         Salomon Brothers Funds Trust 2005 Annual Report

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Salomon Brothers Mid Cap Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:

 

---

 

See Notes to Financial Statements.

 

Salomon Brothers Funds Trust 2005 Annual Report         71

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Salomon Brothers Mid Cap Fund

 

 

Financial Highlights (continued)

 

For a share of each class of beneficial interest outstanding throughout each year ended December 31, unless otherwise noted:

 

---

 

See Notes to Financial Statements.

 

72         Salomon Brothers Funds Trust 2005 Annual Report

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Notes to Financial Statements

 

The Salomon Brothers National Tax Free Bond Fund (“National Tax Free Bond Fund”), Salomon Brothers California Tax Free Bond Fund (“California Tax Free Bond Fund”) and Salomon Brothers New York Tax Free Bond Fund (“New York Tax Free Bond Fund”) each are a separate non-diversified series of the Salomon Funds Trust (the “Trust”). Salomon Brothers Mid Cap Fund (“Mid Cap Fund”) is a separate diversified series of the Trust. The Trust, a Massachusetts business trust, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company.

The following are significant accounting policies consistently followed by the Funds and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.

(a) Investment Valuation. Debt securities are valued at the mean between the bid and ask prices provided by an independent pricing service that are based on transactions in municipal obligations, quotations from municipal bond dealers, market transactions in comparable securities and various relationships between securities. Equity securities for which market quotations are available are valued at the last sale price or official closing price on the primary market or exchange on which they trade. When prices are not readily available, or are determined not to reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before a Fund calculates its net asset value, the Fund may value these investments at fair value as determined in accordance with the procedures approved by the Fund’s Board of Trustees. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates market value.

(b) Repurchase Agreements. When entering into repurchase agreements, it is the Funds’ policy that their custodian or a third party custodian take possession of the underlying collateral securities, the market value of which at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market to ensure the adequacy of the collateral. If the seller defaults and the market value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Funds may be delayed or limited.

(c) Fund Concentration. Since California Tax Free Bond Fund and New York Tax Free Bond Fund invests primarily in obligations of issuers within California and New York, respectively, they are subject to possible concentration risks associated with the economic, political, or legal developments or industrial or regional matters specifically affecting California and New York, respectively.

(d) Security Transactions and Investment Income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend

 

Salomon Brothers Funds Trust 2005 Annual Report         73

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Notes to Financial Statements (continued)

 

date. Foreign dividend income, with respect to the Mid Cap Fund, is recorded on the ex-dividend date or as soon as practical after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults on an expected interest payment, the Funds’ policy is to generally halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default.

(e) Foreign Currency Translation. The Mid Cap Fund’s investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.

The Mid Cap Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.

Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities, at the date of valuation, resulting from changes in exchange rates.

Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.

(f) Distributions to Shareholders. Distributions from net investment income for National Tax Free Bond Fund, California Tax Free Bond Fund and New York Tax Free Bond Fund are declared each business day to shareholders of record that day, and are paid on the last business day of the month. The Funds intend to satisfy conditions that will enable interest from municipal securities, which is exempt from federal and certain state income taxes, to retain such tax-exempt status when distributed to the shareholders of the Funds. Distributions from net investment income for the Mid Cap Fund if any, are declared on an annual basis. Distributions of net realized gains, if any, are taxable and are declared at least annually. Distributions are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.

(g) Class Accounting. Investment income, common expenses and realized/unrealized gain (loss) on investments are allocated to the various classes of the Funds on the basis of daily net assets of each class. Fees relating to a specific class are charged directly to that class.

(h) Expenses. The Funds bear all their costs of its operations other than expenses specifically assumed by the Manager. Expenses incurred by the Trust with respect to any

 

74         Salomon Brothers Funds Trust 2005 Annual Report

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Notes to Financial Statements (continued)

 

two or more funds or series are allocated in proportion to the average net assets of each fund, except when allocations of direct expenses to each Fund can otherwise be made fairly. Expenses directly attributable to a fund are charged to that fund.

(i) Federal and Other Taxes. It is the Funds’ policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, the Funds intend to distribute substantially all of its income and net realized gains on investments, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Funds’ financial statements. Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates.

(j) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. There were no reclassifications during the current year for Salomon Brothers National Tax Free Bond Fund, Salomon Brothers California Tax Free Bond Fund, Salomon Brothers New York Tax Free Bond Fund. Additionally, during the current year, the following reclassifications have been made:

 

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On December 1, 2005, Citigroup Inc. (“Citigroup”) completed the sale of substantially all of its asset management business, Citigroup Asset Management (“CAM”), to Legg Mason, Inc. (“Legg Mason”). As a result, the Funds’ investment manager, Salomon Brothers Asset Management Inc. (the “Manager”), previously an indirect wholly-owned subsidiary of Citigroup, has become a wholly-owned subsidiary of Legg Mason. Completion of the sale caused the Funds’ existing investment management contracts to terminate. Each Fund’s shareholders approved a new investment management contract between each Fund, as applicable and the Manager, which became effective on December 1, 2005.

Legg Mason, whose principal executive offices are at 100 Light Street, in Baltimore, Maryland 21202, is a financial services holding company.

Prior to the transaction and under the new investment management agreements, the Funds paid the Manager a fee calculated at an annual rate of 0.50%, 0.50%, 0.50% and 0.75 % of the average daily net assets of National Tax Free Bond Fund, California Tax Free Bond Fund, New York Tax Free Bond Fund and Mid Cap Fund, respectively. These fees are accrued daily and payable monthly.

 

Salomon Brothers Funds Trust 2005 Annual Report         75

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Notes to Financial Statements (continued)

 

For the year ended December 31, 2005, the Funds had the following voluntary expense limitations, which resulted in management fee waivers and expense reimbursements.

 

 

For the year ended December 31, 2005, the Manager voluntarily waived management fees of $204,363, $52,328, $179,455 and $74,922 for National Tax Free Bond Fund, California Tax Free Bond Fund, New York Tax Free Bond Fund and Mid Cap Fund, respectively. In addition, for the year ended December 31, 2005, the Manager has reimbursed expenses totaling $57,924, $118,690, $2,659 and $15,636 for the National Tax Free Bond Fund, the California Tax Free Bond Fund, the New York Tax Free Bond Fund and Mid Cap Fund respectively. These expense limitations can be terminated at any time by the Manager.

Each Fund’s Board has approved PFPC Inc. (“PFPC”) to serve as transfer agent for each Fund, effective January 1, 2006. The principal business office of PFPC is located at 4400 Computer Drive Westborough, MA 01581. During the period covered by this report, PFPC acted as the Funds’ transfer agent. PFPC was responsible for shareholder recordkeeping and financial processing for all shareholder accounts and was paid by CTB. For the period ended December 31, 2005, the Funds paid CTB $16,388, $449, $2,450 and $2,732 for National Tax Free Bond Fund, California Tax Free Bond Fund, New York Free Bond Fund and Mid Cap Fund, respectively. In addition, for the period ended December 31, 2005, the Funds paid $10,727, $2,784, $32,432 and $3,981 to other Citigroup affiliates for shareholder record keeping services for National Tax Free Bond Fund, California Tax Free Bond Fund, New York Tax Free Bond Fund and Mid Cap Fund, respectively.

Each Fund’s Board has appointed the Fund’s current distributor, Citigroup Global Markets Inc. (“CGM”) and Legg Mason Investor Services, LLC (“LMIS”), a wholly-owned broker-dealer subsidiary of Legg Mason, as co-distributors of each Fund. Each Fund’s Board has also approved amended and restated Rule 12b-1 Plans. CGM and other broker-dealers, financial intermediaries and financial institutions (each called a “Service Agent”) that currently offer each Fund shares will continue to make the Funds’ shares available to their clients. Additional Service Agents may offer the Funds’ shares in the future.

There is a maximum initial sales charge of 4.00% for Class A shares of National Tax Free Bond Fund, California Tax Free Bond Fund and New York Tax Free Bond Fund. There is also a maximum initial sales charge of 5.75% for Class A shares of Mid Cap Fund. There is also a 4.00% contingent deferred sales charge (“CDSC”) on Class B shares of the National Tax Free Bond Fund, California Tax Free Bond Fund and New York Tax Free Bond Fund which applies if shares are redeemed within the first year after purchase payment, 3.00% in the second year, 2.00% in the third year, 1.00% in the fourth and fifth year and no deferred

 

76         Salomon Brothers Funds Trust 2005 Annual Report

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Notes to Financial Statements (continued)

 

sales charge after the fifth year. There is a contingent deferred sales charge (“CDSC”) of 5.00% on Class B shares of the Mid Cap Fund, which applies if redemption occurs within one year from purchase payment and declines thereafter by 1.00% a year until no CDSC is incurred. Class C shares of the Funds have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. In certain cases, Class A shares of the Funds have a 1.00% CDSC, which applies if redemption occurs within one year from purchase payment. This CDSC only applies to those purchases of Class A shares, which, when combined with current holdings of Class A shares, equal or exceed $1,000,000 in the aggregate. These purchases do not incur an initial sales charge. Class O shares of the Funds have no initial or contingent deferred sales charges.

For the year ended December 31, 2005, sales charges received by CGM and CDSCs paid to CGM were as follows:

 

 

For the year ended December 31, 2005, there were no brokerage commissions paid to CGM and its affiliates from the Mid Cap Fund.

Certain officers and one trustee of the Trust are employees of Legg Mason or its affiliates and do not receive compensation from the Trust.

The Trust has adopted a Retirement Plan (“Plan”) for all Trustees who are not “interested persons” of the Trust, within the meaning of the 1940 Act. Under the Plan, all Trustees are required to retire from the Board as of the last day of the calendar year in which the applicable Trustee attains age 75. Trustees may retire under the Plan before attaining the mandatory retirement age. Trustees who have served as Trustee of the Trust or any of the investment companies associated with the Manager for at least ten years when they retire are eligible to receive the maximum retirement benefit under the Plan. The maximum retirement benefit is an amount equal to five times the amount of retainer and regular meeting fees payable to a Trustee during the entirety of the calendar year of the Trustee’s retirement. Amounts under the Plan may be paid in installments or in a lump sum (discounted to present value). Benefits under the Plan are unfunded. Three former Trustees are currently receiving payments under the Plan. In addition, two other former Trustees elected to receive a lump sum payment under the Plan. The Trust’s allocable share of expenses of the Plan for the year ended December 31, 2005 was $3,486.

 

Salomon Brothers Funds Trust 2005 Annual Report         77

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Notes to Financial Statements (continued)

 

During the year ended December 31, 2005, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:

 

 

At December 31, 2005, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:

 

 

Effective July 29, 2005, the Funds, along with affiliated funds, entered into an agreement with a syndicate of banks which allows the funds collectively to borrow up to $250 million. Interest on borrowing, if any, is charged to the specific fund executing the borrowing at the base rate of the bank. The line of credit requires a quarterly payment of a commitment fee based on the average daily unused portion of the line of credit. For the year ended December 31, 2005, the commitment fee allocated to the National Tax Free Bond Fund, California Tax Free Bond Fund, New York Tax Free Bond Fund and the Mid Cap Fund were $943, $237, $2,247, and $530 respectively. Since the line of credit was established, there have been no borrowings.

 

78         Salomon Brothers Funds Trust 2005 Annual Report

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Notes to Financial Statements (continued)

 

Pursuant to the Rule 12b-1 plan, each Fund pays a service fee with respect to its Class A, B and C shares calculated at the annual rate of 0.25% of the average daily net assets of each respective class. Each Fund also pays a distribution fee with respect to Class B shares calculated at the annual rate of 0.75% of the average daily net assets of that class. National Tax Free Bond Fund, California Tax Free Bond Fund and New York Tax Free Bond Fund each pay a distribution fee with respect to Class C shares calculated at the annual rate of 0.50% of the average daily net assets of that class. Mid Cap Fund pays a distribution fee with respect to Class C shares calculated at the annual rate of 0.75% of the average daily net assets of that class. For the year ended December 31, 2005, total Distribution fees, which are accrued daily and paid monthly, were as follows:

 

 

For the year ended December 31, 2005, total Transfer Agent fees were as follows:

 

 

For the year ended December 31, 2005, total Shareholder Reports expenses were as follows:

 

 

Salomon Brothers Funds Trust 2005 Annual Report         79

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Notes to Financial Statements (continued)

 

 

 

80         Salomon Brothers Funds Trust 2005 Annual Report

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Notes to Financial Statements (continued)

 

The Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest without par value for National Tax Free Bond Fund, California Tax Free Bond Fund and New York Tax Free Bond Fund and with a par value of $0.001 per share for Mid Cap Fund.

Transactions in Fund shares for the periods indicated were as follows:

 

 

Salomon Brothers Funds Trust 2005 Annual Report         81

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Notes to Financial Statements (continued)

 

 

82         Salomon Brothers Funds Trust 2005 Annual Report

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Notes to Financial Statements (continued)

 

 

Subsequent to the fiscal year end, the Fund has made the following tax-exempt distributions for:

 

 

Salomon Brothers Funds Trust 2005 Annual Report         83

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Notes to Financial Statements (continued)

 

The tax character of distributions paid during the fiscal year ended December 31, 2005 were as follows:

 

 

The tax character of distributions paid during the fiscal year ended December 31, 2004 were as follows:

 

 

As of December 31, 2005, the components of accumulated earnings on a tax basis were as follows:

 

 

 

These amounts will be available to offset any future taxable capital gains.

 

84         Salomon Brothers Funds Trust 2005 Annual Report

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Notes to Financial Statements (continued)

 

On May 31, 2005, the U.S. Securities and Exchange Commission (“SEC”) issued an order in connection with the settlement of an administrative proceeding against Smith Barney Fund Management Inc. (“SBFM”) and CGM relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds (the “Affected Funds”).

The SEC order finds that SBFM and CGM willfully violated Section 206(1) of the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the order finds that SBFM and CGM knowingly or recklessly failed to disclose to the boards of the Affected Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (“First Data”), the Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that CAM, the Citigroup business unit that, at the time, included the Affected Funds’ investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGM. The order also finds that SBFM and CGM willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Affected Funds’ best interests and that no viable alternatives existed. SBFM and CGM do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding.

The SEC censured SBFM and CGM and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order requires Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Affected Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan prepared and submitted for approval by the SEC. The order also requires that transfer agency fees received from the Affected Funds since December 1, 2004 less certain expenses be placed in escrow and provides that a portion of such fees may be subsequently distributed in accordance with the terms of the order.

The order required SBFM to recommend a new transfer agent contract to the Fund boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGM would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Funds’ Board selected a new transfer agent for the Funds. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.

 

Salomon Brothers Funds Trust 2005 Annual Report         85

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Notes to Financial Statements (continued)

 

At this time, there is no certainty as to how the proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made. Although there can be no assurance, the Affected Funds’ investment manager does not believe that this matter will have a material adverse effect on the Affected Funds.

 

Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGM and SBFM (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the SEC described in Note 9. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the investment manager for the Smith Barney family of funds, rescission of the Funds’ management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses.

On October 5, 2005, a motion to consolidate the five actions and any subsequently filed, related action was filed. That motion contemplates that a consolidated amended complaint alleging substantially similar causes of action will be filed in the future.

As of the date of this report, the Funds’ investment manager believes that resolution of the pending lawsuit will not have a material effect on the financial position or results of operations of the Funds or the ability of the Funds’ investment manager and its affiliates to continue to render services to the Funds under their respective contracts.

 

* * *

 

Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against CGM and a number of its affiliates, including SBFM and Salomon Brothers Asset Management Inc. (“SBAM”) (the “Advisers”), substantially all of the mutual funds managed by the Advisers, including the Fund (the “Funds”), and directors or trustees of the Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGM created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Advisers caused the Funds to pay excessive brokerage commissions to CGM for steering clients towards proprietary funds. The complaints also alleged that the Defendants breached their fiduciary duty to the Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Funds failed to adequately disclose certain aspects of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Funds’ contracts with the Advisers, recovery of all fees paid to the Advisers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.

On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. While the lawsuit is in its earliest stages, to the extent that the Complaint purports to state causes of action against the Funds, the

 

86         Salomon Brothers Funds Trust 2005 Annual Report

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Notes to Financial Statements (continued)

Funds’ investment manager believes the Funds have significant defenses to such allegations, which the Funds intend to vigorously assert in responding to the Complaint.

Additional lawsuits arising out of theses circumstances and presenting similar allegations and requests for relief may be filed against the Defendants in the future.

As of the date of this report, each Fund’s investment manager and the Funds believe that the resolution of the pending lawsuit will not have a material effect on the financial position or results of operations of the Funds or the ability of the Advisers and their affiliates to continue to render services to the Funds under their respective contracts.

The Defendants have moved to dismiss the Complaint. Those motions are pending before the court.

 

On September 16, 2005, the staff of the SEC informed SBFM and SBAM that the staff is considering recommending that the SEC institute administrative proceedings against SBFM and SBAM for alleged violations of Section 19(a) and 34(b) of the Investment Company Act (and related Rule 19a-1). The notification is a result of an industry wide inspection by the SEC and is based upon alleged deficiencies in disclosures regarding dividends and distributions paid to shareholders of certain funds. Section 19(a) and related Rule 19a-1 of the Investment Company Act generally require funds that are making dividend and distribution payments to provide shareholders with a written statement disclosing the source of the dividends and distributions, and, in particular, the portion of the payments made from each of net investment income, undistributed net profits and/or paid-in capital. In connection with the contemplated proceedings, the staff may seek a cease and desist order and/or monetary damages from SBFM or SBAM.

Although there can be no assurance, SBFM and SBAM believes that this matter is not likely to have a material adverse effect on the Fund or SBFM and SBAM’s ability to perform investment management services relating to the Funds.

 

Salomon Brothers Funds Trust 2005 Annual Report         87

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Report of Independent Registered Public Accounting Firm

 

To the Shareholders and Board of Trustees of

Salomon Funds Trust:

 

We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of Salomon Brothers National Tax Free Bond Fund, Salomon Brothers California Tax Free Bond Fund, Salomon Brothers New York Tax Free Bond Fund, and Salomon Brothers Mid Cap Fund, each a series of Salomon Funds Trust as of December 31, 2005, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Trust’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2005, by correspondence with the custodian and brokers. 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 Salomon Brothers National Tax Free Bond Fund, Salomon Brothers California Tax Free Bond Fund, Salomon Brothers New York Tax Free Bond Fund, and Salomon Brothers Mid Cap Fund, as of December 31, 2005, the results of their operations for the year then ended, the changes in their net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended in conformity with U.S. generally accepted accounting principles.

 

New York, New York

February 22, 2006

 

88         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited)

 

Salomon Brothers National Tax Free Bond Fund

 

Background

The members of the Board of Salomon Brothers National Tax Free Bond Fund (the “Fund”), a series of Salomon Funds Trust, including the Fund’s Board members that are not considered to be “interested persons” under the Investment Company Act of 1940, as amended (the “Independent Board Members”), received information from the Fund’s manager (the “Manager”) to assist them in their consideration of the Fund’s management agreement (the “Management Agreement”). The Board received and considered a variety of information about the Manager and the Fund’s distributor, as well as the advisory and distribution arrangements for the Fund and other funds overseen by the Board, certain portions of which are discussed below. The presentation made to the Board encompassed the Fund and all the funds for which the Board has responsibility. The discussion below covers both advisory and administrative functions being rendered by the Manager, each function encompassed by the Management Agreement.

 

Board Approval of Management Agreement

In approving the Management Agreement, the Fund’s Board, including the Independent Board Members, considered the factors below. In all of the Board’s considerations with respect to the approval of the Management Agreement, the Board was mindful of the proposed acquisition of the Manager by Legg Mason, Inc.

 

Nature, Extent and Quality of the Services under the Management Agreement

The Board received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager under the Management Agreement during the past year. The Board noted information received at regular meetings throughout the year related to the services rendered by the Manager in its management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Fund’s other service providers. The Board’s evaluation of the services provided by the Manager took into account the Board’s knowledge and familiarity gained as Board members of funds in the Citigroup Asset Management (“CAM”) fund complex, including the scope and quality of the Manager’s investment management and other capabilities and the quality of its administrative and other services. The Board observed that the scope of services provided by the Manager had expanded over time as a result of regulatory and other developments, including maintaining and monitoring its own and the Fund’s expanded compliance programs. The Board also considered the Manager’s response to recent regulatory compliance issues affecting it and the CAM fund complex. The Board reviewed information received from the Manager regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the Investment Company Act of 1940, as amended.

The Board reviewed the qualifications, backgrounds and responsibilities of the Manager’s senior personnel and the portfolio management team primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered the degree to which the Manager implemented organizational changes to improve investment results and the services provided to the CAM fund complex. The Board also considered, based on

 

Salomon Brothers Funds Trust 2005 Annual Report         89

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Board Approval of Management Agreement (unaudited) (continued)

 

its knowledge of the Manager and its affiliates, the financial resources available to CAM and its parent organization, Citigroup Inc.

The Board also considered the Manager’s brokerage policies and practices, the standards applied in seeking best execution, the use of a broker affiliated with the Manager and the existence of quality controls applicable to brokerage allocation procedures. In addition, management also reported to the Board on, among other things, its business plans, recent organizational changes and portfolio manager compensation plan.

The Board concluded that, overall, the nature, extent and quality of services provided (and expected to be provided) under the Management Agreement were acceptable.

 

Fund Performance

The Board received and considered performance information for the Fund as well as for a group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Board also noted that it had received and discussed with management information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark(s).

The information comparing the Fund’s performance to that of its Performance Universe, consisting of all retail and institutional funds classified as “general municipal debt funds” by Lipper, showed, among other data, that the Fund’s performance for the 1-year period ended March 31, 2005 was lower than the median while the performance for the 3- and 5-year periods ended March 31, 2005 was above the median. The Board took into account the Manager’s explanation of the Fund’s performance, as well as its plans to reexamine the Fund in the relatively near future.

Based on their review, which included careful consideration of all of the factors noted above, the Board, mindful of the proposed transaction with Legg Mason, concluded that it will continue to evaluate the Fund’s performance and any actions proposed by the Manager with respect to the Fund.

 

Management Fees and Expense Ratios

The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) payable by the Fund to the Manager in light of the nature, extent and quality of the management services provided by the Manager. The Board also reviewed and considered that fee waiver and/or expense reimbursement arrangements are currently in place for the Fund and considered the actual fee rate (after taking waivers and reimbursements into account) (the “Actual Management Fee”) and that the Manager had agreed to continue its fee waivers and reimbursements until further notice.

Additionally, the Board received and considered information comparing the Fund’s Contractual Management Fees and Actual Management Fee and the Fund’s overall expenses with those of funds in both the relevant expense group and a broader group of funds, each selected and provided by Lipper. The Board also reviewed information

 

90         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited) (continued)

 

regarding fees charged by the Manager to other U.S. clients investing primarily in an asset class similar to that of the Fund including, where applicable, separate accounts. The Manager reviewed with the Board the significant differences in scope of services provided to the Fund and to these other clients, noting that the Fund is provided with administrative services, office facilities, Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other Fund providers. The Board considered the fee comparisons in light of the differences required to manage these different types of accounts. The Board received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a proposed framework of fees based on asset classes.

Management also discussed with the Board the Fund’s distribution arrangements. The Board was provided with information concerning revenues received by and certain expenses incurred by the Fund’s affiliated distributor and how the amounts received by the distributor are paid.

The information comparing the Fund’s Contractual and Actual Management Fees as well as its actual total expense ratio to its Expense Group, consisting of certain retail front-end load funds (including the Fund) classified as “general municipal debt funds” and chosen by Lipper to be comparable to the Fund, showed that the Fund’s Contractual Management Fee and Actual Management Fee (which reflects a fee waiver) were below the median of its Expense Group. The Board took into account that the Actual Management Fee reflects the Manager’s waiver of its entire fee and that the Manager was also reimbursing certain of the Fund’s other expenses. The Board noted that the Fund’s actual total expense ratio was also below the median. The Board also noted that the Manager was continuing its voluntary waiver until further notice, resulting in an effective fee that is lower than the current contractual fee.

Taking all of the above into consideration, the Board determined that the Management Fee was reasonable in light of the nature, extent and quality of the services provided to the Fund under the Management Agreement.

 

Manager Profitability

The Board received and considered a profitability analysis of the Manager and its affiliates in providing services to the Fund. The Board also received profitability information with respect to the CAM fund complex as a whole. In addition, the Board received information with respect to the Manager’s allocation methodologies used in preparing this profitability data as well as a report from an outside consultant that had reviewed the Manager’s methodology. The Board noted that the Manager had waived its entire management fee from the Fund, and that the Fund was not profitable to the Manager and its affiliates.

 

Economies of Scale

The Board received and discussed information concerning whether the Manager realizes economies of scale as the Fund’s assets grow. The Board noted that if the Fund’s assets

 

Salomon Brothers Funds Trust 2005 Annual Report         91

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Board Approval of Management Agreement (unaudited) (continued)

 

increase over time, certain expenses, such as fees for Board members, auditors and legal fees, become a smaller percentage of overall assets. The Board also noted that the Fund’s Contractual Management Fee is within the range of management fees paid by the other funds in the Expense Group, and is lower than the median. The Board also noted that the Manager is currently waving its entire management fee. The Board also took into account the current asset level of the Fund. The Board determined that the management fee structure was reasonable.

 

Other Benefits to the Manager

The Board considered other benefits received by the Manager and its affiliates as a result of their relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders.

In light of the costs of providing investment management and other services to the Fund and the Manager’s ongoing commitment to the Fund, the profits and other ancillary benefits that the Manager and its affiliates received were considered reasonable.

In light of all of the foregoing, the Board approved the Management Agreement to continue for another year.

No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Management Agreement, and each Board Member attributed different weight to the various factors. The Independent Board Members were advised by separate independent legal counsel throughout the process. The Board also discussed the proposed continuance of the Management Agreement in private sessions with their independent legal counsel at which no representatives of the Manager were present.

 

Additional Information

On June 23, 2005, Citigroup Inc. entered into a definitive agreement (the “Transaction Agreement”) with Legg Mason, Inc. under which Citigroup agreed to sell substantially all of its asset management business, Citigroup Asset Management (“CAM”), which includes the Adviser, to Legg Mason in exchange for the broker-dealer and investment banking businesses of Legg Mason and certain other considerations (the “Transaction”). The Transaction closed on December 1, 2005.

The consummation of the Transaction resulted in the automatic termination of the Fund’s current management agreement in accordance with the Investment Company Act of 1940, as amended (the “1940 Act”). Prior to the closing of the Transaction, the Fund’s Board approved a new management agreement between the Fund and the Adviser (the “New Management Agreement”) and authorized the Fund’s officers to submit the New Management Agreement to shareholders for their approval.

On July 11, 2005, members of the Board discussed with CAM management and certain senior Legg Mason representatives the Transaction and Legg Mason’s general plans and intentions regarding the Fund, including the preservation, strengthening and growth of CAM’s business and its combination with Legg Mason’s business. Among other things,

 

92         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited) (continued)

 

the Board Members also inquired about the plans for and anticipated roles and responsibilities of certain CAM employees and officers after the Transaction.

At a meeting held in person on August 7, 2005, the Fund’s Board, including a majority of the Board Members who are not “interested persons” of the Fund or the Adviser as defined in the 1940 Act (the “Independent Board Members”), approved the New Management Agreement. To assist the Board in its consideration of the New Management Agreement, Legg Mason provided materials and information about Legg Mason, including its financial condition and asset management capabilities and organization, and CAM provided materials and information about the Transaction between Legg Mason and Citigroup. Representatives of CAM and Legg Mason and/or Western Asset Management and its affiliates (“Western Asset”) also made presentations to and responded to questions from the Board. The Independent Board Members, through their independent legal counsel, also requested and received additional information from CAM and Legg Mason in connection with their consideration of the New Management Agreement. The additional information was provided in advance of and at the August meeting. After the presentations and after reviewing the written materials provided, the Independent Board Members met in executive session with their counsel to consider the New Management Agreement.

The Independent Board Members conferred separately and with their counsel about the Transaction on a number of occasions, including in connection with the July and August meetings.

In their deliberations concerning the New Management Agreement, among other things, the Board Members considered:

(i) the automatic termination of the current management agreement upon completion of the Transaction and the need for continuity of services provided under the current management agreement;

(ii) the reputation, financial strength and resources of Legg Mason and its investment advisory subsidiaries;

(iii) that, following the Transaction, CAM will be part of an organization focused on the asset management business;

(iv) that Legg Mason and its wholly-owned subsidiary, Western Asset, are experienced and respected asset management firms, and that Legg Mason has advised the Board Members that (a) it intends to combine the fixed income investment operations (including money market fund operations) of CAM with those of Western Asset and may also wish to combine other CAM operations with those of other Legg Mason subsidiaries; (b) after the closing of the Transaction, it will take steps to combine the investment management operations of Western Asset with the fixed income operations of the Adviser, which, among other things, may involve Western Asset and the Adviser sharing common systems and procedures, employees (including portfolio managers), investment and trading platforms, and other resources; (c) it is expected that these combination processes will result in changes to portfolio managers or portfolio management teams for a number of the CAM funds, subject to Board consent and appropriate notice to shareholders, and that, in other cases, the current portfolio managers or portfolio management teams will remain in place; and (d) in

 

Salomon Brothers Funds Trust 2005 Annual Report         93

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Board Approval of Management Agreement (unaudited) (continued)

 

the future, it may recommend that Western Asset or other Legg Mason subsidiaries be appointed as the adviser or subadviser to some or all of the CAM funds, subject to applicable regulatory requirements;

(v) that CAM management had advised the Board that a number of portfolio managers and other key CAM personnel would be retained after the closing of the Transaction;

(vi) that CAM management and Legg Mason have advised the Board that following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Fund and their shareholders by the Adviser, including compliance services;

(vii) that under the Transaction Agreement, Citigroup and Legg Mason have agreed not to take any action that is not contemplated by the Transaction or fail to take any action that to their respective knowledge would cause any of the requirements of Section 15(f) of the 1940 Act not to be met;

(viii) the assurances from Citigroup and Legg Mason that, for a three-year period following the closing of the Transaction, Citigroup-affiliated broker-dealers will continue to offer the Fund as an investment product, and the potential benefits to Fund shareholders from this and other third-party distribution access;

(ix) the potential benefits to Fund shareholders from being part of a combined fund family with Legg Mason-sponsored funds, including possible economies of scale and access to investment opportunities;

(x) that Citigroup and Legg Mason would derive certain benefits from the Transaction and that, as a result, they have a financial interest in the matters that were being considered;

(xi) the potential effects of regulatory restrictions on the Fund if Citigroup-affiliated broker-dealers remain principal underwriters of the Fund after the closing of the Transaction;

(xii) the fact that the Fund’s total advisory and administrative fees will not increase by virtue of the New Management Agreement, but will remain the same;

(xiii) the terms and conditions of the New Management Agreement, including the differences from the current management agreement, and the benefits of a single, uniform form of agreement covering these services;

(xiv) that the Fund would not bear the costs of obtaining shareholder approval of the New Management Agreement;

(xv) that Citigroup and Legg Mason were negotiating a license arrangement that would permit the Fund to maintain its current name for some agreed upon time period after the closing of the Transaction; and

(xvi) that, as discussed in detail above, the Board had performed a full annual review of the current management agreement as required by the 1940 Act. In that regard, the Board’s deliberations concerning the New Management Agreement reflected its prior evaluation of relevant factors, including the nature, quality and extent of services provided, costs of services provided, profitability, fall-out benefits, fees and economies of scale and investment performance considered in connection

 

94         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited) (continued)

 

with the approval of the current management agreement and its determination that information provided by CAM and Legg Mason management prior to and at the August meeting supported the continued appropriateness of such conclusions with respect to the New Management Agreement.

No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the New Management Agreement, and each Board Member attributed different weight to the various factors. The Independent Board Members were advised by separate independent legal counsel throughout the process. The Board also discussed the New Management Agreement in private sessions with their independent legal counsel at which no representatives of the Adviser were present. In light of all of the foregoing, the Board approved the New Management Agreement and authorized the Fund’s officers to submit the New Management Agreement to shareholders for their approval.

 

Salomon Brothers Funds Trust 2005 Annual Report         95

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Board Approval of Management Agreement (unaudited) (continued)

 

Salomon Brothers California Tax Free Bond Fund

 

Background

The members of the Board of Salomon Brothers California Tax Free Bond Fund (the “Fund”), a series of Salomon Funds Trust, including the Fund’s Board members that are not considered to be “interested persons” under the Investment Company Act of 1940, as amended (the “Independent Board Members”), received information from the Fund’s manager (the “Manager”) to assist them in their consideration of the Fund’s management agreement (the “Management Agreement”). The Board received and considered a variety of information about the Manager and the Fund’s distributor, as well as the advisory and distribution arrangements for the Fund and other funds overseen by the Board, certain portions of which are discussed below. The presentation made to the Board encompassed the Fund and all the funds for which the Board has responsibility. The discussion below covers both advisory and administrative functions being rendered by the Manager, each function encompassed by the Management Agreement.

 

Board Approval of Management Agreement

In approving the Management Agreement, the Fund’s Board, including the Independent Board Members, considered the factors below. In all of the Board’s considerations with respect to the approval of the Management Agreement, the Board was mindful of the proposed acquisition of the Manager by Legg Mason, Inc.

 

Nature, Extent and Quality of the Services under the Management Agreement

The Board received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager under the Management Agreement during the past year. The Board noted information received at regular meetings throughout the year related to the services rendered by the Manager in its management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Fund’s other service providers. The Board’s evaluation of the services provided by the Manager took into account the Board’s knowledge and familiarity gained as Board members of funds in the Citigroup Asset Management (“CAM”) fund complex, including the scope and quality of the Manager’s investment management and other capabilities and the quality of its administrative and other services. The Board observed that the scope of services provided by the Manager had expanded over time as a result of regulatory and other developments, including maintaining and monitoring its own and the Fund’s expanded compliance programs. The Board also considered the Manager’s response to recent regulatory compliance issues affecting it and the CAM fund complex. The Board reviewed information received from the Manager regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the Investment Company Act of 1940, as amended.

The Board reviewed the qualifications, backgrounds and responsibilities of the Manager’s senior personnel and the portfolio management team primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered the degree to which the Manager implemented organizational changes to improve investment results

 

96         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited) (continued)

 

and the services provided to the CAM fund complex. The Board also considered, based on its knowledge of the Manager and its affiliates, the financial resources available to CAM and its parent organization, Citigroup Inc.

The Board also considered the Manager’s brokerage policies and practices, the standards applied in seeking best execution, the use of a broker affiliated with the Manager and the existence of quality controls applicable to brokerage allocation procedures. In addition, management also reported to the Board on, among other things, its business plans, recent organizational changes and portfolio manager compensation plan.

The Board concluded that, overall, the nature, extent and quality of services provided (and expected to be provided) under the Management Agreement were acceptable.

 

Fund Performance

The Board received and considered performance information for the Fund as well as for a group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Board also noted that it had received and discussed with management information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark(s).

The information comparing the Fund’s performance to that of its Performance Universe, consisting of all retail and institutional funds classified as “California municipal debt funds” by Lipper, showed, among other data, that the Fund’s performance for the 1-, 3-, and 5-year periods ended March 31, 2005 was below the median. The Board took into account the Manager’s explanation of the Fund’s performance, as well as its plans to reexamine the Fund in the relatively near future.

Based on their review, which included careful consideration of all of the factors noted above, the Board, mindful of the proposed transaction with Legg Mason, concluded that it will continue to evaluate the Fund’s performance and any actions proposed by the Manager with respect to the Fund.

 

Management Fees and Expense Ratios

The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) payable by the Fund to the Manager in light of the nature, extent and quality of the management services provided by the Manager. The Board also reviewed and considered that fee waiver and/or expense reimbursement arrangements are currently in place for the Fund and considered the actual fee rate (after taking waivers and reimbursements into account) (the “Actual Management Fee”) and that the Manager had agreed to continue its fee waivers and reimbursements until further notice.

Additionally, the Board received and considered information comparing the Fund’s Contractual Management Fees and Actual Management Fee and the Fund’s overall expenses with those of funds in both the relevant expense group and a broader group of funds, each selected and provided by Lipper. The Board also reviewed information regarding fees charged by the

 

Salomon Brothers Funds Trust 2005 Annual Report         97

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Board Approval of Management Agreement (unaudited) (continued)

 

Manager to other U.S. clients investing primarily in an asset class similar to that of the Fund including, where applicable, separate accounts. The Manager reviewed with the Board the significant differences in scope of services provided to the Fund and to these other clients, noting that the Fund is provided with administrative services, office facilities, Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other Fund providers. The Board considered the fee comparisons in light of the differences required to manage these different types of accounts. The Board received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a proposed framework of fees based on asset classes.

Management also discussed with the Board the Fund’s distribution arrangements. The Board was provided with information concerning revenues received by and certain expenses incurred by the Fund’s affiliated distributor and how the amounts received by the distributor are paid.

The information comparing the Fund’s Contractual and Actual Management Fees as well as its actual total expense ratio to its Expense Group, consisting of certain retail front-end load funds (including the Fund) classified as “California municipal debt funds” and chosen by Lipper to be comparable to the Fund, showed that the Fund’s Contractual Management Fee was equal to the median of the management fees paid by the other funds in the Expense Group and that the Actual Management Fee (which reflects a fee waiver) was below the median. The Board took into account that the Actual Management Fee reflects the Manager’s waiver of its entire fee and that the Manager was also reimbursing certain of the Fund’s other expenses. The Board noted that the Fund’s actual total expense ratio is below the median. The Board also noted that the Manager was continuing its voluntary waiver until further notice, resulting in an effective fee that is lower than the current contractual fee.

Taking all of the above into consideration, the Board determined that the Management Fee was reasonable in light of the nature, extent and quality of the services provided to the Fund under the Management Agreement.

 

Manager Profitability

The Board received and considered a profitability analysis of the Manager and its affiliates in providing services to the Fund. The Board also received profitability information with respect to the CAM fund complex as a whole. In addition, the Board received information with respect to the Manager’s allocation methodologies used in preparing this profitability data as well as a report from an outside consultant that had reviewed the Manager’s methodology. The Board noted that the Manager had waived its entire management fee from the Fund, and that the Fund was not profitable to the Manager and its affiliates.

 

Economies of Scale

The Board received and discussed information concerning whether the Manager realizes economies of scale as the Fund’s assets grow. The Board noted that if the Fund’s assets

 

98         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited) (continued)

 

increase over time, certain expenses, such as fees for Board members, auditors and legal fees, become a smaller percentage of overall assets. The Board also noted that the Fund’s Contractual Management Fee was equal to the median of the management fees paid by the other funds in the Expense Group. The Board also noted that the Fund’s Contractual Management Fee is within the range of management fees paid by the other funds in the Expense Group, and is lower than the median. The Board also noted that the Manager is currently waving its entire management fee. The Board also took into account the current asset level of the Fund. The Board determined that the management fee structure was reasonable.

 

Other Benefits to the Manager

The Board considered other benefits received by the Manager and its affiliates as a result of their relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders.

In light of the costs of providing investment management and other services to the Fund and the Manager’s ongoing commitment to the Fund, the profits and other ancillary benefits that the Manager and its affiliates received were considered reasonable.

In light of all of the foregoing, the Board approved the Management Agreement to continue for another year.

No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Management Agreement, and each Board Member attributed different weight to the various factors. The Independent Board Members were advised by separate independent legal counsel throughout the process. The Board also discussed the proposed continuance of the Management Agreement in private sessions with their independent legal counsel at which no representatives of the Manager were present.

 

Additional Information

On June 23, 2005, Citigroup Inc. entered into a definitive agreement (the “Transaction Agreement”) with Legg Mason, Inc. under which Citigroup agreed to sell substantially all of its asset management business, Citigroup Asset Management (“CAM”), which includes the Adviser, to Legg Mason in exchange for the broker-dealer and investment banking businesses of Legg Mason and certain other considerations (the “Transaction”). The Transaction closed on December 1, 2005.

The consummation of the Transaction resulted in the automatic termination of the Fund’s current management agreement in accordance with the Investment Company Act of 1940, as amended (the “1940 Act”). Prior to the closing of the Transaction, the Fund’s Board approved a new management agreement between the Fund and the Adviser (the “New Management Agreement”) and authorized the Fund’s officers to submit the New Management Agreement to shareholders for their approval.

On July 11, 2005, members of the Board discussed with CAM management and certain senior Legg Mason representatives the Transaction and Legg Mason’s general plans and intentions regarding the Fund, including the preservation, strengthening and growth of

 

Salomon Brothers Funds Trust 2005 Annual Report         99

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Board Approval of Management Agreement (unaudited) (continued)

 

CAM’s business and its combination with Legg Mason’s business. Among other things, the Board Members also inquired about the plans for and anticipated roles and responsibilities of certain CAM employees and officers after the Transaction.

At a meeting held in person on August 7, 2005, the Fund’s Board, including a majority of the Board Members who are not “interested persons” of the Fund or the Adviser as defined in the 1940 Act (the “Independent Board Members”), approved the New Management Agreement. To assist the Board in its consideration of the New Management Agreement, Legg Mason provided materials and information about Legg Mason, including its financial condition and asset management capabilities and organization, and CAM provided materials and information about the Transaction between Legg Mason and Citigroup. Representatives of CAM and Legg Mason and/or Western Asset Management and its affiliates (“Western Asset”) also made presentations to and responded to questions from the Board. The Independent Board Members, through their independent legal counsel, also requested and received additional information from CAM and Legg Mason in connection with their consideration of the New Management Agreement. The additional information was provided in advance of and at the August meeting. After the presentations and after reviewing the written materials provided, the Independent Board Members met in executive session with their counsel to consider the New Management Agreement.

The Independent Board Members conferred separately and with their counsel about the Transaction on a number of occasions, including in connection with the July and August meetings.

In their deliberations concerning the New Management Agreement, among other things, the Board Members considered:

(i) the automatic termination of the current management agreement upon completion of the Transaction and the need for continuity of services provided under the current management agreement;

(ii) the reputation, financial strength and resources of Legg Mason and its investment advisory subsidiaries;

(iii) that, following the Transaction, CAM will be part of an organization focused on the asset management business;

(iv) that Legg Mason and its wholly-owned subsidiary, Western Asset, are experienced and respected asset management firms, and that Legg Mason has advised the Board Members that (a) it intends to combine the fixed income investment operations (including money market fund operations) of CAM with those of Western Asset and may also wish to combine other CAM operations with those of other Legg Mason subsidiaries; (b) after the closing of the Transaction, it will take steps to combine the investment management operations of Western Asset with the fixed income operations of the Adviser, which, among other things, may involve Western Asset and the Adviser sharing common systems and procedures, employees (including portfolio managers), investment and trading platforms, and other resources; (c) it is expected that these combination processes will result in changes to portfolio managers or portfolio management teams for a number of the CAM funds, subject to Board consent and appropriate notice to shareholders, and that, in other cases, the current portfolio managers or portfolio management teams will remain in place; and (d) in the future, it may recommend that Western Asset or other Legg Mason subsidiaries

 

100         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited) (continued)

 

be appointed as the adviser or subadviser to some or all of the CAM funds, subject to applicable regulatory requirements;

(v) that CAM management had advised the Board that a number of portfolio managers and other key CAM personnel would be retained after the closing of the Transaction;

(vi) that CAM management and Legg Mason have advised the Board that following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Fund and their shareholders by the Adviser, including compliance services;

(vii) that under the Transaction Agreement, Citigroup and Legg Mason have agreed not to take any action that is not contemplated by the Transaction or fail to take any action that to their respective knowledge would cause any of the requirements of Section 15(f) of the 1940 Act not to be met;

(viii) the assurances from Citigroup and Legg Mason that, for a three-year period following the closing of the Transaction, Citigroup-affiliated broker-dealers will continue to offer the Fund as an investment product, and the potential benefits to Fund shareholders from this and other third-party distribution access;

(ix) the potential benefits to Fund shareholders from being part of a combined fund family with Legg Mason-sponsored funds, including possible economies of scale and access to investment opportunities;

(x) that Citigroup and Legg Mason would derive certain benefits from the Transaction and that, as a result, they have a financial interest in the matters that were being considered;

(xi) the potential effects of regulatory restrictions on the Fund if Citigroup-affiliated broker-dealers remain principal underwriters of the Fund after the closing of the Transaction;

(xii) the fact that the Fund’s total advisory and administrative fees will not increase by virtue of the New Management Agreement, but will remain the same;

(xiii) the terms and conditions of the New Management Agreement, including the differences from the current management agreement, and the benefits of a single, uniform form of agreement covering these services;

(xiv) that the Fund would not bear the costs of obtaining shareholder approval of the New Management Agreement;

(xv) that Citigroup and Legg Mason were negotiating a license arrangement that would permit the Fund to maintain its current name for some agreed upon time period after the closing of the Transaction; and

(xvi) that, as discussed in detail above, the Board had performed a full annual review of the current management agreement as required by the 1940 Act. In that regard, the Board’s deliberations concerning the New Management Agreement reflected its prior evaluation of relevant factors, including the nature, quality and extent of services provided, costs of services provided, profitability, fall-out benefits, fees and economies of scale and investment performance considered in connection with the approval of the current management agreement and its determination that information provided by CAM and Legg Mason management prior to and at the August meeting supported the continued appropriateness of such conclusions with respect to the New Management Agreement.

 

Salomon Brothers Funds Trust 2005 Annual Report         101

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Board Approval of Management Agreement (unaudited) (continued)

 

No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the New Management Agreement, and each Board Member attributed different weight to the various factors. The Independent Board Members were advised by separate independent legal counsel throughout the process. The Board also discussed the New Management Agreement in private sessions with their independent legal counsel at which no representatives of the Adviser were present. In light of all of the foregoing, the Board approved the New Management Agreement and authorized the Fund’s officers to submit the New Management Agreement to shareholders for their approval.

A condition to the closing of the Transaction required the new management agreements to be approved by CAM advisory clients representing a substantial majority of investment management revenues. This condition was satisfied and the Transaction closed on December 1, 2005, prior to approval of the Fund’s New Management Agreement having been obtained. The Fund’s current management agreement terminated upon consummation of the Transaction. Prior to the closing of the Transaction, the Fund’s Board, at a meeting held in person on November 21, 2005, approved an interim management agreement for the Fund.

In their deliberations concerning the interim management agreement, the Board Members considered that, as discussed in detail above, within the past year the Board had performed a full annual review of the current management agreement and had approved the New Management Agreement, subject to shareholder approval. In that regard, the Board, in its deliberations concerning the interim management agreement, met with senior representatives of CAM and Legg Mason to receive a status report on Legg Mason’s plans and intentions regarding CAM’s business and its combination with Legg Mason, including its plans for Fund portfolio management. On the basis of that report, the Board determined that its evaluation of relevant factors, including the nature, quality and extent of services provided, costs of services provided, profitability, fall out benefits, fees and economies of scale and investment performance and conclusions with respect thereto in connection with its approval of the New Management Agreement would apply to the interim agreement. However, the Board gave greatest weight to the imminent automatic termination of the current management agreement upon the completion of the Transaction and the need for continuity of the services provided thereunder pending shareholder approval of the New Management Agreement.

In accordance with Rule 15a-4 under the 1940 Act, which regulates the use of interim management agreements, the interim management agreement for the Fund will have a term no longer than 150 days. The terms of the interim management agreement approved by the Board are the same as those of the Fund’s current management agreement, differing only as to the effective date, the termination date and certain additional provisions required by law. Management fees will be held in escrow and not paid to the Manager until shareholders approve the New Management Agreement. If shareholders do not approve the New Management Agreement, the management fees held in escrow will be disbursed in accordance with applicable law.

 

102         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited) (continued)

 

Salomon Brothers New York Tax Free Bond Fund

 

Background

The members of the Board of Salomon Brothers New York Tax Free Bond Fund (the “Fund”), a series of Salomon Funds Trust, including the Fund’s Board members that are not considered to be “interested persons” under the Investment Company Act of 1940, as amended (the “Independent Board Members”), received information from the Fund’s manager (the “Manager”) to assist them in their consideration of the Fund’s management agreement (the “Management Agreement”). The Board received and considered a variety of information about the Manager and the Fund’s distributor, as well as the advisory and distribution arrangements for the Fund and other funds overseen by the Board, certain portions of which are discussed below. The presentation made to the Board encompassed the Fund and all the funds for which the Board has responsibility. The discussion below covers both advisory and administrative functions being rendered by the Manager, each function encompassed by the Management Agreement.

 

Board Approval of Management Agreement

In approving the Management Agreement, the Fund’s Board, including the Independent Board Members, considered the factors below. In all of the Board’s considerations with respect to the approval of the Management Agreement, the Board was mindful of the proposed acquisition of the Manager by Legg Mason, Inc.

 

Nature, Extent and Quality of the Services under the Management Agreement

The Board received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager under the Management Agreement during the past year. The Board noted information received at regular meetings throughout the year related to the services rendered by the Manager in its management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Fund’s other service providers. The Board’s evaluation of the services provided by the Manager took into account the Board’s knowledge and familiarity gained as Board members of funds in the Citigroup Asset Management (“CAM”) fund complex, including the scope and quality of the Manager’s investment management and other capabilities and the quality of its administrative and other services. The Board observed that the scope of services provided by the Manager had expanded over time as a result of regulatory and other developments, including maintaining and monitoring its own and the Fund’s expanded compliance programs. The Board also considered the Manager’s response to recent regulatory compliance issues affecting it and the CAM fund complex. The Board reviewed information received from the Manager regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the Investment Company Act of 1940, as amended.

The Board reviewed the qualifications, backgrounds and responsibilities of the Manager’s senior personnel and the portfolio management team primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered the degree to which the Manager implemented organizational changes to improve investment results

 

Salomon Brothers Funds Trust 2005 Annual Report         103

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Board Approval of Management Agreement (unaudited) (continued)

 

and the services provided to the CAM fund complex. The Board also considered, based on its knowledge of the Manager and its affiliates, the financial resources available to CAM and its parent organization, Citigroup Inc.

The Board also considered the Manager’s brokerage policies and practices, the standards applied in seeking best execution, the use of a broker affiliated with the Manager and the existence of quality controls applicable to brokerage allocation procedures. In addition, management also reported to the Board on, among other things, its business plans, recent organizational changes and portfolio manager compensation plan.

The Board concluded that, overall, the nature, extent and quality of services provided (and expected to be provided) under the Management Agreement were acceptable.

 

Fund Performance

The Board received and considered performance information for the Fund as well as for a group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Board also noted that it had received and discussed with management information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark(s).

The information comparing the Fund’s performance to that of its Performance Universe, consisting of all retail and institutional funds classified as “New York municipal debt funds” by Lipper, showed, among other data, that the Fund’s performance for the 1- and 5-year periods ended March 31, 2005 was below the median and the performance for the 3-year period ended March 31, 2005 was above the median. The Board took into account the Manager’s discussion of the Fund’s performance, as well as its plans to reexamine the Fund in the relatively near future.

Based on their review, which included careful consideration of all of the factors noted above, the Board, mindful of the proposed transaction with Legg Mason, concluded that it will continue to evaluate the Fund’s performance and any actions proposed by the Manager with respect to the Fund.

 

Management Fees and Expense Ratios

The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) payable by the Fund to the Manager in light of the nature, extent and quality of the management services provided by the Manager. The Board also reviewed and considered that fee waiver and/or expense reimbursement arrangements are currently in place for the Fund and considered the actual fee rate (after taking waivers and reimbursements into account) (the “Actual Management Fee”) and that the Manager had agreed to continue its fee waivers and reimbursements until further notice.

Additionally, the Board received and considered information comparing the Fund’s Contractual Management Fees and Actual Management Fee and the Fund’s overall expenses with those of funds in both the relevant expense group and a broader group of funds, each selected

 

104         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited) (continued)

 

and provided by Lipper. The Board also reviewed information regarding fees charged by the Manager to other U.S. clients investing primarily in an asset class similar to that of the Fund including, where applicable, separate accounts. The Manager reviewed with the Board the significant differences in scope of services provided to the Fund and to these other clients, noting that the Fund is provided with administrative services, office facilities, Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other Fund providers. The Board considered the fee comparisons in light of the differences required to manage these different types of accounts. The Board received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a proposed framework of fees based on asset classes.

Management also discussed with the Board the Fund’s distribution arrangements. The Board was provided with information concerning revenues received by and certain expenses incurred by the Fund’s affiliated distributor and how the amounts received by the distributor are paid.

The information comparing the Fund’s Contractual and Actual Management Fees as well as its actual total expense ratio to its Expense Group, consisting of certain retail front-end load funds (including the Fund) classified as “New York municipal debt funds” and chosen to be comparable to the Fund by Lipper, showed that the Fund’s Contractual Management Fee was equal to the median of the management fees paid by the other funds in the Expense Group and that the Actual Management Fee (which reflects a fee waiver) was below the median. The Board noted that the Fund’s actual total expense ratio was also below the median. The Board also noted that the Manager was continuing its voluntary waiver of a portion of the management fee until further notice, resulting in the same net effective fee as currently in place, which is lower than the current contractual fee.

Taking all of the above into consideration, the Board determined that the Management Fee was reasonable in light of the nature, extent and quality of the services provided to the Fund under the Management Agreement.

 

Manager Profitability

The Board received and considered a profitability analysis of the Manager and its affiliates in providing services to the Fund. The Board also received profitability information with respect to the CAM fund complex as a whole. In addition, the Board received information with respect to the Manager’s allocation methodologies used in preparing this profitability data as well as a report from an outside consultant that had reviewed the Manager’s methodology. The Manager’s profitability was considered not excessive in light of the nature, extent and quality of the services provided to the Fund.

 

Economies of Scale

The Board received and discussed information concerning whether the Manager realizes economies of scale as the Fund’s assets grow. The Board noted that as the Fund’s assets have increased over time, certain expenses, such as fees for Board members, auditors and

 

Salomon Brothers Funds Trust 2005 Annual Report         105

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Board Approval of Management Agreement (unaudited) (continued)

 

legal fees, become a smaller percentage of overall assets. The Board also noted that the Fund’s Contractual Management Fee was equal to the median of the management fees paid by the other funds in the Expense Group. The Board also noted that the Fund’s Actual Management Fee was below the median of its Expense Group and that the Manager was continuing its voluntary expense waiver. The Board determined that the management fee structure was reasonable.

 

Other Benefits to the Manager

The Board considered other benefits received by the Manager and its affiliates as a result of their relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders.

In light of the costs of providing investment management and other services to the Fund and the Manager’s ongoing commitment to the Fund, the profits and other ancillary benefits that the Manager and its affiliates received were considered reasonable.

In light of all of the foregoing, the Board approved the Management Agreement to continue for another year.

No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Management Agreement, and each Board Member attributed different weight to the various factors. The Independent Board Members were advised by separate independent legal counsel throughout the process. The Board also discussed the proposed continuance of the Management Agreement in private sessions with their independent legal counsel at which no representatives of the Manager were present.

 

Additional Information

On June 23, 2005, Citigroup Inc. entered into a definitive agreement (the “Transaction Agreement”) with Legg Mason, Inc. under which Citigroup agreed to sell substantially all of its asset management business, Citigroup Asset Management (“CAM”), which includes the Adviser, to Legg Mason in exchange for the broker-dealer and investment banking businesses of Legg Mason and certain other considerations (the “Transaction”). The Transaction closed on December 1, 2005.

The consummation of the Transaction resulted in the automatic termination of the Fund’s current management agreement in accordance with the Investment Company Act of 1940, as amended (the “1940 Act”). Prior to the closing of the Transaction, the Fund’s Board approved a new management agreement between the Fund and the Adviser (the “New Management Agreement”) and authorized the Fund’s officers to submit the New Management Agreement to shareholders for their approval.

On July 11, 2005, members of the Board discussed with CAM management and certain senior Legg Mason representatives the Transaction and Legg Mason’s general plans and intentions regarding the Fund, including the preservation, strengthening and growth of CAM’s business and its combination with Legg Mason’s business. Among other things, the Board Members also inquired about the plans for and anticipated roles and responsibilities of certain CAM employees and officers after the Transaction.

 

106         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited) (continued)

 

At a meeting held in person on August 7, 2005, the Fund’s Board, including a majority of the Board Members who are not “interested persons” of the Fund or the Adviser as defined in the 1940 Act (the “Independent Board Members”), approved the New Management Agreement. To assist the Board in its consideration of the New Management Agreement, Legg Mason provided materials and information about Legg Mason, including its financial condition and asset management capabilities and organization, and CAM provided materials and information about the Transaction between Legg Mason and Citigroup. Representatives of CAM and Legg Mason and/or Western Asset Management and its affiliates (“Western Asset”) also made presentations to and responded to questions from the Board. The Independent Board Members, through their independent legal counsel, also requested and received additional information from CAM and Legg Mason in connection with their consideration of the New Management Agreement. The additional information was provided in advance of and at the August meeting. After the presentations and after reviewing the written materials provided, the Independent Board Members met in executive session with their counsel to consider the New Management Agreement.

The Independent Board Members conferred separately and with their counsel about the Transaction on a number of occasions, including in connection with the July and August meetings.

In their deliberations concerning the New Management Agreement, among other things, the Board Members considered:

(i) the automatic termination of the current management agreement upon completion of the Transaction and the need for continuity of services provided under the current management agreement;

(ii) the reputation, financial strength and resources of Legg Mason and its investment advisory subsidiaries;

(iii) that, following the Transaction, CAM will be part of an organization focused on the asset management business;

(iv) that Legg Mason and its wholly-owned subsidiary, Western Asset, are experienced and respected asset management firms, and that Legg Mason has advised the Board Members that (a) it intends to combine the fixed income investment operations (including money market fund operations) of CAM with those of Western Asset and may also wish to combine other CAM operations with those of other Legg Mason subsidiaries; (b) after the closing of the Transaction, it will take steps to combine the investment management operations of Western Asset with the fixed income operations of the Adviser, which, among other things, may involve Western Asset and the Adviser sharing common systems and procedures, employees (including portfolio managers), investment and trading platforms, and other resources; (c) it is expected that these combination processes will result in changes to portfolio managers or portfolio management teams for a number of the CAM funds, subject to Board consent and appropriate notice to shareholders, and that, in other cases, the current portfolio managers or portfolio management teams will remain in place; and (d) in the future, it may recommend that Western Asset or other Legg Mason subsidiaries be appointed as the adviser or subadviser to some or all of the CAM funds, subject to applicable regulatory requirements;

 

Salomon Brothers Funds Trust 2005 Annual Report         107

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Board Approval of Management Agreement (unaudited) (continued)

 

(v) that CAM management had advised the Board that a number of portfolio managers and other key CAM personnel would be retained after the closing of the Transaction;

(vi) that CAM management and Legg Mason have advised the Board that following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Fund and their shareholders by the Adviser, including compliance services;

(vii) that under the Transaction Agreement, Citigroup and Legg Mason have agreed not to take any action that is not contemplated by the Transaction or fail to take any action that to their respective knowledge would cause any of the requirements of Section 15(f) of the 1940 Act not to be met;

(viii) the assurances from Citigroup and Legg Mason that, for a three-year period following the closing of the Transaction, Citigroup-affiliated broker-dealers will continue to offer the Fund as an investment product, and the potential benefits to Fund shareholders from this and other third-party distribution access;

(ix) the potential benefits to Fund shareholders from being part of a combined fund family with Legg Mason-sponsored funds, including possible economies of scale and access to investment opportunities;

(x) that Citigroup and Legg Mason would derive certain benefits from the Transaction and that, as a result, they have a financial interest in the matters that were being considered;

(xi) the potential effects of regulatory restrictions on the Fund if Citigroup-affiliated broker-dealers remain principal underwriters of the Fund after the closing of the Transaction;

(xii) the fact that the Fund’s total advisory and administrative fees will not increase by virtue of the New Management Agreement, but will remain the same;

(xiii) the terms and conditions of the New Management Agreement, including the differences from the current management agreement, and the benefits of a single, uniform form of agreement covering these services;

(xiv) that the Fund would not bear the costs of obtaining shareholder approval of the New Management Agreement;

(xv) that Citigroup and Legg Mason were negotiating a license arrangement that would permit the Fund to maintain its current name for some agreed upon time period after the closing of the Transaction; and

(xvi) that, as discussed in detail above, the Board had performed a full annual review of the current management agreement as required by the 1940 Act. In that regard, the Board’s deliberations concerning the New Management Agreement reflected its prior evaluation of relevant factors, including the nature, quality and extent of services provided, costs of services provided, profitability, fall-out benefits, fees and economies of scale and investment performance considered in connection with the approval of the current management agreement and its determination that information provided by CAM and Legg Mason management prior to and at the August meeting supported the continued appropriateness of such conclusions with respect to the New Management Agreement.

 

108         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited) (continued)

 

No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the New Management Agreement, and each Board Member attributed different weight to the various factors. The Independent Board Members were advised by separate independent legal counsel throughout the process. The Board also discussed the New Management Agreement in private sessions with their independent legal counsel at which no representatives of the Adviser were present. In light of all of the foregoing, the Board approved the New Management Agreement and authorized the Fund’s officers to submit the New Management Agreement to shareholders for their approval.

 

Salomon Brothers Funds Trust 2005 Annual Report         109

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Board Approval of Management Agreement (unaudited) (continued)

 

Salomon Brothers Mid Cap Fund

 

Background

The members of the Board of Salomon Brothers Mid Cap Fund (the “Fund”), a series of Salomon Funds Trust, including the Fund’s Board members that are not considered to be “interested persons” under the Investment Company Act of 1940, as amended (the “Independent Board Members”), received information from the Fund’s manager (the “Manager”) to assist them in their consideration of the Fund’s management agreement (the “Management Agreement”). The Board received and considered a variety of information about the Manager and the Fund’s distributor, as well as the advisory and distribution arrangements for the Fund and other funds overseen by the Board, certain portions of which are discussed below. The presentation made to the Board encompassed the Fund and all the funds for which the Board has responsibility. The discussion below covers both advisory and administrative functions being rendered by the Manager, each function encompassed by the Management Agreement.

 

Board Approval of Management Agreement

In approving the Management Agreement, the Fund’s Board, including the Independent Board Members, considered the factors below. In all of the Board’s considerations with respect to the approval of the Management Agreement, the Board was mindful of the proposed acquisition of the Manager by Legg Mason, Inc.

 

Nature, Extent and Quality of the Services under the Management Agreement

The Board received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager under the Management Agreement during the past year. The Board noted information received at regular meetings throughout the year related to the services rendered by the Manager in its management of the Fund’s affairs and the Manager’s role in coordinating the activities of the Fund’s other service providers. The Board’s evaluation of the services provided by the Manager took into account the Board’s knowledge and familiarity gained as Board members of funds in the Citigroup Asset Management (“CAM”) fund complex, including the scope and quality of the Manager’s investment management and other capabilities and the quality of its administrative and other services. The Board observed that the scope of services provided by the Manager had expanded over time as a result of regulatory and other developments, including maintaining and monitoring its own and the Fund’s expanded compliance programs. The Board also considered the Manager’s response to recent regulatory compliance issues affecting it and the CAM fund complex. The Board reviewed information received from the Manager regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under the Investment Company Act of 1940, as amended.

The Board reviewed the qualifications, backgrounds and responsibilities of the Manager’s senior personnel and the portfolio management team primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered the degree to which the Manager implemented organizational changes to improve investment results

 

110         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited) (continued)

 

and the services provided to the CAM fund complex. The Board also considered, based on its knowledge of the Manager and its affiliates, the financial resources available to CAM and its parent organization, Citigroup Inc.

The Board also considered the Manager’s brokerage policies and practices, the standards applied in seeking best execution, the Manager’s policies and practices regarding soft dollars, the use of a broker affiliated with the Manager and the existence of quality controls applicable to brokerage allocation procedures. In addition, management also reported to the Board on, among other things, its business plans, recent organizational changes and portfolio manager compensation plan.

The Board concluded that, overall, the nature, extent and quality of services provided (and expected to be provided) under the Management Agreement were acceptable.

 

Fund Performance

The Board received and considered performance information for the Fund as well as for a group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Board also noted that it had received and discussed with management information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark(s).

The information comparing the Fund’s performance to that of its Performance Universe, consisting of all retail and institutional funds classified as “mid-cap core funds” by Lipper, showed, among other data, that the Fund’s performance for the 1- and 3-year periods ended March 31, 2005 was below the median. Management noted that there has been a change in the portfolio management team, effective May 2005. The Board took into account the Manager’s discussion of the Fund’s performance, as well as its plans to reexamine the Fund in the relatively near future.

Based on their review, which included careful consideration of all of the factors noted above, the Board, mindful of the proposed transaction with Legg Mason, concluded that it will continue to evaluate the Fund’s performance and any proposed actions by the Manager with respect to the Fund.

 

Management Fees and Expense Ratios

The Board reviewed and considered the contractual management fee (the “Contractual Management Fee”) payable by the Fund to the Manager in light of the nature, extent and quality of the management services provided by the Manager. The Board also reviewed and considered that fee waiver and/or expense reimbursement arrangements are currently in place for the Fund and considered the actual fee rate (after taking waivers and reimbursements into account) (the “Actual Management Fee”) and that the Manager had agreed to continue its fee waivers and reimbursements until further notice.

Additionally, the Board received and considered information comparing the Fund’s Contractual Management Fees and Actual Management Fee and the Fund’s overall

 

Salomon Brothers Funds Trust 2005 Annual Report         111

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Board Approval of Management Agreement (unaudited) (continued)

 

expenses with those of funds in both the relevant expense group and a broader group of funds, each selected and provided by Lipper. The Board also reviewed information regarding fees charged by the Manager to other U.S. clients investing primarily in an asset class similar to that of the Fund including, where applicable, separate accounts. The Manager reviewed with the Board the significant differences in scope of services provided to the Fund and to these other clients, noting that the Fund is provided with administrative services, office facilities, Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other Fund providers. The Board considered the fee comparisons in light of the differences required to manage these different types of accounts. The Board received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a proposed framework of fees based on asset classes.

Management also discussed with the Board the Fund’s distribution arrangements. The Board was provided with information concerning revenues received by and certain expenses incurred by the Fund’s affiliated distributor and how the amounts received by the distributor are paid.

The information comparing the Fund’s Contractual and Actual Management Fees as well as its actual total expense ratio to its Expense Group, consisting of certain retail front-end load funds (including the Fund) classified as “mid-cap core funds” and chosen by Lipper to be comparable to the Fund, showed that the Fund’s Contractual Management Fee and Actual Management Fee (which reflects a fee waiver) were above the median. The Board noted that the Fund’s actual total expense ratio was above the median. The Board noted management’s discussion of Fund expenses. The Board also took into account that the Manager was continuing its voluntary waiver of a portion of the management fee until further notice, resulting in the same net effective fee as currently in place, which is lower than the current contractual fee.

Taking all of the above into consideration, the Board determined that the Management Fee was reasonable in light of the nature, extent and quality of the services provided to the Fund under the Management Agreement.

 

Manager Profitability

The Board received and considered a profitability analysis of the Manager and its affiliates in providing services to the Fund. The Board also received profitability information with respect to the CAM fund complex as a whole. In addition, the Board received information with respect to the Manager’s allocation methodologies used in preparing this profitability data as well as a report from an outside consultant that had reviewed the Manager’s methodology. The Manager’s profitability was considered not excessive in light of the nature, extent and quality of the services provided to the Fund.

 

Economies of Scale

The Board received and discussed information concerning whether the Manager realizes economies of scale as the Fund’s assets grow. The Board noted that if the Fund’s assets

 

112         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited) (continued)

 

increase over time, certain expenses, such as fees for Board members, auditors and legal fees, become a smaller percentage of overall assets. The Board also noted that the Fund’s Contractual Management Fee is lower than the average of management fees paid by the other funds in the Expense Group across all asset levels. The Board also noted that the Fund’s Actual Management Fee was below the median of its Expense Group and that the Manager was continuing its voluntary expense waiver. The Board also took into account the current asset level of the Fund. The Board determined that the management fee structure was reasonable.

 

Other Benefits to the Manager

The Board considered other benefits received by the Manager and its affiliates as a result of their relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders.

In light of the costs of providing investment management and other services to the Fund and the Manager’s ongoing commitment to the Fund, the profits and other ancillary benefits that the Manager and its affiliates received were considered reasonable.

In light of all of the foregoing, the Board approved the Management Agreement to continue for another year.

No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Management Agreement, and each Board Member attributed different weight to the various factors. The Independent Board Members were advised by separate independent legal counsel throughout the process. The Board also discussed the proposed continuance of the Management Agreement in private sessions with their independent legal counsel at which no representatives of the Manager were present.

 

Additional Information

On June 23, 2005, Citigroup Inc. entered into a definitive agreement (the “Transaction Agreement”) with Legg Mason, Inc. under which Citigroup agreed to sell substantially all of its asset management business, Citigroup Asset Management (“CAM”), which includes the Adviser, to Legg Mason in exchange for the broker-dealer and investment banking businesses of Legg Mason and certain other considerations (the “Transaction”). The Transaction closed on December 1, 2005.

The consummation of the Transaction resulted in the automatic termination of the Fund’s current management agreement in accordance with the Investment Company Act of 1940, as amended (the “1940 Act”). Prior to the closing of the Transaction, the Fund’s Board approved a new management agreement between the Fund and the Adviser (the “New Management Agreement”) and authorized the Fund’s officers to submit the New Management Agreement to shareholders for their approval.

On July 11, 2005, members of the Board discussed with CAM management and certain senior Legg Mason representatives the Transaction and Legg Mason’s general plans and intentions regarding the Fund, including the preservation, strengthening and growth of

 

Salomon Brothers Funds Trust 2005 Annual Report         113

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Board Approval of Management Agreement (unaudited) (continued)

 

CAM’s business and its combination with Legg Mason’s business. Among other things, the Board Members also inquired about the plans for and anticipated roles and responsibilities of certain CAM employees and officers after the Transaction.

At a meeting held in person on August 7, 2005, the Fund’s Board, including a majority of the Board Members who are not “interested persons” of the Fund or the Adviser as defined in the 1940 Act (the “Independent Board Members”), approved the New Management Agreement. To assist the Board in its consideration of the New Management Agreement, Legg Mason provided materials and information about Legg Mason, including its financial condition and asset management capabilities and organization, and CAM provided materials and information about the Transaction between Legg Mason and Citigroup. Representatives of CAM and Legg Mason and/or Western Asset Management and its affiliates (“Western Asset”) also made presentations to and responded to questions from the Board. The Independent Board Members, through their independent legal counsel, also requested and received additional information from CAM and Legg Mason in connection with their consideration of the New Management Agreement. The additional information was provided in advance of and at the August meeting. After the presentations and after reviewing the written materials provided, the Independent Board Members met in executive session with their counsel to consider the New Management Agreement.

The Independent Board Members conferred separately and with their counsel about the Transaction on a number of occasions, including in connection with the July and August meetings.

In their deliberations concerning the New Management Agreement, among other things, the Board Members considered:

(i) the automatic termination of the current management agreement upon completion of the Transaction and the need for continuity of services provided under the current management agreement;

(ii) the reputation, financial strength and resources of Legg Mason and its investment advisory subsidiaries;

(iii) that, following the Transaction, CAM will be part of an organization focused on the asset management business;

(iv) that Legg Mason is an experienced and respected asset management firm, and that Legg Mason has advised the Board Members that (a) it may wish to combine certain CAM operations with those of certain Legg Mason subsidiaries; (b) it is expected that these combination processes will result in changes to portfolio managers or portfolio management teams for a number of the CAM funds, subject to Board consent and appropriate notice to shareholders, and that, in other cases, the current portfolio managers or portfolio management teams will remain in place; and (c) in the future, it may recommend that Legg Mason subsidiaries be appointed as the adviser or subadviser to some or all of the CAM funds, subject to applicable regulatory requirements;

(v) that CAM management had advised the Board that a number of portfolio managers and other key CAM personnel would be retained after the closing of the Transaction;

 

114         Salomon Brothers Funds Trust 2005 Annual Report

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Board Approval of Management Agreement (unaudited) (continued)

 

(vi) that CAM management and Legg Mason have advised the Board that following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Fund and their shareholders by the Adviser, including compliance services;

(vii) that under the Transaction Agreement, Citigroup and Legg Mason have agreed not to take any action that is not contemplated by the Transaction or fail to take any action that to their respective knowledge would cause any of the requirements of Section 15(f) of the 1940 Act not to be met;

(viii) the assurances from Citigroup and Legg Mason that, for a three-year period following the closing of the Transaction, Citigroup-affiliated broker-dealers will continue to offer the Fund as an investment product, and the potential benefits to Fund shareholders from this and other third-party distribution access;

(ix) the potential benefits to Fund shareholders from being part of a combined fund family with Legg Mason-sponsored funds, including possible economies of scale and access to investment opportunities;

(x) that Citigroup and Legg Mason would derive certain benefits from the Transaction and that, as a result, they have a financial interest in the matters that were being considered;

(xi) the potential effects of regulatory restrictions on the Fund if Citigroup-affiliated broker-dealers remain principal underwriters of the Fund after the closing of the Transaction;

(xii) the fact that the Fund’s total advisory and administrative fees will not increase by virtue of the New Management Agreement, but will remain the same;

(xiii) the terms and conditions of the New Management Agreement, including the differences from the current management agreement, and the benefits of a single, uniform form of agreement covering these services;

(xiv) that the Fund would not bear the costs of obtaining shareholder approval of the New Management Agreement;

(xv) that Citigroup and Legg Mason were negotiating a license arrangement that would permit the Fund to maintain its current name for some agreed upon time period after the closing of the Transaction; and

(xvi) that, as discussed in detail above, the Board had performed a full annual review of the current management agreement as required by the 1940 Act. In that regard, the Board’s deliberations concerning the New Management Agreement reflected its prior evaluation of relevant factors, including the nature, quality and extent of services provided, costs of services provided, profitability, fall-out benefits, fees and economies of scale and investment performance considered in connection with the approval of the current management agreement and its determination that information provided by CAM and Legg Mason management prior to and at the August meeting supported the continued appropriateness of such conclusions with respect to the New Management Agreement.

 

Salomon Brothers Funds Trust 2005 Annual Report         115

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Board Approval of Management Agreement (unaudited) (continued)

 

No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the New Management Agreement, and each Board Member attributed different weight to the various factors. The Independent Board Members were advised by separate independent legal counsel throughout the process. The Board also discussed the New Management Agreement in private sessions with their independent legal counsel at which no representatives of the Adviser were present. In light of all of the foregoing, the Board approved the New Management Agreement and authorized the Fund’s officers to submit the New Management Agreement to shareholders for their approval.

 

116         Salomon Brothers Funds Trust 2005 Annual Report

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Additional Information (unaudited)

 

Information about Trustees and Officers

The business and affairs of the Salomon Funds Trust (“Trust”) are managed under the direction of the Trust’s Board of Trustees. Information pertaining to the Trustees and officers of the Trust is set forth below. The Statement of Additional Information includes additional information about the Trustees and is available, without charge, upon request by calling 1-800-451-2010.

 

 

Salomon Brothers Funds Trust 2005 Annual Report         117

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Additional Information (unaudited) (continued)

 

 

118         Salomon Brothers Funds Trust 2005 Annual Report

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Additional Information (unaudited) (continued)

 

 

Salomon Brothers Funds Trust 2005 Annual Report         119

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Additional Information (unaudited) (continued)

 

 

120         Salomon Brothers Funds Trust 2005 Annual Report

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Additional Information (unaudited) (continued)

 

 

Salomon Brothers Funds Trust 2005 Annual Report         121

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Additional Information (unaudited) (continued)

 

 

122         Salomon Brothers Funds Trust 2005 Annual Report

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Additional Information (unaudited) (continued)

 

 

Salomon Brothers Funds Trust 2005 Annual Report         123

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Additional Shareholder Information (unaudited)

 

Results of a Special Meeting of Shareholders

On November 29, 2005, a Special Meeting of Shareholders was held for the following purposes: 1) to approve a new management agreement and 2) to elect Trustees. The following table provides the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each matter voted on at the Special Meeting of Shareholders.

 

 

On December 19, 2005, a new management agreement was approved. The following table provides the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each matter voted on at the Special Meeting of Shareholders.

 

 

124         Salomon Brothers Funds Trust 2005 Annual Report

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Important Tax Information (unaudited)

 

The following information is provided with respect to the distributions paid during the taxable year ended December 31, 2005 for:

 

Salomon Brothers National Tax Free Bond Fund

All of the net investment income distributions paid monthly by the Fund from January 2005 through November 2005 qualify as tax-exempt interest dividends for Federal income tax purposes. Additionally, 99.62% of the net investment income distribution paid in December 2005 qualifies as a tax-exempt interest dividend for Federal income tax purposes.

 

Salomon Brothers California Tax Free Bond Fund

All of the net investment income distributions paid monthly by the Fund from January 2005 through July 2005 and from September 2005 through November 2005 qualify as tax-exempt interest dividends for Federal income tax purposes. Additionally, 99.53% of the net investment income distribution paid in August 2005 and 93.61% of the net investment income distribution paid in December 2005 qualifies as a tax-exempt interest dividend for Federal income tax purposes.

 

Salomon Brothers New York Tax Free Bond Fund

All of the net investment income distributions paid monthly by the Fund from January 2005 through July 2005 and from September 2005 through November 2005 qualify as tax-exempt interest dividends for Federal income tax purposes. Additionally, 99.27% of the net investment income distribution paid in August 2005 and 91.87% of the net investment income distribution paid in December 2005 qualifies as a tax-exempt interest dividend for Federal income tax purposes.

 

Salomon Brothers Mid Cap Fund

100% of the ordinary income distribution paid to shareholders of record on December 27, 2005 represents qualified dividend income for individuals and qualifies for the dividends received deduction for corporations.

Additionally, the Fund paid long-term capital gains distributions of $0.361758 and $0.626547 per share to shareholders of record on August 18, 2005 and December 8, 2005, respectively.

 

Please retain this information for your records.

 

Salomon Brothers Funds Trust 2005 Annual Report         125

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Salomon Funds Trust

 

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This report is submitted for the general information of the shareholders of Salomon Funds Trust, but it may also be used as sales literature when preceded or accompanied by the current Prospectus.

 

This report must be preceded or accompanied by a free prospectus. Investors should consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other important information about the Funds. Please read the prospectus carefully before investing.

 

www.citigroupam.com

 

©2005 Legg Mason Investor Service, LLC.

Member NASD, SIPC

 

 

 

 

 

Salomon Funds Trust

 

Salomon Brothers National Tax Free Bond Fund

 

Salomon Brothers California Tax Free Bond Fund

 

Salomon Brothers New York Tax Free Bond Fund

 

Salomon Brothers Mid Cap Fund

 

The Funds are separate investment Funds of the Salomon Funds Trust, a Massachusetts business trust.

 

SALOMON BROTHERS ASSET MANAGEMENT

399 Park Avenue

New York, New York 10022

1-800-SALOMON

 

Each Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Funds’ Forms N-Q are available on the Commission’s website at www.sec.gov. The Funds’ Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Funds, shareholders can call 1-800-446-1013.

 

Information on how the Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30, and a description of the policies and procedures that the funds use to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling 1-800-446-1013, (2) on the funds’ website at www.citigroupam.com and (3) on the SEC’s website at www.sec.gov.

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ITEM 2. CODE OF ETHICS.

 

The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.

 

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

 

The Board of Trustees of the registrant has determined that Stephen Randolph Gross, the Chairman of the Board’s Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated Mr. Gross as the Audit Committee’s financial expert. Mr. Gross is an “independent” Trustee pursuant to paragraph (a)(2) of Item 3 to Form N-CSR.

 

ITEM 4. Principal Accountant Fees and Services

 

a) Audit Fees. The aggregate fees billed in the last two fiscal years ending December 31, 2004 and December 31, 2005 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $78,000 in 2004 and $78,000 in 2005.

 

b) Audit-Related Fees. The aggregate fees billed in the Reporting Periods for assurance and related services by the Auditor that are reasonably related to the performance of the audit of the Registrant’s financial statements and are not reported under paragraph (a) of this Item 4 were $0 in 2004 and $255 in 2005. These services were rendered in connection with the review of KPMG workpaper review.

 

In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Salomon Funds Trust (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Periods (prior to May 6, 2003 services provided by the Auditor were not required to be pre-approved).

 

(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $8,100 in 2004 and $8,100 in 2005. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification

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matters and/or treatment of various financial instruments held or proposed to be acquired or held.

There were no fees billed for tax services by the Auditors to ervice affiliates during the Reporting Periods that required pre-approval by the Audit Committee.

 

d) All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item for the Salomon Funds Trust

 

All Other Fees. There were no other non-audit services rendered by the Auditor to Smith Barney Fund Management LLC (“SBFM”), and any entity controlling, controlled by or under common control with SBFM that provided ongoing services to Salomon Funds Trust requiring pre-approval by the Audit Committee in the Reporting Period.

 

(e) Audit Committee’s pre–approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.

 

(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by Smith Barney Fund Management LLC or Salomon Brothers Asset Management Inc. or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.

 

The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.

 

Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the

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Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.

 

(2) For the Salomon Funds Trust, the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 100% for 2004 and 2005; Tax Fees were 100% and 100% for 2004 and 2005; and Other Fees were 100% and 100% for 2004 and 2005.

 

(f) N/A

 

(g) Non-audit fees billed by the Auditor for services rendered to Salomon Funds Trust and CAM and any entity controlling, controlled by, or under common control with CAM that provides ongoing services to Salomon Funds Trust during the reporting period were $0 in 2005 for fees related to the transfer agent matter as fully described in the notes the financial statements titled “additional information” and $75,000 for 2004.

 

(h) Yes. The Salomon Funds Trust’ Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates which were not pre-approved (not requiring pre-approval) is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Salomon Funds Trust or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.

 

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

 

Not applicable.

 

ITEM 6. SCHEDULE OF INVESTMENTS.

 

Included herein under Item 1.

 

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

 

Not applicable.

 

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

 

Not applicable.

 

ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

 

Not applicable.

 

ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

 

Not applicable.

 

ITEM 11. CONTROLS AND PROCEDURES.

 

 

 

ITEM 12. EXHIBITS.

 

 

Exhibit 99.CODE ETH

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.