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SMITH BARNEY SECTOR SERIES INC.
Smith Barney Natural Resources Fund
7 World Trade Center
New York, New York 10048
October 18, 2000
Dear Shareholders:
You are being asked to vote on an Agreement and Plan of Reorganization
whereby all of the assets of Smith Barney Natural Resources Fund (the "Fund"),
a series of Smith Barney Sector Series Inc. ("Sector Series"), would be
transferred in a tax-free reorganization to Smith Barney Fundamental Value
Fund Inc. (the "Acquiring Fund"), in exchange for shares of the corresponding
class of common stock of the Acquiring Fund. If the Agreement and Plan of
Reorganization is approved and consummated, you would no longer be a
shareholder of the Fund, but would become a shareholder of the corresponding
class of the Acquiring Fund, which has a similar investment objective and
policies to your Fund, except as described in the Prospectus/Proxy Statement.
AFTER CAREFUL REVIEW, THE MEMBERS OF YOUR FUND'S BOARD HAVE APPROVED THE
PROPOSED REORGANIZATION. THE BOARD MEMBERS OF YOUR FUND BELIEVE THAT THE
PROPOSAL SET FORTH IN THE NOTICE OF MEETING FOR YOUR FUND IS IMPORTANT AND
RECOMMEND THAT YOU READ THE ENCLOSED MATERIALS CAREFULLY AND THEN VOTE FOR THE
PROPOSAL.
Your vote is important. PLEASE TAKE A MOMENT TO SIGN AND RETURN YOUR PROXY
CARD(S) IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. For more information,
please call 1-800-451-2010. If you prefer, you can vote by telephone or
through the internet by using the information on your proxy card. The Fund may
also solicit proxies from shareholders by letter and/or telephone. Voting by
telephone or through the internet will reduce the time and costs associated
with the proxy solicitation. When the Fund records proxies by telephone or
through the internet, it will use procedures designed to (i) authenticate
shareholders' identities, (ii) allow shareholders to authorize the voting of
their shares in accordance with their instructions and (iii) confirm that
their instructions have been properly recorded.
Whichever voting method you choose, please read the full text of the
accompanying Prospectus/Proxy Statement before you vote.
Respectfully,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board, President and Chief Executive Officer
Smith Barney Sector Series Inc.
WE URGE YOU TO SIGN AND RETURN YOUR PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID
ENVELOPE TO ENSURE A QUORUM AT THE MEETING. YOUR VOTE IS IMPORTANT REGARDLESS
OF THE NUMBER OF SHARES YOU OWN.
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SMITH BARNEY SECTOR SERIES INC.
Smith Barney Natural Resources Fund
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Please take notice that a Special Meeting of Shareholders (the "Special
Meeting") of Smith Barney Sector Series Inc. ("Sector Series"), on behalf of
its series, Smith Barney Natural Resources Fund (the "Fund"), will be held at
the offices of SSB Citi Fund Management LLC, 7 World Trade Center, New York,
New York 10048, on November 22, 2000, at 9:15 a.m., Eastern time, for the
following purposes:
PROPOSAL 1: To approve an Agreement and Plan of Reorganization for
the Fund;
PROPOSAL 2: To transact such other business as may properly come
before the meeting or any adjournment(s) thereof.
The appointed proxies will vote in their discretion on any other business as
may properly come before the Special Meeting or any adjournments thereof.
Holders of record of shares of the Fund at the close of business on October
13, 2000 are entitled to vote at the Special Meeting and at any adjournments
thereof.
If the necessary quorum to transact business or the vote required to approve
a Proposal is not obtained at the Special Meeting, the persons named as
proxies may propose one or more adjournments of the Special Meeting in
accordance with applicable law to permit further solicitation of proxies. Any
such adjournment as to a matter will require the affirmative vote of the
holders of a majority of the Fund's shares present in person or by proxy at
the Special Meeting. The persons named as proxies will vote in favor of such
adjournment those proxies which they are entitled to vote in favor of the
Proposal and will vote against any such adjournment those proxies to be voted
against the Proposal. For more information, please call 1-800-451-2010.
By Order of the Board of Directors
Christina T. Sydor
Secretary
October 18, 2000
----------------
IMPORTANT--WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY CARD(S) AND RETURN
THE CARD(S) IN THE ENCLOSED ADDRESSED ENVELOPE WHICH REQUIRES NO POSTAGE AND
IS INTENDED FOR YOUR CONVENIENCE. YOUR PROMPT RETURN OF THE ENCLOSED PROXY
CARD(S) MAY SAVE THE NECESSITY AND EXPENSE OF FURTHER SOLICITATIONS TO ENSURE
A QUORUM AT THE SPECIAL MEETING. IF YOU CAN ATTEND THE SPECIAL MEETING AND
WISH TO VOTE YOUR SHARES IN PERSON AT THAT TIME, YOU WILL BE ABLE TO DO SO.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
GENERAL.................................................................... 1
PROPOSAL: APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION................. 4
SYNOPSIS................................................................... 4
INVESTMENT OBJECTIVE AND POLICIES OF THE ACQUIRING FUND.................... 7
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND.............................. 8
INVESTMENT MANAGEMENT FEES AND EXPENSES.................................... 10
ANNUAL FUND OPERATING EXPENSES............................................. 12
DISTRIBUTION OF SHARES AND OTHER SERVICES.................................. 15
PURCHASE, REDEMPTION AND EXCHANGE INFORMATION.............................. 16
DIVIDENDS AND OTHER DISTRIBUTIONS.......................................... 16
TAX CONSEQUENCES........................................................... 16
PRINCIPAL INVESTMENTS AND RISK FACTORS..................................... 16
THE PROPOSED TRANSACTION................................................... 21
REASONS FOR THE PROPOSED TRANSACTION....................................... 22
DESCRIPTION OF THE SECURITIES TO BE ISSUED................................. 23
FEDERAL INCOME TAX CONSEQUENCES............................................ 24
LIQUIDATION AND TERMINATION OF SERIES...................................... 25
PORTFOLIO SECURITIES....................................................... 25
PORTFOLIO TURNOVER......................................................... 25
CAPITALIZATION AND PERFORMANCE............................................. 26
ADDITIONAL INFORMATION ABOUT THE FUNDS..................................... 27
INTERESTS OF CERTAIN PERSONS............................................... 27
ADDITIONAL INFORMATION..................................................... 28
</TABLE>
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ADDITIONAL MATERIALS
The following additional materials, which have been incorporated by
reference into the Statement of Additional Information dated October 18, 2000
relating to this Prospectus/Proxy Statement and the Reorganization, will be
sent to all shareholders of the Fund requesting a copy of such Statement of
Additional Information.
1. The Statement of Additional Information for the Acquiring Fund, dated
January 28, 2000.
2. The Statement of Additional Information for the Fund, dated February 14,
2000.
3. Annual Report of the Acquiring Fund for the year ended September 30,
1999 and the Semi-Annual Report of the Acquiring Fund for the six-month
period ended March 31, 2000.
4. Annual Report of the Fund for the year ended October 31, 1999 and the
Semi-Annual Report of the Fund for the six-month period ended April 30,
2000.
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Merger Q&A
Natural Resources Fund into Smith Barney Fundamental Value Fund Inc.
The enclosed materials include a combined Prospectus/Proxy Statement
containing information you need to make a more informed decision. However, we
thought it would also be helpful for you to have, at the start, answers to
some of the important questions you might have about the proposed
reorganization.
We hope you find these explanations useful as you review your materials
before voting. For more detailed information about the proposed
reorganization, please refer to the enclosed combined Prospectus/Proxy
Statement.
What will happen to my shares if the proposed reorganization is approved?
You will become a shareholder of the Smith Barney Fundamental Value Fund
Inc. on or about December 1, 2000 ("Closing Date") and will no longer be a
shareholder of the Smith Barney Natural Resources Fund, which will be
terminated pursuant to the proposed reorganization. You will receive shares of
the Smith Barney Fundamental Value Fund Inc. with a total net asset value
equal to the total net asset value of your investment in the Smith Barney
Natural Resources Fund at the time of the transaction.
If the reorganization is approved and you do not wish to become a
shareholder of the Smith Barney Fundamental Value Fund Inc., you may redeem
your shares prior to the Closing Date. Please note that any redemption will be
subject to all applicable sales charges and redemption fees and will result in
a taxable event for federal income tax purposes.
What is the key reason for this fund reorganization?
The portfolio manager has managed the Smith Barney Natural Resources Fund
with a broader focus than traditional sector funds, which is reflected in the
similarities of the current holdings of both Funds. The Smith Barney Natural
Resources Fund has not been successful in attracting investors and its
relatively small size hampers the management of its portfolio securities and
also results in a higher expense ratio than would be the case for a larger
fund. The proposed reorganization will create one single larger sized fund and
provide shareholders of the Smith Barney Natural Resources Fund with a fund
that has lower annual expenses and a broader investment mandate.
Do the funds have similar investment objectives?
Yes. The Smith Barney Natural Resources Fund seeks long-term capital
appreciation, while the Smith Barney Fundamental Value Fund Inc. seeks long-
term capital growth, with current income as a secondary consideration. John G.
Goode, the portfolio manager of your Fund, has also been the portfolio manager
of the Smith Barney Fundamental Value Fund Inc. since November 1995. There are
differences in the investment practices and limitations of each Fund (and
related risks). For additional information regarding the differences between
the two Funds, please refer to the enclosed proxy statement.
Do both Funds have the same dividend and other distribution payment schedules?
Yes. Each Fund generally pays dividends and makes capital gain
distributions, if any, once a year, typically in December.
<PAGE>
What are the tax consequences of this proposed reorganization?
Subject to shareholder approval, the proposed reorganization will not be a
taxable event. Shareholders will not realize any capital gain or loss as a
direct result of the proposed reorganization.
However, if the proposed reorganization is approved by the Smith Barney
Natural Resources Fund's shareholders, then as soon as practicable before the
Closing Date, the Smith Barney Natural Resources Fund will pay or have paid
its shareholders a cash distribution of substantially all undistributed 2000
net investment income and undistributed realized net capital gains. We ask
that you consult your tax advisor or other tax professional for assistance.
Will I enjoy the same privileges as a shareholder of the Smith Barney
Fundamental Value Fund Inc. that I currently have as a shareholder of the
Smith Barney Natural Resources Fund?
Yes. You will continue to enjoy substantially the same shareholder
privileges such as systematic investment, automatic cash withdrawal and
dividend reinvestment as well as access to professional service
representatives.
How does the Board of Directors recommend I vote?
The Directors recommend that you vote FOR the reorganization. Although no
guarantees can be given, the Directors believe the reorganization is in the
best interest of the Smith Barney Natural Resources Fund and its shareholders.
Why is my vote important?
Shareholders have a responsibility to vote on important matters affecting
their fund investments. No matter how many shares you own, your vote--and its
timeliness--are also important. Please complete and sign the enclosed proxy
card today!
Please note if you sign and date your proxy card, but do not provide voting
instructions, your shares will be voted FOR the proposal. Thank you in advance
for your vote.
<PAGE>
PROSPECTUS/PROXY STATEMENT
7 World Trade Center
New York, New York 10048
(800) 451-2010
OCTOBER 18, 2000
RELATING TO THE ACQUISITION BY
SMITH BARNEY FUNDAMENTAL VALUE FUND INC. (THE "ACQUIRING FUND")
OF THE ASSETS OF SMITH BARNEY NATURAL RESOURCES FUND (THE "FUND"),
A SERIES OF SMITH BARNEY SECTOR SERIES INC. ("SECTOR SERIES").
GENERAL
This Prospectus/Proxy Statement is furnished to shareholders of the Fund in
connection with a proposed reorganization in which all of the assets of the
Fund would be acquired by the Acquiring Fund, in exchange solely for voting
shares of the corresponding class of common stock of the Acquiring Fund and
the assumption by the Acquiring Fund of all of the stated liabilities of the
Fund (collectively, the "Reorganization"). Shares of the Acquiring Fund
thereby received would then be distributed to the shareholders of the Fund in
complete liquidation of the Fund, and the Fund would be terminated as a series
of Sector Series. As a result of the Reorganization, each shareholder of the
Fund would receive that number of full and fractional shares of the
corresponding class of the Acquiring Fund having an aggregate net asset value
equal to the aggregate net asset value of such shareholder's shares of the
Fund held as of the close of business on the Closing Date (as defined herein)
of the Reorganization. Shareholders of the Fund are being asked to vote on an
Agreement and Plan of Reorganization pursuant to which such transactions, as
described more fully below, would be consummated.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely the information about the Acquiring Fund that
a prospective investor should know before investing. For a more detailed
discussion of the investment objectives, policies, restrictions and risks of
the Acquiring Fund, see the prospectus for the Acquiring Fund, dated January
28, 2000, as supplemented from time to time, which is included
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE
ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS COMBINED
PROSPECTUS/PROXY STATEMENT AND IN THE MATERIALS EXPRESSLY INCORPORATED
HEREIN BY REFERENCE AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUNDS.
1
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herewith and incorporated herein by reference. This Prospectus/Proxy Statement
is also accompanied by the Acquiring Fund's annual report to shareholders for
the year ended September 30, 1999, and the semi-annual report to shareholders
for the six months ended March 31, 2000, each of which is included herewith
and incorporated herein by reference. For a more detailed discussion of the
investment objectives, policies, restrictions and risks of the Fund, see the
prospectus for the Fund, dated February 14, 2000, the annual report to
shareholders for the year ended October 31, 1999, and the semi-annual report
to shareholders for the six months ended April 30, 2000, each of which is
incorporated herein by reference and a copy of which may be obtained without
charge by writing to Smith Barney Mutual Funds, 7 World Trade Center, New
York, New York 10048, or by calling toll-free (800) 451-2010. A Statement of
Additional Information of the Fund and the Acquiring Fund dated October 18,
2000 containing additional information about the Reorganization and the
parties thereto has been filed with the Securities and Exchange Commission
(the "SEC" or the "Commission") and is incorporated by reference into this
Prospectus/Proxy Statement. A copy of the Statement of Additional Information
is available upon request and without charge by writing to or calling Smith
Barney Mutual Funds at the address or phone number listed above. Shareholder
inquiries regarding the Fund or the Acquiring Fund may also be made by calling
the phone number listed above. The information contained herein concerning the
Fund has been provided by, and is included herein in reliance upon, Sector
Series on behalf of the Fund. The information contained herein concerning the
Acquiring Fund has been provided by, and is included herein in reliance upon,
the Acquiring Fund.
The Acquiring Fund is a diversified open-end management investment company
organized as a Maryland corporation. The Fund is a diversified series of
Sector Series, an open-end management investment company organized as a
Maryland corporation. The principal investment objective of the Acquiring Fund
is long-term capital growth, with current income as a secondary consideration.
The Acquiring Fund seeks to achieve its primary objective by investing in
common stocks and common stock equivalents, such as preferred stocks and
securities convertible into common stocks, of companies that SSB Citi Fund
Management LLC ("SSB Citi") believes are undervalued in the market place. The
investment objective of the Fund is long-term capital appreciation. The Fund
invests primarily in equity and debt securities of U.S. and foreign companies
in natural resources industries. Natural resources include gold and other
precious metals, base metals, minerals, water, timberland and forest products,
agricultural commodities, oil, gas, coal and other energy resources. Both
Funds benefit from advisory services rendered by SSB Citi and have the same
portfolio manager, John G. Goode.
----------------
In the descriptions of the Proposal below, the word "fund" is sometimes used
to mean investment companies or series thereof in general, and not the Fund
whose proxy statement this is. In addition, in this Proxy
Statement/Prospectus, for simplicity, actions are described as being taken by
either the Fund or the Acquiring Fund (each, a "Fund," and collectively, the
"Funds"), although all actions are actually taken by Sector Series, on behalf
of the Fund, or by the Acquiring Fund, respectively.
This Prospectus/Proxy Statement, the Notice of Special Meeting and the proxy
card(s) are first being mailed to shareholders on or about October 18, 2000 or
as soon as practicable thereafter. Any shareholder of the Fund giving a proxy
has the power to revoke it by mail (addressed to the Secretary at the
principal executive office of Sector Series at the address shown at the
beginning of this Prospectus/Proxy Statement) or in person at the Special
Meeting by executing a superseding proxy or by submitting a notice of
revocation to the Fund. All properly executed proxies received in time for the
Special Meeting will be voted as specified in the proxy or, if no
specification is made, in favor of the Proposal referred to in the Proxy
Statement.
2
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The presence at any shareholders' meeting, in person or by proxy, of the
holders of shares of the Fund holding a majority of the votes of the Fund
entitled to be cast shall be necessary and sufficient to constitute a quorum
for the transaction of business. If the necessary quorum to transact business
or the vote required to approve any Proposal is not obtained at the Special
Meeting, the persons named as proxies may propose one or more adjournments of
the Special Meeting in accordance with applicable law to permit further
solicitation of proxies with respect to the Proposal that did not receive the
vote necessary for its passage or to obtain a quorum. Any such adjournment as
to a matter will require the affirmative vote of the holders of a majority of
the Fund's shares present in person or by proxy at the Special Meeting. The
persons named as proxies will vote in favor of such adjournment those proxies
which they are entitled to vote in favor of that Proposal and will vote
against any such adjournment those proxies to be voted against that Proposal.
For purposes of determining the presence of a quorum for transacting business
at the Special Meeting, abstentions and broker "non-votes" will be treated as
shares that are present but which have not been voted. Broker non-votes are
proxies received by the Fund from brokers or nominees when the broker or
nominee has neither received instructions from the beneficial owner or other
persons entitled to vote nor has discretionary power to vote on a particular
matter. Accordingly, shareholders are urged to forward their voting
instructions promptly.
The Proposal requires the affirmative vote of the holders of a majority of
the Fund's shares outstanding and entitled to vote thereon. Abstentions and
broker non-votes will have the effect of a "no" vote on the Proposal.
Holders of record of the shares of the Fund at the close of business on
October 13, 2000 (the "Record Date"), as to any matter on which they are
entitled to vote, will be entitled to one vote per share on all business of
the Special Meeting. As of October 13, 2000, there were 1,905,046.168 shares
of the Fund outstanding.
To the best of the Acquiring Fund's knowledge, as of October 13, 2000,
except as set forth in Annex A, no person owned beneficially more than 5% of
any class of the Acquiring Fund's outstanding shares. To the best of Sector
Series' knowledge, as of October 13, 2000, no person owned beneficially more
than 5% of any class of the Fund's outstanding shares.
As of October 13, 2000, less than 1% of the outstanding shares of the Fund
and the Acquiring Fund were owned directly or beneficially by the Directors of
Sector Series and the Acquiring Fund, respectively.
Each of the Fund and the Acquiring Fund provides periodic reports to all of
its shareholders which highlight relevant information, including investment
results and a review of portfolio changes. You may receive an additional copy
of the most recent annual report for each of the Fund and the Acquiring Fund
and a copy of any more recent semi-annual report, without charge, by calling
800-451-2010 or writing to the Fund or the Acquiring Fund at the address shown
at the beginning of this Prospectus/Proxy Statement.
3
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PROPOSAL: APPROVAL OF AGREEMENT AND PLAN OF REORGANIZATION
The Board of Directors of each of Sector Series and the Acquiring Fund,
including a majority of the Directors who are not "interested persons" of such
Funds (as defined in the Investment Company Act of 1940, as amended (the "1940
Act")) (the "Non-Interested Directors" or "Non-Interested Board Members"),
approved on September 12, 2000 and September 7, 2000, respectively, an
Agreement and Plan of Reorganization (the "Plan"). Subject to its approval by
the shareholders of the Fund, the Plan provides for (a) the transfer of all of
the assets of the Fund to the Acquiring Fund in exchange for shares of the
corresponding class of the Acquiring Fund and assumption of the Fund's stated
liabilities; (b) the distribution of such Acquiring Fund shares to the
shareholders of the Fund in complete liquidation of the Fund and the
cancellation of the Fund's outstanding shares; and (c) the liquidation and
termination of the Fund as a series of Sector Series (collectively, the
"Reorganization"). As a result of the Reorganization, each shareholder of the
Fund will become a shareholder of the corresponding class of the Acquiring
Fund and will hold, immediately after the closing of the Reorganization (the
"Closing"), that number of full and fractional shares of the corresponding
class of the Acquiring Fund having an aggregate net asset value equal to the
aggregate net asset value of such shareholder's shares held in the Fund as of
the close of business on the Closing Date (as defined below). The Closing is
expected to occur on December 1, 2000, or on such later date as the parties
may agree in writing (the "Closing Date").
SYNOPSIS
The following is a summary of certain information contained in this
Prospectus/Proxy Statement. This summary is qualified by reference to the more
complete information contained elsewhere in this Prospectus/Proxy Statement,
the Prospectus of the Acquiring Fund, the Prospectus of the Fund and the Plan,
the form of which is attached to this Prospectus/Proxy Statement as Exhibit A.
Shareholders of the Fund should read this entire Prospectus/Proxy Statement
carefully.
Introduction. Like your Fund, the Acquiring Fund is managed and administered
by SSB Citi, an affiliate of Salomon Smith Barney Inc. ("Salomon Smith
Barney"). The investment objective of the Acquiring Fund is long-term capital
growth (with current income as a secondary consideration) and the investment
objective of the Fund is long-term capital appreciation. John G. Goode is the
portfolio manager of your Fund as well as the Acquiring Fund. The distributor,
transfer agent and sub-transfer agents of each of the Fund and the Acquiring
Fund are identical. The Fund has retained KPMG LLP as its independent
auditors, while the Acquiring Fund has retained Deloitte & Touche LLP as its
independent auditors. The Acquiring Fund's custodian is PNC Bank, National
Association, while the Fund's custodian is The Chase Manhattan Bank, N.A.
If the Plan is consummated, shareholders of the Fund will become
shareholders of the corresponding class of the Acquiring Fund. The
Reorganization has been proposed in an effort to provide shareholders with
exposure to a broader investment mandate than currently available to the Fund,
while also providing shareholders of the Fund the benefit of a lower expense
ratio. The Fund has not been successful in attracting investors and its
relatively small size hampers the management of its portfolio securities and
also results in a higher expense ratio than would be the case for a larger
fund. Although past performance is not necessarily indicative of future
returns, the Acquiring Fund has also outperformed the Fund in the 5 and 10
year and since inception periods. After the Reorganization, shareholders of
the Fund will continue to enjoy many of the same shareholder privileges, such
as systematic investment, automatic cash withdrawal and automatic dividend
reinvestment, and
4
<PAGE>
access to professional service representatives as shareholders of the
Acquiring Fund. Each of the Fund and the Acquiring Fund declares dividends
from net investment income and pays distributions of net realized capital
gains, if any, annually. See "Dividends and Other Distributions." It is a
condition of the Reorganization that each Fund receive an opinion of
independent legal counsel that the Reorganization will be tax-free. This means
that shareholders will not realize any capital gain or loss as a direct result
of the Reorganization.
Proposed Transaction. The aggregate net asset value of each class of voting
shares of the Acquiring Fund (the "Shares") issued in exchange for all of the
assets and stated liabilities of the corresponding class of the Fund will be
equal to the net asset value of that class of the Fund as of the Closing Date.
Immediately following the transfer of Shares to the Fund, the Shares received
by the Fund will be distributed pro rata to the shareholders of record of the
Fund on the Closing Date and the shares of the Fund will be cancelled.
For the reasons described below under "The Proposed Transaction--Reasons for
the Proposed Transaction," the Board of Directors of Sector Series, including
the Non-Interested Directors, on behalf of the Fund, has concluded the
following:
-- the Reorganization is in the best interests of the Fund and its
shareholders; and
-- the interests of the existing shareholders of the Fund will not be
diluted as a result of the Reorganization.
Accordingly, the Directors recommend approval of the Plan. If the Plan is
not approved, the Fund will continue in existence unless other action is taken
by the Directors; such other action may include resubmitting the Plan for
shareholder approval and termination and liquidation of the Fund.
Comparison of Investment Objectives and Policies. The principal investment
objective of the Acquiring Fund is long-term capital growth, with current
income as a secondary consideration. The Acquiring Fund seeks to achieve its
primary objective by investing in common stocks and common stock equivalents,
such as preferred stocks and securities convertible into common stocks, of
companies that SSB Citi believes are undervalued in the market place. The
Acquiring Fund may also invest in securities, such as preferred stocks and
convertible securities, that provide dividend or interest income. The
Acquiring Fund may invest up to 25% of its assets in foreign securities
(including, among other things, American Depository Receipts).
The investment objective of the Fund is long-term capital appreciation. The
Fund seeks to achieve its objective by investing primarily (at least 65% of
its assets) in equity and debt securities of issuers in natural resources
industries. Natural resources include gold and other precious metals, base
metals, minerals, water, timberland and forest products, agricultural
commodities, oil, gas, coal and other energy resources. The Fund may invest up
to 35% of its assets in securities of U.S. and foreign issuers not engaged in
natural resources industries, as well as in gold bullion and gold coins.
Each Fund may purchase short-term investments, money market instruments and
repurchase agreements and may lend portfolio securities. Each Fund also may
invest in small, medium and large capitalization companies. Under normal
circumstances, the Fund may hold up to 20% of its assets in cash and in short-
term investments, but it may hold such instruments without limitation when SSB
Citi determines that it is appropriate to maintain a temporary defensive
position. Each Fund may also invest in warrants and restricted securities and
may engage in short sales against the box and borrowing. With respect to short
sales against the box, the Fund will segregate the common stock or convertible
or exchangeable preferred stock or debt securities in a special account with
its custodian; not more than 10% of the Fund's net assets (taken at current
value) may be held as collateral for such sales at any one time.
5
<PAGE>
Each Fund may borrow for temporary or emergency (not leveraging) purposes,
including for the meeting of redemption requests, in an amount up to 10% of
its total assets. The Fund may also pledge its assets in connection with such
borrowings. Whenever these borrowings exceed 5% of the Fund's total assets,
however, the Fund will not make any additional investments.
Both Funds may invest in medium- or low-rated securities and unrated
securities of comparable quality (sometimes referred to as "junk bonds"). Each
Fund may use derivative contracts, such as futures and options on securities
indices or currencies, options on these futures, forward currency contracts
and interest rate or currency swaps for hedging purposes or as a substitute
for buying or selling securities, but the Acquiring Fund may also use these
instruments, in some limited cases, to enhance return. The Fund may utilize up
to 10% of its assets to purchase put options on securities owned by the Fund
and up to an additional 10% of its assets to purchase call options on
securities the Fund may acquire in the future. The Fund may purchase only put
options that are traded on a regulated exchange. The Fund may purchase and
write put and call options on domestic and foreign stock indexes to hedge
against risks of market-wide movements affecting that portion of its assets
invested in the country whose stocks are subject to the hedges. The Fund may
also purchase put and call options on gold, purchase gold futures contracts
and write covered call options on gold.
For hedging purposes, the Acquiring Fund may write covered call options,
purchase put and call options on currencies and debt securities and use
interest rate futures contracts and options thereon. The Acquiring Fund may
write call options on securities and currencies only if they are covered and
such options must remain covered so long as the Acquiring Fund is obligated as
a writer. The Acquiring Fund may write covered call options on securities for
hedging purposes and to enhance return. The Acquiring Fund may purchase put
and call options and write call options on domestic stock indexes listed on
domestic exchanges and may invest in stock index futures contracts and options
on futures contracts that are traded on a domestic exchange or board of trade.
Each Fund has substantially similar fundamental investment restrictions with
respect to its diversified status; issuing senior securities; industry
concentration (except natural resources investments with respect to the Fund);
underwriting securities; borrowing money; purchasing or selling real estate,
real estate mortgages, commodities or commodity contracts (except that the
Fund may also invest in gold bullion and coins or receipts for gold); and
making loans. Investment restrictions of each Fund which are fundamental
policies may not be changed without the approval of the applicable Fund's
shareholders.
With respect to non-fundamental policies (those which may be changed by a
Fund's Board of Directors without shareholder approval), both Funds (i) may
not invest more than 5% of their assets in issuers which have been in
continuous operations for less than three years; (ii) may invest up to 15% of
their net assets in illiquid securities; (iii) may not invest in any issuer
for the purpose of exercising control or management; and (iv) may not purchase
any securities on margin (except for such short-term credits as are necessary
for the clearance of purchases and sales of portfolio securities) or sell any
securities short (except "against the box"). The Acquiring Fund (i) may not
invest in other open-end investment companies; (ii) purchase or sell real
estate limited partnership interests; and (iii) purchase or retain the
securities of any issuer if it has knowledge that any officer or director of
the Acquiring Fund or SSB Citi owns beneficially more than 1/2 of 1% of the
outstanding securities of the issuer and the persons so owning more than 1/2
of 1% of such securities together own beneficially more than 5% of such
securities. While the Acquiring Fund may only invest up to 2% of its net
assets in warrants, the Fund may invest up to 5% of its net assets in
warrants. The foregoing limitations do not include warrants acquired by a Fund
as part of a unit or attached to securities at the time of purchase. The
Acquiring Fund may not write, purchase or sell puts, calls, straddles, spreads
or combinations thereof or engage in transactions
6
<PAGE>
involving futures contracts and related options except as described herein.
The Acquired Fund may not engage in the purchase or sale of put, call,
straddle or spread options or in the writing of such options other than (i)
purchasing and writing put and call options on securities and stock indexes,
(ii) entering into closing purchase transactions with respect to such options,
(iii) purchasing put and call options on gold, purchasing gold futures
contracts and writing covered call options on gold, or (iv) upon 60 days'
notice given to its shareholders, (1) writing put and other call options on
gold or (2) entering into other hedging transactions involving futures
contracts and related options, including gold futures contracts.
Investors should refer to the respective prospectuses and statements of
additional information of the Fund and the Acquiring Fund for a fuller
description of each Fund's investment policies and restrictions.
INVESTMENT OBJECTIVE AND POLICIES OF THE ACQUIRING FUND
Principal Investment Strategies. As stated above, the Acquiring Fund seeks
long-term capital growth, with current income as a secondary consideration.
The Acquiring Fund invests primarily in common stocks and common stock
equivalents, such as preferred stocks and securities convertible into common
stocks, of companies that SSB Citi believes are undervalued in the market
place. While SSB Citi selects investments primarily for their capital
appreciation potential, secondary consideration is given to a company's
dividend record and the potential for an improved dividend return. The
Acquiring Fund generally invests in securities of large, well-known companies
but may also invest a significant portion of its assets in securities of small
to medium-sized companies when SSB Citi believes smaller companies offer more
attractive value opportunities. The Acquiring Fund's primary objective is
fundamental and may not be changed without the approval of the holders of a
majority of the Acquiring Fund's outstanding shares. There is no guarantee
that the Acquiring Fund will achieve its investment objective.
The Acquiring Fund may also invest in securities, such as preferred stocks
and convertible securities, that provide dividend or interest income. The
Acquiring Fund may also invest up to 25% of its assets in securities of
foreign issuers and may, but need not, use derivative contracts, such as
futures and options on securities, securities indices or currencies, options
on these futures, forward currency contracts and interest rate or currency
swaps for any of the following purposes:
. To hedge against the economic impact of adverse changes in the market
value of its securities, because of changes in stock market prices,
currency exchange rates or interest rates;
. As a substitute for buying or selling securities; or
. To enhance return.
The Acquiring Fund may also depart from its principal investment strategies
in response to adverse market, economic or political conditions by taking
temporary defensive positions in money market and short-term debt securities.
Selection Process. On behalf of the Acquiring Fund, SSB Citi employs a two-
step stock selection process in its search for undervalued stocks of
temporarily out of favor companies. First, SSB Citi uses proprietary models
and fundamental research to try to identify stocks that are underpriced in the
market relative to their fundamental value. Next, SSB Citi looks for a
positive catalyst in the company's near term outlook which SSB Citi believes
will accelerate earnings or improve the value of the company's assets. SSB
Citi also emphasizes companies in those sections of the economy which SSB Citi
believes are undervalued relative to other sectors.
7
<PAGE>
When evaluating an individual stock, SSB Citi looks for:
. Low market valuations measured by SSB Citi's valuation models
. Positive changes in earnings prospects because of factors such as:
. New, improved or unique products and services
. New or rapidly expanding markets for the company's products
. New management
. Changes in the economic, financial, regulatory or political
environment particularly affecting the company
. Effective research, product development and marketing
. A business strategy not yet recognized by the market place
Principal risks of investing in the Acquiring Fund. Investors could lose
money on their investment in the Acquiring Fund, or the Acquiring Fund may not
perform as well as other investments, if:
. Stock prices decline generally
. SSB Citi's judgment about the attractiveness, value or potential
appreciation of a particular stock proves to be incorrect
. An adverse event, such as negative press reports about a company in
which the Acquiring Fund invests, depresses the value of the company's
stock
. The markets strongly favor growth stocks over stocks with value
characteristics
. Small or medium capitalization companies fall out of favor with
investors
Compared to funds that focus only on large capitalization companies, the
Acquiring Fund's share price may be more volatile because the Acquiring Fund
also invests a significant portion of its assets in small and medium
capitalization companies.
Compared to large companies, small and medium capitalization companies are
more likely to have:
. More limited product lines
. Fewer capital resources
. More limited management depth
Further, securities of small and medium capitalization companies are more
likely to:
. Experience sharper swings in market values
. Be harder to sell at times and at prices SSB Citi believes appropriate
. Offer greater potential for gains and losses
INVESTMENT OBJECTIVE AND POLICIES OF THE FUND
Principal Investment Strategies. The Fund seeks long-term capital
appreciation by investing primarily in equity and debt securities of issuers
in natural resources industries. The Fund invests primarily in equity
securities of U.S. and foreign companies in natural resources industries.
Natural resources include gold and other precious metals, base metals,
minerals, water, timberland and forest products, agricultural commodities,
oil, gas, coal and other energy resources. A natural resources company derives
at least 50% of its revenue from:
. Owning, producing or processing natural resources or leases or rights to
natural resources
. Exploring for, developing, transporting or distributing natural
resources
8
<PAGE>
. Providing services or supplies to a natural resources industry
. Developing energy efficient technologies
. Upgrading or processing raw commodities into intermediate products
Selection Process. The Fund invests in a broad range of natural resources
industries that have the potential for long-term capital appreciation. SSB
Citi considers the risks associated with investing in the countries where
these industries are located.
In allocating assets among these industries, SSB Citi considers:
. The likely impact of expected economic development on industry demand
. Expected changes in industry supply relative to demand
. The degree to which expected positive or negative industry developments
are reflected in the market price of industry securities
. Domestic or international political factors that may influence natural
resource companies
In selecting the securities of specific companies, SSB Citi looks for:
. Consistently high return on capital
. Growth in cash flow and earnings
. A low stock price relative to private market valuation, or historical
valuation measures
. Experienced and effective management whose interests are aligned with
those of shareholders
. Events that cause a security to be temporarily undervalued
The Fund may lend its securities to earn income for the Fund. The Fund may,
but need not, use derivative contracts, such as futures and options on
securities, securities, securities indices or currencies, options on these
futures, forward currency contracts and interest rate or currency swaps for
any of the following purposes:
. To hedge against the economic impact of adverse changes in the market
value of its securities, because of changes in stock market prices,
currency exchange rates or interest rates;
. Settle transactions in securities quoted in foreign currencies; or
. As a substitute for buying or selling securities.
The Fund may engage in foreign currency transactions solely to manage its
exposure to foreign securities.
The Fund may invest up to 35% of its assets in securities of U.S. and
foreign issuers not engaged in natural resources industries, as well as in
gold bullion and gold coins. The Fund may also invest in debt securities of
U.S. and foreign corporate and governmental issuers rated as low as B by the
major rating agencies or, if unrated, of comparable quality. The Fund may
depart from its principal investment strategies in response to adverse market,
economic or political conditions by taking temporary defensive positions in
all types of money market and short-term debt securities.
Principal risks of investing in the Fund. Investors could lose money on
their investment in the Fund, or the Fund may not perform as well as other
investments, because:
. Stock markets are volatile and can decline significantly in response to
adverse issuer, political, regulatory, market or economic developments.
Different parts of the market can react differently to these
developments.
9
<PAGE>
. Foreign markets can be more volatile than the U.S. market because of
increased risks of adverse issuer, political, regulatory, market or
economic developments and can perform differently than the U.S. market.
Currency fluctuations may adversely impact the Fund's investments.
. The natural resources industries can be significantly affected by events
relating to international, political and economic developments, energy
conservation, the success of exploration projects, and tax and other
government regulations.
. The value of an individual security or particular type of security can
be more volatile than the market as a whole and can perform differently
than the market as a whole. The value of smaller capitalized companies
may involve greater risks, such as limited product lines, markets and
financial or managerial resources.
. The Fund's investments are spread across the sector on which it focuses.
However, because those investments are limited to a comparatively narrow
segment of the economy, the Fund's investments are not as diversified as
most mutual funds, and far less diversified than the broad securities
markets. This means that the Fund tends to be more volatile than other
mutual funds, and the value of its portfolio investments tend to go up
and down more rapidly. As a result, the value of your investment in the
Fund may rise or fall rapidly.
. SSB Citi's judgment about the attractiveness, growth prospects, value or
potential appreciation of a particular stock may prove to be incorrect.
INVESTMENT MANAGEMENT FEES AND EXPENSES
Sector Series, on behalf of the Fund, and the Acquiring Fund each retain SSB
Citi pursuant to separate contracts, to manage the daily investment and
business affairs of the Fund and the Acquiring Fund, respectively, subject to
the policies established by their respective Board of Directors. All expenses
of each Fund, including the investment advisory fees, are paid by that Fund.
Shareholders pay no direct charges or fees for investment services.
The Acquiring Fund. SSB Citi, located at 7 World Trade Center, New York, New
York 10048, serves as the Acquiring Fund's investment adviser and
administrator. SSB Citi (through its predecessor entities) has been in the
investment counseling business since 1968 and renders investment management
and administration services to a wide variety of individual, institutional and
investment company clients having aggregate assets under management as of June
30, 2000 in excess of $388 billion. SSB Citi and Salomon Smith Barney are
subsidiaries of Citigroup Inc. Citigroup businesses provide a broad range of
financial services--asset management, banking and consumer finance, credit and
charge cards, insurance, investments, investment banking and trading--and use
diverse channels to make them available to consumer and corporate customers
around the world.
Subject to the supervision and direction of the Acquiring Fund's Board of
Directors, SSB Citi manages the Fund's portfolio in accordance with the
Acquiring Fund's stated investment objective and policies, makes investment
decisions for the Acquiring Fund, places orders to purchase and sell
securities and employs professional portfolio managers and securities analysts
who provide research services to the Acquiring Fund. Under an investment
advisory agreement, the Acquiring Fund pays SSB Citi a fee, computed daily and
paid monthly, at the annual rate of 0.55% of the value of its average daily
net assets up to $1.5 billion, 0.50% of the
10
<PAGE>
value of its average daily net assets up to $2.0 billion, 0.49% of the value
of its average daily net assets up to $2.5 billion, 0.46% of its average daily
net assets up to $3 billion and 0.38% of its average daily net assets in
excess of $3.5 billion. The fee is graduated so that increases in the
Acquiring Fund's net assets may result in a lower annual fee rate and
decreases in its net assets may result in a higher annual fee rate. As
administrator, SSB Citi oversees all aspects of the Acquiring Fund's
administration and operation. For administration services rendered to the
Acquiring Fund, the Acquiring Fund pays SSB Citi a fee, computed daily and
paid monthly, at the annual rate of 0.20% of the value of the Acquiring Fund's
average daily net assets up to $2 billion, 0.16% of the value of its average
daily net assets in excess of $2.5 billion, 0.14% of the value of its average
daily net assets in excess of $3 billion and 0.12% of its average daily net
assets in excess of $3.5 billion. For its management and administration
services, SSB Citi received a fee during the Fund's last fiscal year equal to
0.75% of the Acquiring Fund's average daily net assets. The total investment
management and administration fees incurred and paid by the Acquiring Fund for
the year ended September 30, 1999 were $12,219,483.
The Acquiring Fund's total expense ratio (total annual operating expenses as
a percentage of average net assets) for each class of its shares for the
period ended August 31, 2000 is set forth below under "Annual Fund Operating
Expenses." SSB Citi projects that if the proposed Reorganization is effected,
the expense ratio for each class of the Acquiring Fund will be unchanged for
the year ending September 30, 2001. The actual expense ratio for the Acquiring
Fund for the year ending September 30, 2001 may be higher or lower than as set
forth below, depending upon the Acquiring Fund's performance, general stock
market and economic conditions, sales and redemptions of the Acquiring Fund
shares (including redemptions by former shareholders of the Fund), and other
factors.
John G. Goode, Chairman and Chief Investment Officer of Davis Skaggs
Investment Management, a division of SSB Citi, and a managing director of
Salomon Smith Barney has been responsible for the day-to-day management of the
Acquiring Fund since November 1990. Mr. Goode has 16 years of experience with
SSB Citi or its predecessors. Mr. Goode's management discussion and analysis
of the Acquiring Fund's performance during the fiscal year ended September 30,
1999 is included in the Fund's Annual Report to Shareholders dated September
30, 1999.
The Fund. The Fund's investment manager is SSB Citi. SSB Citi selects the
Fund's investments and oversees its operations. For its management services
(investment advisory and administration), SSB Citi received a fee during the
Fund's last fiscal year equal to 0.75% of the Fund's average daily net assets.
The total investment management fees incurred and paid by the Fund for the
year ended October 31, 1999 were $400,065.
John G. Goode (described above) has been responsible for the day-to-day
management of the Fund since November 1995.
The expenses of the Fund and the Acquiring Fund for the fiscal year ended
October 31, 1999 and the period ended August 31, 2000, respectively, and pro
forma expenses following the proposed restructuring are outlined below. As a
result of the Reorganization, shareholders of the Fund will be investing in
the corresponding class of the Acquiring Fund with expenses that are currently
between 0.44% and 0.71% lower than those of the relevant class of the Fund.
11
<PAGE>
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
Smith Barney Fundamental Value Fund Inc. Class A Class B Class L Class Y
---------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases... 5.00% None 1.00% None
(as a percentage of offering price)
Maximum Deferred Sales Charge (load)........ None* 5.00% 1.00% None
(as a percentage of the lower of net asset
value at purchase or redemption)
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees............................. 0.73% 0.73% 0.73% 0.73%
12b-1 fees.................................. 0.25 1.00 1.00 None
Other expenses.............................. 0.14 0.16 0.16 0.04
---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES................. 1.12% 1.89% 1.89% 0.77%
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Smith Barney Natural Resources Fund Class A Class B Class L Class Y
----------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases... 5.00% None 1.00% None
(as a percentage of offering price)
Maximum Deferred Sales Charge (load)........ None* 5.00% 1.00% None
(as a percentage of the lower of net asset
value at purchase or redemption)
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees............................. 0.75% 0.75% 0.75% 0.75%
12b-1 fees.................................. 0.25 1.00 1.00 None
Other expenses**............................ 0.73 0.67 0.58 0.73
---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES................. 1.73% 2.42% 2.33% 1.48%
==== ==== ==== ====
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Fundamental Value Fund
Inc. Class A Class B Class L Class Y
----------------------------------- --------- --------- --------- ---------
Smith Barney Fundamental Value Fund Pro Forma Pro Forma Pro Forma Pro Forma
Inc. (Pro Forma) Class A Class B Class L Class Y
----------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on
purchases (as a percentage of
offering price)..................... 5.00% None 1.00% None
Maximum Deferred Sales Charge (load)
(as a percentage of the lower of net
asset value at purchase or
redemption)......................... None* 5.00% 1.00% None
Annual Fund Operating Expenses
(as a percentage of average net
assets)
Management fees...................... 0.73% 0.73% 0.73% 0.73%
12b-1 fees........................... 0.25 1.00 1.00 None
Other expenses....................... 0.14 0.16 0.16 0.04
---- ---- ---- ----
TOTAL FUND OPERATING EXPENSES.......... 1.12% 1.89% 1.89% 0.77%
==== ==== ==== ====
</TABLE>
--------
* You may buy Class A Shares in amounts of $1 million or more at net asset
value (without an initial sales charge) but if you redeem those shares
within 12 months of their purchase, you will pay a deferred sales charge of
1.00%
** For Class Y Shares, "Other Expenses" have been estimated based on expenses
incurred by Class A Shares because no Class Y Shares were outstanding for
the year ended October 31, 1999.
13
<PAGE>
Example. This Example is intended to help you compare the cost of investing
in each of the Funds. The Example assumes you invest $10,000 in each Fund for
the time periods indicated and then redeem all of your shares at the end of
those periods. The Example also assumes your investment has a 5% return each
year and that each Fund's annual operating expenses remain the same. Although
your actual costs may be higher or lower, based on these assumptions your
costs would be:
<TABLE>
<CAPTION>
Smith Barney Fundamental Value Fund Inc. 1 year 3 years 5 years 10 years*
---------------------------------------- ------ ------- ------- ---------
<S> <C> <C> <C> <C>
An Investor would pay the following expenses
on a $10,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the end
of each time period:
Class A.................................... $608 $838 $1,086 $1,795
Class B.................................... 692 894 1,121 2,011
Class L.................................... 390 688 1,111 2,289
Class Y.................................... 79 246 428 954
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
An Investor would pay the following expenses on the
same investment, assuming the same annual return and
no redemption:
Class A............................................. $608 $838 $1,086 $1,795
Class B............................................. 192 594 1,021 2,011
Class L............................................. 290 688 1,111 2,289
Class Y............................................. 79 246 428 954
</TABLE>
<TABLE>
<CAPTION>
3 5
Smith Barney Natural Resources Fund 1 year years years 10 years*
----------------------------------- ------ ------ ------ ---------
<S> <C> <C> <C> <C>
An Investor would pay the following expenses on
a $10,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the end of
each time period:
Class A...................................... $667 $1,018 $1,392 $2,439
Class B...................................... 745 1,055 1,391 2,586
Class L...................................... 434 820 1,333 2,739
Class Y...................................... 151 468 808 1,768
An Investor would pay the following expenses on
the same investment, assuming the same annual
return and no redemption:
Class A...................................... $667 $1,018 $1,392 $2,439
Class B...................................... 245 755 1,291 2,586
Class L...................................... 334 820 1,333 2,739
Class Y...................................... 151 468 808 1,768
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Smith Barney Fundamental Value Fund Pro Forma Pro Forma Pro Forma Pro Forma
Inc. (Pro Forma) (unaudited) 1 year 3 years 5 years 10 years*
----------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
An Investor would pay the following
expenses on a $10,000 investment,
assuming (1) 5.00% annual return and
(2) redemption at the end of each
time period:
Class A............................. $608 $838 $1,086 $1,795
Class B............................. 692 894 1,121 2,011
Class L............................. 390 688 1,111 2,289
Class Y............................. 79 246 428 954
An Investor would pay the following
expenses on the same investment,
assuming the same annual return and
no redemption:
Class A............................. $608 $838 $1,086 $1,795
Class B............................. 192 594 1,021 2,011
Class L............................. 290 688 1,111 2,289
Class Y............................. 79 246 428 954
</TABLE>
--------
* Ten-year figures assume conversion of Class B shares to Class A shares at
the end of the eighth year following the date of purchase.
This example assumes reinvestment of all dividends and distributions. These
examples should not be considered representations of past or future expenses.
Actual Fund expenses can vary from year to year and may be higher or lower
than those shown. Please refer to each Fund's prospectus and statement of
additional information for a more detailed discussion of the fees and expenses
applicable to each class of shares of a Fund.
DISTRIBUTION OF SHARES AND OTHER SERVICES
As of June 5, 2000, Salomon Smith Barney distributes shares of each Fund as
principal underwriter and as such conducts a continuous offering pursuant to a
"best efforts" arrangement requiring Salomon Smith Barney to take and pay for
only such securities as may be sold to the public. Prior to that time, CFBDS,
Inc. acted as distributor of each Fund's shares. Each Fund has adopted a plan
of distribution under Rule 12b-1 under the 1940 Act (the "Plan"), pursuant to
which Salomon Smith Barney is paid a service fee with respect to Class A,
Class B and Class L shares of each Fund at the annual rate of 0.25% of the
average daily net assets of the respective Class. Salomon Smith Barney is also
paid a distribution fee with respect to Class B and Class L shares of each
Fund at the annual rate of 0.75% of the average daily net assets attributable
to those Classes. Class B shares of each Fund that automatically convert to
Class A shares eight years after the date of original purchase will no longer
be subject to a distribution fee. The fees are used by Salomon Smith Barney to
pay its Financial Consultants for servicing shareholder accounts and, in the
case of Class B and Class L shares, to cover expenses primarily intended to
result in the sale of those shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Salomon Smith Barney and the
payments may exceed distribution expenses actually incurred. Please refer to
each Fund's prospectus and statement of additional information for a more
detailed discussion of the distribution and shareholder servicing arrangements
applicable to each class of shares of the Funds.
15
<PAGE>
PURCHASE, REDEMPTION AND EXCHANGE INFORMATION
The purchase, redemption and exchange procedures and privileges with respect
to the Fund are substantially similar to those of the Acquiring Fund.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each of the Fund and the Acquiring Fund declares dividends from net
investment income and pays distributions of net realized capital gains, if
any, annually. Each Fund intends to distribute any net realized capital gains
after utilization of capital loss carryforwards, if any, in November or
December to prevent application of a federal excise tax. An additional
distribution may be made if necessary. Any dividends or capital gains
distributions declared in October, November or December with a record date in
such month and paid during the following January will be treated by
shareholders for federal income tax purposes as if received on December 31 of
the calendar year in which declared. Dividends and distributions of each Fund
will be invested in additional shares of the applicable Fund at net asset
value and credited to the shareholder's account on the payment date or, at the
shareholder's election, paid in cash.
If the Plan is approved by the Fund's shareholders, then as soon as
practicable before the Closing Date, the Fund will pay or have paid its
shareholders a cash distribution of substantially all undistributed net
investment income and undistributed realized net capital gains for the current
taxable year through the Closing Date.
TAX CONSEQUENCES
The Fund and the Acquiring Fund will have received an opinion of Willkie
Farr & Gallagher, counsel to Sector Series and the Acquiring Fund, in
connection with the Reorganization, to the effect that, based upon certain
facts, assumptions and representations, the Reorganization will constitute a
tax-free reorganization within the meaning of section 368(a)(1) of the
Internal Revenue Code of 1986, as amended (the "Code"). If the Reorganization
constitutes a tax-free reorganization, no gain or loss will be recognized by
the Fund or its shareholders as a direct result of the Reorganization. See
"The Proposed Transaction--Federal Income Tax Consequences."
PRINCIPAL INVESTMENTS AND RISK FACTORS
General. Although the Funds have similar investment objectives, the
investment practices and limitations of each Fund (and the risks related
thereto) are not identical. A more complete description of the investment
practices and limitations of the Acquiring Fund is contained in the prospectus
and statement of additional information of the Acquiring Fund, dated January
28, 2000, as supplemented from time to time, a copy of which is included
herewith, and in the Statement of Additional Information of the Fund and the
Acquiring Fund dated October 18, 2000 (relating to the proposed
Reorganization) which is incorporated herein by reference. Please refer to
each Fund's prospectus and statement of additional information for a more
detailed discussion of the specific investment practices and risks of the
applicable Fund.
In addition to those already described above, the following summarizes the
principal risk factors for the Funds. The Fund's investments may be subject to
greater risk and market fluctuation than those of the Acquiring Fund which
invests in securities representing a broader range of investment alternatives.
16
<PAGE>
Short-Term Investments. As noted above, in certain circumstances each Fund
may invest in short-term corporate and government money market instruments,
such as obligations of the U.S. government, its agencies and instrumentalities
("U.S. government securities"), high-quality commercial paper, bank
certificates of deposit ("CDs"), time deposits ("TDs"), and bankers'
acceptances, and may engage in repurchase agreement transactions with respect
to such instruments.
Obligations of foreign branches of domestic banks, such as CDs and TDs, may
be general obligations of the parent bank in addition to the issuing branch,
or may be limited by the terms of a specific obligation and government
regulation. Such obligations are subject to different risks than are those of
domestic banks or domestic branches of foreign banks. These risks include
foreign economic and political developments, foreign governmental restrictions
that may adversely affect payment of principal and interest on the
obligations, foreign exchange controls and foreign withholding and other taxes
on interest income. Foreign branches of domestic banks are not necessarily
subject to the same or similar regulatory requirements that apply to domestic
banks, such as mandatory reserve requirements, loan limitations, and
accounting, auditing and financial recordkeeping requirements. In addition,
less information may be publicly available about a foreign branch of a
domestic bank than about a domestic bank. CDs issued by wholly owned Canadian
subsidiaries of domestic banks are guaranteed as to repayment of principal and
interest (but not as to sovereign risk) by the domestic parent bank.
Obligations of domestic branches of foreign banks may be general obligations
of the parent bank in addition to the issuing branch, or may be limited by the
terms of a specific obligation and by government regulation as well as
governmental action in the country in which the foreign bank has its head
office. A domestic branch of a foreign bank with assets in excess of $1
billion may or may not be subject to reserve requirements imposed by the
Federal Reserve System or by the state in which the branch is located if the
branch is licensed in that state. In addition, branches licensed by the
Comptroller of the Currency and branches licensed by certain states ("State
Branches") may or may not be required to: (a) pledge to the regulator by
depositing assets with a designated bank within the state, an amount of its
assets equal to 5% of its total liabilities; and (b) maintain assets within
the state in an amount equal to a specified percentage of the aggregate amount
of liabilities of the foreign bank payable at or through all of its agencies
or branches within the state. The deposits of State Branches may not
necessarily be insured by the FDIC. In addition, there may be less publicly
available information about a domestic branch of a foreign bank than about a
domestic bank.
Repurchase Agreements. Each Fund may enter into repurchase agreements with
certain member banks of the Federal Reserve System and certain dealers on the
Federal Reserve Bank of New York's list of reporting dealers. Under the terms
of a typical repurchase agreement, a Fund would acquire securities for a
relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase, and the Fund to resell, the securities
at an agreed-upon price and time, thereby determining the yield during a
Fund's holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during a Fund's holding period.
Repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
a Fund's ability to dispose of the underlying securities, the risk of a
possible decline in the value of the underlying securities during the period
in which a Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or
part of the income from the agreement. SSB Citi, acting under the supervision
of the Board of Directors, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those dealers and banks with which a
Fund enters into repurchase agreements to evaluate potential risks.
Lending of Portfolio Securities. Consistent with applicable regulatory
requirements, each Fund may lend its portfolio securities to brokers, dealers
and other financial organizations. Loans of portfolio securities by a
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<PAGE>
Fund will be collateralized by cash, letters of credit or U.S. government
securities which are maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The risks in
lending portfolio securities, like those associated with other extensions of
secured credit, consist of possible delays in receiving additional collateral
or in the recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Loans will be made to firms
deemed by SSB Citi to be of good standing and will not be made unless, in the
judgment of SSB Citi, the consideration to be earned from such loans would
justify the risk.
Options, Futures and Currency Strategies. Although a Fund might not employ
the use of forward currency contracts, options and futures, the use of any of
these strategies would involve certain investment risks and transaction costs
to which it might not otherwise be subject. These risks include: dependence on
SSB Citi's ability to predict movement in the prices of individual debt
securities, fluctuations in the general fixed-income markets and movements in
interest rates and currency markets, imperfect correlation between movements
in the price of currency, options, futures contracts or options thereon and
movements in the price of the currency or security hedged or used for cover;
the fact that skills and techniques needed to trade options, futures contracts
and options thereon or to use forward currency contracts are different from
those needed to select the securities in which a Fund invests; lack of
assurance that a liquid market will exist for any particular option, futures
contract or options thereon at any particular time and possible need to defer
or accelerate closing out certain options, futures contracts and options
thereon in order to continue to qualify for the beneficial tax treatment
afforded "regulated investment companies" under the Code.
There are several risks in connection with the use of futures contracts as a
hedging device. Successful use of futures contracts by a Fund is subject to
the ability of SSB Citi to predict correct movements in the stock market or in
the direction of interest rates. These predictions involve skills and
techniques that may be different from those involved in the management of
investments in securities. In addition, there can be no assurance that there
will be a perfect correlation between movements in the price of the securities
underlying the futures contract and movements in the price of the securities
that are the subject of the hedge. A decision of whether, when and how to
hedge involves the exercise of skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected trends in market behavior or interest rates.
Positions in futures contracts may be closed out only on the exchange on
which they were entered into (or through a linked exchange) and no secondary
market exists for those contracts. In addition, although each Fund intends to
enter into futures contracts only if there is an active market for the
contracts, there is no assurance that an active market will exist for the
contracts at any particular time. Most futures exchanges and boards of trade
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit. It is
possible that futures contract prices could move to the daily limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and subjecting some futures traders to
substantial losses. In such event, and in the event of adverse price
movements, a Fund would be required to make daily cash payments of variation
margin; in such circumstances, an increase in the value of the portion of the
portfolio being hedged, if any, may partially or complete offset losses on the
futures contract. As described above, however, no assurance can be given that
the price of the securities being hedged will correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract.
Foreign Securities. Investing in the securities of foreign companies
involves special risks and considerations not typically associated with
investing in U.S. companies. These include differences in
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<PAGE>
accounting, auditing and financial reporting standards, generally higher
commission rates on foreign portfolio transactions, the possibility of
expropriation or confiscatory taxation, adverse changes in investment or
exchange control regulations, political instability which could affect U.S.
investments in foreign securities, and potential restrictions on the flow of
international capital. Additionally, foreign securities often trade with less
frequency and volume than domestic securities and therefore may exhibit
greater price volatility. Many of the foreign securities held by each Fund
will not be registered with, nor will the issuers thereof be subject to the
reporting requirements of, the SEC. Accordingly, there may be less publicly
available information about the securities and about the foreign company
issuing them than is available about a domestic company and its securities.
Moreover, individual foreign economies may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross domestic product,
rate of inflation, capital reinvestment, resource self-sufficiency and balance
of payment positions. Each Fund may invest in securities of foreign
governments (or agencies or subdivisions thereof), and therefore many, if not
all, of the foreign considerations apply to such investments as well.
Securities of Developing Countries. A developing country is generally
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are
generally less diverse and mature, and to political systems that can be
expected to have less stability, than those of developed countries. Historical
experience indicates that the markets of developing countries have been more
volatile than the markets of the more mature economies of developed countries;
however, such markets often have provided higher rates of return to investors.
Preferred Stocks and Convertible Securities. Convertible debt securities and
preferred stock entitle the holder to acquire the issuer's stock by exchange
or purchase at a predetermined rate. Convertible securities are subject both
to the credit and interest rate risks associated with fixed income securities
and to the stock market risk associated with equity securities.
Warrants. Warrants acquired entitle a Fund to buy common stock from the
issuer at a specified price and time. Warrants are subject to the same market
risks as stocks, but may be more volatile in price. A Fund's investment in
warrants will not entitle it to receive dividends or exercise voting rights
and will become worthless if the warrants cannot be profitably exercised
before the expiration dates.
Lower-Rated Securities. Generally, lower-rated securities offer a higher
current yield than the yield offered by higher-rated securities but involve
greater volatility of price and risk of loss of income and principal,
including the probability of default by or bankruptcy of the issuers of such
securities. Medium- and low-rated and comparable unrated securities (a) will
likely have some quality and protective characteristics that, in the judgment
of the rating organization, are outweighed by large uncertainties or major
risk exposures to adverse conditions and (b) are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. Accordingly, it is possible that
these types of factors could, in certain instances, reduce the value of
securities held by a Fund, with a commensurate effect on the value of a Fund's
shares.
While the market values of medium- and lower-rated securities and comparable
unrated securities tend to react less to fluctuations in interest rate levels
than do those of higher-rated securities, the market values of certain of
these securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than higher-rated securities.
In addition, medium- and lower-rated securities and comparable unrated
securities generally present a higher degree of credit risk. Issuers of
medium- and lower-rated securities and comparable unrated securities are often
highly leveraged and may not have more traditional
19
<PAGE>
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium- and lower-rated securities
and comparable unrated securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. A Fund may incur
additional expenses to the extent required to seek recovery upon a default in
the payment of principal or interest on its portfolio holdings. In addition,
the markets in which medium- and lower-rated or comparable unrated securities
are traded generally are more limited than those in which higher-rated
securities are traded. The existence of limited markets for these securities
may restrict the availability of securities for a Fund to purchase and also
may have the effect of limiting the ability of a Fund to (a) obtain accurate
market quotations for purposes of valuing securities and calculating net asset
value and (b) sell securities at their fair value either to meet redemption
requests or to respond to changes in the economy or the financial markets. The
market for some medium- and lower-rated and comparable unrated securities is
relatively new and has not fully weathered a major economic recession. Any
such economic downturn could adversely affect the ability of the issuers of
such securities to repay principal and pay interest thereon.
Fixed income securities, including medium- and lower-rated and comparable
unrated securities, frequently have call or buy-back features that permit
their issuers to call or repurchase the securities from their holders, such as
the Funds. If an issuer exercises these rights during periods of declining
interest rates, a Fund may have to replace the security with a lower yielding
security, resulting in a decreased return to the Fund.
Securities which are rated Ba by Moody's Investors Service, Inc. or BB by
Standard & Poor's Ratings Group have speculative characteristics with respect
to capacity to pay interest and repay principal. Securities which are rated B
generally lack characteristics of the desirable investment and assurance of
interest and principal payments over any long period of time may be small.
Gold Futures Contracts and Related Options (applicable solely to the Fund).
The use of gold futures contracts as a hedging device involves several risks.
Losses incurred in hedging transactions and the costs of these transactions
will affect the Fund's performance. There are several risks in connection with
the use of gold futures contracts and related options as hedging devices.
Successful use of gold futures contracts and related options by the Fund is
subject to the ability of SSB Citi to predict correctly movements in the price
of gold and other factors affecting markets for gold. These predictions
involve skills and techniques that are different from those generally involved
in the management of the Fund. In addition, there can be no assurance that
there will be a correlation between movements in the price of gold futures
contracts or an option on a gold futures contract and movements in the price
of the hedged assets. A decision of whether, when and how to hedge involves
the exercise of skill and judgment, and even a well conceived hedge may be
unsuccessful to some degree because of market behavior or unexpected trends in
the price of gold or the hedged securities.
Although the Fund intends to purchase gold futures contracts and related
options only if there is an active market for the contracts, there is no
assurance that an active market will exist for the contracts or options at any
particular time. Most futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the
daily limit has been reached in a particular contract, no trades may be made
that day at a price beyond that limit. It is possible that gold futures
contract prices could move to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of gold
futures positions and subjecting the Fund to substantial losses. In such
event, and in the event of adverse price movements, the Fund would be required
to make daily cash payments of maintenance margin, and an increase, if any, in
the value of the portion of the portfolio being hedged may partially or
completely offset losses on the
20
<PAGE>
futures contract. As described above, however, there is no guarantee that the
price of the assets being hedged will, in fact, correlate with the price
movements in a gold futures contract or an option thereon and thus provide an
offset to losses on the futures contract or option.
If the Fund has hedged against the possibility of a change in the price of
gold adversely affecting the value of its assets and prices move in a
direction opposite to that which was anticipated, the Fund will probably lose
part or all of the benefit of the increased value of the assets hedged because
of offsetting losses in its futures positions. In addition, in such a
situation, if the Fund has insufficient cash, it might have to sell assets to
meet daily maintenance margin requirements at a time when it would be
disadvantageous to do so. These sales of assets could, but will not
necessarily, be at increased prices which reflect the change in the value of
gold.
THE PROPOSED TRANSACTION
Description of the Plan. As stated above, the Plan provides for the transfer
of all of the assets of the Fund to the Acquiring Fund in exchange for that
number of full and fractional shares of the corresponding class of the
Acquiring Fund having an aggregate net asset value equal to the aggregate net
asset value of the shareholder's shares held in the Fund as of the close of
regular trading on the New York Stock Exchange, Inc. on the date of the
Closing. The Acquiring Fund will assume all of the stated liabilities of the
Fund. In connection with the Closing, the Fund will distribute the shares of
the corresponding class of common stock of the Acquiring Fund received in the
exchange to the shareholders of the Fund in complete liquidation of the Fund.
The Fund will be terminated as a series of Sector Series.
Upon completion of the Reorganization, each shareholder of the Fund will own
that number of full and fractional shares of the corresponding class of the
Acquiring Fund having an aggregate net asset value equal to the aggregate net
asset value of such shareholder's shares held in the Fund as of the close of
trading on the Closing Date. Each Fund shareholder's account with the
Acquiring Fund will be substantially similar in all material respects to the
accounts currently maintained by the Fund's sub-transfer agent for such
shareholder. Some of the outstanding shares of the Fund are represented by
physical certificates; however, in the interest of economy and convenience,
shares of the Fund generally are not represented by physical certificates, and
shares of the Acquiring Fund issued to Fund shareholders similarly will be in
uncertificated form.
Until the Closing, shareholders of the Fund will, of course, continue to be
able to redeem their shares at the net asset value next determined after
receipt by the Fund's sub-transfer agent of a redemption request in proper
form. Redemption requests received by the sub-transfer agent thereafter will
be treated as requests received for the redemption of shares of the Acquiring
Fund received by the shareholder in connection with the Reorganization.
The obligations of Sector Series, on behalf of the Fund, and the Acquiring
Fund, under the Plan are subject to various conditions, as stated therein.
Among other things, the Plan requires that all filings be made with, and all
authority be received from, the SEC and state securities commissions as may be
necessary in the opinion of counsel to permit the parties to carry out the
transactions contemplated by the Plan. The Fund and the Acquiring Fund are in
the process of making the necessary filings. To provide against unforeseen
events, the Plan may be terminated or amended at any time prior to the Closing
(in accordance with the Plan), notwithstanding the approval of the Plan by the
shareholders of the Fund. However, no amendment may be made that materially
adversely affects the interests of the shareholders of the Fund without
obtaining the approval of the Fund's shareholders. The Fund and the Acquiring
Fund may at any time waive compliance with certain of the covenants
21
<PAGE>
and conditions contained in the Plan. For a complete description of the terms
and conditions of the Reorganization, see the Plan at Exhibit A.
SSB Citi will assume and pay all of the expenses that are solely and
directly related to the Reorganization which expenses are estimated to be
approximately $67,000. Shareholders have no rights of appraisal.
REASONS FOR THE PROPOSED TRANSACTION
Prior to a telephonic meeting of Sector Series' Board of Directors held on
September 12, 2000, the Directors of the Fund, including a majority of the
Non-Interested Directors, were presented with materials discussing the
benefits which would accrue to the shareholders of the Fund if the Fund were
to reorganize with and into the Acquiring Fund. These materials, and other
matters of concern to the Directors, were discussed at the telephonic meeting
held on September 12, 2000, at which time the Directors were assisted by
independent counsel. For the reasons discussed below, the Board of Directors
of Sector Series, including a majority of the Non-Interested Directors, has
determined that the proposed Reorganization is in the best interests of the
Fund and its shareholders and that the interests of the shareholders of the
Fund will not be diluted as a result of the proposed Reorganization.
The proposed combination of the Fund and the Acquiring Fund will allow the
shareholders of the Fund to continue to participate in a portfolio that is
professionally managed by the same portfolio manager, but will provide them
with an opportunity to participate in a Fund with a broader investment mandate
and with lower total annual operating expenses. The Directors of the Fund
believe that shareholders of the Fund will benefit from the proposed
Reorganization because the Acquiring Fund offers the following benefits:
Enhanced Flexibility with Respect to Portfolio Investments. As stated
previously, the Reorganization is being proposed in an effort to provide
shareholders of the Fund with exposure to a broader investment mandate than
currently available to the Fund, while also providing shareholders of the Fund
the benefit of a lower expense ratio. As discussed in detail herein, the total
operating expenses of the Acquiring Fund are also currently (and are projected
to be following the Closing of the Reorganization) lower than the
corresponding fees and expenses incurred by the Fund.
While past performance is not necessarily indicative of future results, the
Acquiring Fund has generally produced better total returns than the Fund over
the 5 and 10 year and since inception periods ended December 31, 1999.
Lower Fees and Expenses. If the proposed transaction is approved,
shareholders of the Fund will benefit from lower total fund expenses. Please
refer to "Investment Management Fees and Expenses" and "Annual Fund Operating
Expenses" set forth above.
As set forth above, as of their most recent fiscal year end, each class of
shares of the Fund has higher gross operating expenses than the corresponding
class of the Acquiring Fund. As a result of the Reorganization, shareholders
of the Fund will be investing in the corresponding class of the Acquiring Fund
with expenses that are currently between 0.44% and 0.71% lower than those of
the relevant class of the Fund. If the Reorganization is approved by
shareholders of the Fund, the Acquiring Fund's net expense ratio for each
class of its shares is estimated to remain unchanged for the year ending
September 30, 2001.
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<PAGE>
Going forward, shareholders should benefit from economies of scale through
lower expense ratios and higher net income distributions over time since some
of the fixed expense currently paid by the Acquiring Fund, such as accounting,
legal and printing costs, would also be spread over a larger asset base.
Due to a combination of factors, including the relatively small size of the
Fund, past and prospective sales of shares of the Fund and current market
conditions, the Directors and management of Sector Series believe the Fund and
its shareholders would benefit from a tax-free reorganization with a larger
fund with a broader investment mandate and with a lower total annual expense
ratio. Accordingly, it is recommended that the shareholders of the Fund
approve the Reorganization with the Acquiring Fund.
The Board of Directors of Sector Series, in recommending the proposed
transaction, considered a number of factors, including the following:
(1) the lower total annual expense ratio of the Acquiring Fund;
(2) the Funds have similar investment objectives and the portfolio
manager has managed the Fund with a broader focus than traditional sector
funds which is reflected in the similarities of the current holdings of the
Funds; the Reorganization will afford shareholders of the Fund with an
opportunity to invest in a fund with a broader investment mandate;
(3) the tax-free nature of the Reorganization;
(4) the terms and conditions of the Reorganization and that it should not
result in a dilution of Fund shareholder interests;
(5) the level of costs and expenses to the Fund of the proposed
Reorganization; and
(6) a larger asset base could provide portfolio management benefits, such
as greater diversification and the ability to command more attention from
brokers and underwriters.
DESCRIPTION OF THE SECURITIES TO BE ISSUED
Sector Series was incorporated under the laws of the State of Maryland on
July 16, 1986 under the name Shearson Precious Metals and Minerals Fund Inc.,
which was changed to Shearson Lehman Precious Metals and Minerals Fund Inc. on
October 30, 1986. Since that time, as its sponsor has changed, the Fund's name
has been changed to Smith Barney Precious Metals and Minerals Fund Inc. and
Smith Barney Natural Resources Fund Inc. On November 29, 1999, the Board of
Directors voted to amend the Fund's Charter to change its name to Smith Barney
Sector Series Inc., with Smith Barney Natural Resources Fund, Smith Barney
Financial Services Fund, Smith Barney Health Sciences Fund and Smith Barney
Technology Fund each classified as a separate series of Sector Series. Smith
Barney Global Biotechnology Fund, Smith Barney Global Technology Fund and
Smith Barney Global Media and Telecommunications Fund are also separate series
of Sector Series. Sector Series is registered with the SEC as a diversified,
open-end management investment company. The Acquiring Fund was originally
incorporated under the laws of the State of Washington on March 17, 1981, and
is registered with the SEC as a diversified, open-end management investment
company. On January 27, 1995, shareholders approved the reincorporation of the
Acquiring Fund as a Maryland corporation, which subsequently occurred on May
24, 1995.
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<PAGE>
Each Fund currently offers shares of common stock classified into four
Classes, A, B, L and Y. Each Class of shares represents an identical pro rata
interest in the relevant Fund's investment portfolio. As a result, the Classes
of each Fund have the same rights, privileges and preferences, except with
respect to: (a) the designation of each Class; (b) the effect of the
respective sales charges, if any, for each Class; (c) the distribution and/or
service fees borne by each Class; (d) the expenses allocable exclusively to
each Class; (e) voting rights on matters exclusively affecting a single Class;
(f) the exchange privilege of each Class; and (g) the conversion feature of
the Class B Shares.
Each share of each class of a Fund represents an interest in that class of
the Fund that is equal to and proportionate with each other share of that
class of the Fund. Shareholders are entitled to one vote per share (and a
proportionate fractional vote per each fractional share) held on matters on
which they are entitled to vote. Neither Fund is required to hold shareholder
meetings annually, although shareholder meetings may be called for purposes
such as electing or removing Directors, changing fundamental policies or
approving an investment management contract. Special meetings of shareholders
of the Acquiring Fund will be called at the request in writing of shareholders
entitled to cast at least 10% of the votes entitled to be cast at the meeting.
Unless requested by shareholders entitled to cast a majority of all the votes
entitled to be cast at the meeting, a special meeting of shareholders of the
Acquiring Fund need not be called to consider any matter which is
substantially the same as a matter voted on at any special meeting of
shareholders of the Acquiring Fund held during the preceding 12 months.
Special meetings of shareholders of Sector Series for the purpose of removing
a Director will be called at the request in writing of shareholders entitled
to cast at least 10% of the votes entitled to be cast at the meeting, and for
all other purposes at the request in writing of shareholders entitled to cast
at least 25% of the votes entitled to be cast at the meeting.
Shares of the Acquiring Fund issued to the shareholders of the Fund pursuant
to the Reorganization will be fully paid and nonassessable when issued,
transferable without restrictions and will have no preemptive rights.
The foregoing is only a summary of certain characteristics of the operations
of Sector Series and the Acquiring Fund. The foregoing is not a complete
description of the documents cited. Shareholders should refer to the
provisions of charter documents and state law governing each Fund for a more
thorough description.
FEDERAL INCOME TAX CONSEQUENCES
The Reorganization is conditioned upon the receipt by Sector Series, on
behalf of the Fund, and the Acquiring Fund of an opinion from Willkie Farr &
Gallagher, substantially to the effect that, based upon certain facts,
assumptions and representations of the parties, for federal income tax
purposes: (i) the transfer to the Acquiring Fund of all of the assets of the
Fund in exchange solely for shares and the assumption by the Acquiring Fund of
all of the stated liabilities of the Fund, followed by the distribution of
such shares to Fund shareholders in exchange for their shares of the Fund in
complete liquidation of the Fund, will constitute a "reorganization" within
the meaning of Section 368(a)(1) of the Code, and the Acquiring Fund and the
Fund will each be "a party to a reorganization" within the meaning of Section
368(b) of the Code; (ii) no gain or loss will be recognized by the Fund upon
the transfer of the Fund's assets to the Acquiring Fund in exchange for the
Acquiring Fund shares and the assumption by the Acquiring Fund of all of the
stated liabilities of the Fund or upon the distribution (whether actual or
constructive) of the Acquiring Fund shares to the Fund's shareholders in
exchange for their shares of the Fund; (iii) the basis of the assets of the
Fund in the hands of the Acquiring Fund will be the same as the basis of such
assets of the Fund immediately prior to the transfer; (iv) the holding period
of the assets of the Fund in the hands of the Acquiring Fund will include the
period during which such assets
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<PAGE>
were held by the Fund; (v) no gain or loss will be recognized by the Acquiring
Fund upon the receipt of the assets of the Fund in exchange for shares and the
assumption by the Acquiring Fund of all of the stated liabilities of the Fund;
(vi) no gain or loss will be recognized by the shareholders of the Fund upon
the receipt of shares solely in exchange for their shares of the Fund as part
of the transaction; (vii) the basis of shares received by the shareholders of
the Fund will be the same as the basis of the shares of the Fund exchanged
therefor; and (viii) the holding period of shares received by the shareholders
of the Fund will include the holding period during which the shares of the
Fund exchanged therefor were held, provided that at the time of the exchange
the shares of the Fund were held as capital assets in the hands of the
shareholders of the Fund.
While neither Sector Series nor the Acquiring Fund is aware of any adverse
state or local tax consequences of the proposed Reorganization, they have not
requested any ruling or opinion with respect to such consequences and
shareholders may wish to consult their own tax adviser with respect to such
matters.
LIQUIDATION AND TERMINATION OF SERIES
If the Reorganization is effected, the Fund will be liquidated and
terminated as a series of Sector Series, and the Fund's outstanding shares
will be cancelled.
PORTFOLIO SECURITIES
If the Reorganization is effected, SSB Citi will analyze and evaluate the
portfolio securities of the Fund being transferred to the Acquiring Fund.
Consistent with the Acquiring Fund's investment objective and policies, any
restrictions imposed by the Code and the best interests of the Acquiring
Fund's shareholders (including former shareholders of the Fund), SSB Citi will
determine the extent and duration to which the Fund's portfolio securities
will be maintained by the Acquiring Fund. A significant rebalancing of the
Fund's portfolio securities in connection with the Reorganization is not
anticipated. Subject to market conditions at the time of any such rebalancing,
the disposition of the Fund's portfolio securities may result in a capital
gain or loss. The actual tax consequences of any disposition of portfolio
securities will vary depending upon the specific security(ies) being sold.
PORTFOLIO TURNOVER
The portfolio turnover rate for the Acquiring Fund (i.e., the ratio of the
lesser of annual sales or purchases to the monthly average value of the
portfolio (excluding from both the numerator and the denominator securities
with maturities at the time of acquisition of one year or less)), for the year
ended September 30, 1999 was 43%. The portfolio turnover rate for the Fund for
the year ended October 31, 1999 was 133%.
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<PAGE>
CAPITALIZATION AND PERFORMANCE
Pro Forma Capitalization (Unaudited). The following table sets forth the
unaudited capitalization of each class of each of the Acquiring Fund and the
Fund as of June 30, 2000 as adjusted giving effect to the Reorganization
discussed herein:(1)
<TABLE>
<CAPTION>
Smith Barney Smith Barney Pro Forma
Natural Resources Fundamental after
Fund Value Fund Reorganization
----------------- ------------ --------------
(In thousands, except per share values)
(Unaudited)
<S> <C> <C> <C>
Class A
Net Assets........................ $18,404 $ 950,667 $ 969,071
Net asset value per share......... $ 18.81 $ 15.17 $ 15.17
Shares outstanding................ 978 62,649 63,862
Class B
Net Assets........................ $17,737 $1,202,831 $1,220,568
Net asset value per share......... $ 18.03 $ 14.88 $ 14.88
Shares outstanding................ 984 80,834 82,026
Class L
Net Assets........................ $ 2,834 $ 186,089 $ 188,923
Net asset value per share......... $ 18.08 $ 14.87 $ 14.87
Shares outstanding................ 157 12,512 12,703
Class Y
Net Assets........................ $ -- $ 80,204 $ 80,204
Net asset value per share......... $ -- $ 15.26 $ 15.26
Shares outstanding................ -- 5,256 5,256
</TABLE>
--------
(1) Assumes the Reorganization had been consummated on June 30, 2000, and is
for information purposes only. No assurance can be given as to how many
shares of the Acquiring Fund will be received by shareholders of the Fund
on the date the Reorganization takes place, and the foregoing should not
be relied upon to reflect the number of shares of the Acquiring Fund that
actually will be received on or after such date.
Total return is a measure of the change in value of an investment in a fund
over the period covered, which assumes that any dividends or capital gains
distributions are automatically reinvested in shares of the fund rather than
paid to the investor in cash. The formula for total return used by a fund is
prescribed by the SEC and includes three steps: (1) adding to the total number
of shares of the fund that would be purchased by a hypothetical $1,000
investment in the fund all additional shares that would have been purchased if
all dividends and distributions paid or distributed during the period had been
automatically reinvested; (2) calculating the redeemable value of the
hypothetical initial investment as of the end of the period by multiplying the
total number of shares owned at the end of the period by the net asset value
per share on the last trading day of the period; and (3) dividing this account
value for the hypothetical investor by the amount of the initial investment,
and annualizing the result for periods of less than one year. Total return may
be stated with or without giving effect to any expense limitations in effect
for a fund.
26
<PAGE>
The following table reflects the average annual total returns of Class A
Shares for the 1, 3, 5 and 10 year (or since inception) periods, as
applicable, ending December 31, 1999 for each of the Fund and the Acquiring
Fund:
<TABLE>
<CAPTION>
The Fund The Acquiring Fund
-------- ------------------
<S> <C> <C>
Average Annual Total Return:(1)
1-year.............................................. 29.13% 24.29%
5-year.............................................. 1.10% 20.49%
10-year............................................. 1.54% 15.62%
Since Inception..................................... 2.85% 14.80%
Inception Date...................................... 11/24/86 11/12/81
</TABLE>
--------
(1) The average annual total returns for other classes of each Fund's shares
would be similar to the returns of the Class A Shares of the relevant
Fund, but would differ to the extent that the other class of shares had a
higher or lower total annual expense ratio during the relevant periods.
ADDITIONAL INFORMATION ABOUT THE FUNDS
As noted above, additional information about Sector Series with respect to
the Fund, the Acquiring Fund, and the Reorganization has been filed with the
SEC and may be obtained without charge by writing to Smith Barney Mutual
Funds, 7 World Trade Center, New York, New York 10048, or by calling (800)
451-2010.
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the 1940 Act, and in accordance therewith, files
reports, proxy material and other information about the applicable Fund with
the Commission.
Such reports, proxy material and other information can be inspected and
copied at the Public Reference Room maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of such material can also be
obtained from the Public Reference Branch, Office of Consumer Affairs and
Information Services, Securities and Exchange Commission 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates or without charge from the
Commission at [email protected]. Copies of such material can also be obtained
from Smith Barney Mutual Funds, 7 World Trade Center, New York, New York
10048, or by calling (800) 451-2010.
INTERESTS OF CERTAIN PERSONS
SSB Citi and certain of the Acquiring Fund's service providers have a
financial interest in the Reorganization, arising from the fact that their
respective fees under their respective agreements with the Acquiring Fund will
increase as the amount of the Acquiring Fund's assets increases; the amount of
those assets will increase by virtue of the Reorganization.
THE BOARD MEMBERS OF SECTOR SERIES RECOMMEND THAT THE SHAREHOLDERS OF THE FUND
VOTE IN FAVOR OF THIS PROPOSAL.
27
<PAGE>
ADDITIONAL INFORMATION
General. The cost of preparing, printing and mailing the enclosed proxy
card(s) and Prospectus/Proxy Statement and all other costs incurred in
connection with the solicitation of proxies, including any additional
solicitation made by letter and/or telephone, will be paid by SSB Citi. In
addition to solicitation by mail, certain officers and representatives of
Sector Series, officers and employees of SSB Citi and certain financial
services firms and their representatives, who will receive no extra
compensation for their services, may solicit proxies by telegram or
personally.
When the Fund records proxies by telephone or through the internet, it will
use procedures designed to (i) authenticate shareholders' identities, (ii)
allow shareholders to authorize the voting of their shares in accordance with
their instructions and (iii) confirm that their instructions have been
properly recorded.
To participate in the Special Meeting, the shareholder may submit the proxy
card originally sent with the Prospectus/Proxy Statement or attend in person.
Any proxy given by a shareholder is revocable until voted at the Special
Meeting.
Proposals of Shareholders. Shareholders wishing to submit proposals for
inclusion in a proxy statement for a shareholder meeting subsequent to the
Special Meeting, if any, should send their written proposals to the Secretary
of Sector Series, c/o Smith Barney Mutual Funds, 7 World Trade Center, New
York, New York 10048, within a reasonable time before the solicitation of
proxies for such meeting. The timely submission of a proposal does not
guarantee its inclusion.
Other Matters to Come Before the Special Meeting. No Board member is aware
of any matters that will be presented for action at the Special Meeting other
than the matters set forth herein. Should any other matters requiring a vote
of shareholders arise, the proxy in the accompanying form will confer upon the
person or persons entitled to vote the shares represented by such proxy the
discretionary authority to vote the shares as to any such other matters in
accordance with their best judgment in the interest of Sector Series and/or
the Fund.
PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) PROMPTLY. NO
POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
By order of the Board of Directors,
Christina T. Sydor
Secretary
28
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<S> <C>
Annex A: 5% Shareholders
Exhibit A: Form of Agreement and Plan of Reorganization
</TABLE>
<PAGE>
ANNEX A
Fundamental Value Fund Class Y
<TABLE>
<CAPTION>
Shareholders: % of Shares
------------- -----------
<S> <C>
Smith Barney Concert Series, Inc. .................................. 60.8546
Balanced Portfolio PNC Bank, NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Fl., Ste 200
Philadelphia, PA 19151-3111
Smith Barney Concert Series, Inc. .................................. 28.0440
Balanced Portfolio PNC Bank, NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Fl., Ste 200
Philadelphia, PA 19151-3111
Smith Barney Concert Series, Inc. .................................. 7.6057
Balanced Portfolio PNC Bank, NA
Attn: Sheila Heacock
8800 Tinicum Blvd., 3rd Fl., Ste 200
Philadelphia, PA 19151-3111
</TABLE>
1
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of
this day of October, 2000, between Smith Barney Sector Series Inc. ("Sector
Series"), a Maryland corporation with its principal place of business at 7
World Trade Center, New York, New York 10048, on behalf of its series, Smith
Barney Natural Resources Fund (the "Acquired Fund"), and Smith Barney
Fundamental Value Fund Inc. (the "Acquiring Fund"), a Maryland corporation
with its principal place of business at 7 World Trade Center, New York, New
York 10048, and solely for purposes of Section 10.2 hereof, SSB Citi Fund
Management LLC ("SSB Citi").
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). The reorganization (the
"Reorganization") will consist of the transfer of all of the assets of the
Acquired Fund to the Acquiring Fund in exchange solely for voting shares of
the corresponding class of common stock ($.001 par value per share) of the
Acquiring Fund (the "Acquiring Fund Shares"), the assumption by the Acquiring
Fund of all of the stated liabilities of the Acquired Fund and the
distribution of the Acquiring Fund Shares to the shareholders of the Acquired
Fund in complete liquidation of the Acquired Fund as provided herein, all upon
the terms and conditions hereinafter set forth in this Agreement.
All representations, warranties, agreements or covenants made or undertaken
by the Acquired Fund in this Agreement are actually made or undertaken by
Sector Series on behalf of the Acquired Fund.
NOW, THEREFORE, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. Transfer of Assets of the Acquired Fund to the Acquiring Fund in Exchange
for the Acquiring Fund Shares, the Assumption of all Acquired Fund Stated
Liabilities and the Liquidation of the Acquired Fund
1.1. Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, the Acquired Fund
agrees to transfer to the Acquiring Fund all of the Acquired Fund's assets as
set forth in section 1.2, and the Acquiring Fund agrees in exchange therefor
(i) to deliver to the Acquired Fund that number of full and fractional
Acquiring Fund Shares determined by dividing the value of the Acquired Fund's
assets, computed in the manner and as of the time and date set forth in
section 2.1, by the net asset value of one Acquiring Fund Share, computed in
the manner and as of the time and date set forth in section 2.2; and (ii) to
assume all of the stated liabilities of the Acquired Fund, as set forth in
section 1.3. Such transactions shall take place at the closing provided for in
section 3.1 (the "Closing").
1.2. The assets of the Acquired Fund to be acquired by the Acquiring Fund
(collectively "Assets") shall consist of all assets, including, without
limitation, all cash, cash equivalents, securities, commodities and futures
interests and dividends or interest or other receivables that are owned by the
Acquired Fund and any deferred or prepaid expenses shown on the unaudited
statement of assets and liabilities of the Acquired Fund prepared as of the
effective time of the closing (the "Effective Time Statement"), prepared in
accordance with generally accepted accounting principles ("GAAP") applied
consistently with those of the Acquired Fund's most recent audited balance
sheet.
A-1
<PAGE>
1.3. The Acquired Fund will endeavor to discharge all the Acquired Fund's
known liabilities and obligations prior to the Closing Date as defined in
section 3.1, other than those liabilities and obligations which would
otherwise be discharged at a later date in the ordinary course of business.
1.4. On or as soon as practicable prior to the Closing Date as defined in
section 3.1, the Acquired Fund will declare and pay to its shareholders of
record one or more dividends and/or other distributions so that it will have
distributed substantially all of its investment company taxable income
(computed without regard to any deduction for dividends paid) and realized net
capital gain, if any, for the current taxable year through the Closing Date.
1.5. Immediately after the transfer of assets provided for in section 1.1
(the "Liquidation Time"), Sector Series will distribute to the Acquired Fund's
shareholders of record (the "Acquired Fund Shareholders"), determined as of
the Valuation Time (as defined herein), on a pro rata basis, the Acquiring
Fund Shares received by the Acquired Fund pursuant to section 1.1 and will
completely liquidate. Such distribution and liquidation will be accomplished
by the transfer of the Acquiring Fund Shares then credited to the account of
the Acquired Fund on the books of the Acquiring Fund to open accounts on the
share records of the Acquiring Fund in the names of the Acquired Fund
Shareholders. The aggregate net asset value of Acquiring Fund Shares to be so
credited to Acquired Fund Shareholders shall be equal to the aggregate net
asset value of each class of the Acquired Fund shares owned by such
shareholders as of the Valuation Time (as defined herein). All issued and
outstanding shares of the Acquired Fund will simultaneously be cancelled on
the books of the Acquired Fund, although share certificates representing
interests in shares of the Acquired Fund will represent a number of Acquiring
Fund Shares after the Closing Date as determined in accordance with section
2.3. The Acquiring Fund will not issue certificates representing Acquiring
Fund Shares in connection with such exchange.
1.6. Ownership of Acquiring Fund Shares will be shown on the books of the
Acquiring Fund. Shares of the Acquiring Fund will be issued in the manner
described in the Acquiring Fund's then-current prospectus and statement of
additional information.
1.7. Any reporting responsibility of the Acquired Fund including, without
limitation, the responsibility for filing of regulatory reports, tax returns,
or other documents with the Securities and Exchange Commission (the
"Commission"), any state securities commission, and any federal, state or
local tax authorities or any other relevant regulatory authority, is and shall
remain the responsibility of the Acquired Fund.
1.8. All books and records of the Acquired Fund, including all books and
records required to be maintained under the Investment Company Act of 1940, as
amended (the "1940 Act") and the rules and regulations thereunder, shall be
available to the Acquiring Fund from and after the Closing Date and shall be
turned over to the Acquiring Fund as soon as practicable following the closing
date.
2. Valuation
2.1. The value of the Assets shall be computed as of the close of regular
trading on The New York Stock Exchange, Inc. ("NYSE") on the Closing Date, as
defined in Section 3.1 (such time and date also being hereinafter called the
"Valuation Time") after the declaration and payment of any dividends and/or
other distributions on that date, using the valuation procedures set forth in
the Acquiring Fund's Articles of Incorporation, as amended, and then-current
prospectus or statement of additional information.
2.2. The net asset value of an Acquiring Fund share shall be the net asset
value per share of each class computed as of the Valuation Time using the
valuation procedures referred to in section 2.1.
A-2
<PAGE>
2.3. The number of the Acquiring Fund Shares to be issued (including
fractional shares, if any) in exchange for the Assets shall be determined by
dividing the value of the Assets with respect to shares of each class of the
Acquired Fund determined in accordance with section 2.1 by the net asset value
by class of an Acquiring Fund Share determined in accordance with section 2.2.
2.4. All computations of value hereunder shall be made by or under the
direction of each Fund's respective accounting agent, if applicable, in
accordance with its regular practice and the requirements of the 1940 Act and
shall be subject to confirmation by each Fund's respective independent
accountants upon the reasonable request of the other Fund.
3. Closing and Closing Date
3.1. The Closing of the transactions contemplated by this Agreement shall be
December 1, 2000, or such later date as the parties may agree in writing (the
"Closing Date"). All acts taking place at the Closing shall be deemed to take
place simultaneously as of 4:00 P.M., Eastern time, on the Closing Date,
unless otherwise agreed to by the parties. The Closing shall be held at the
offices of SSB Citi or at such other place and time as the parties may agree.
3.2. The Acquired Fund shall deliver to Acquiring Fund on the Closing Date a
schedule of assets.
3.3. The Chase Manhattan Bank, N.A., as custodian for the Acquired Fund,
shall deliver at the Closing a certificate of an authorized officer stating
that (a) the Assets shall have been delivered in proper form to The Chase
Manhattan Bank, N.A., custodian for the Acquiring Fund, prior to or on the
Closing Date and (b) all necessary taxes in connection with the delivery of
the Assets, including all applicable federal and state stock transfer stamps,
if any, have been paid or provision for payment has been made. The Acquired
Fund's portfolio securities represented by a certificate or other written
instrument shall be presented by Custodian for Acquired Fund to Custodian for
Acquiring Fund for examination no later than five business days preceding the
Closing Date and transferred and delivered by the Acquired Fund as of the
Closing Date by the Acquired Fund for the account of Acquiring Fund duly
endorsed in proper form for transfer in such condition as to constitute good
delivery thereof. The Acquired Fund's portfolio securities and instruments
deposited with a securities depository, as defined in Rule 17f-4 under the
1940 Act, shall be delivered as of the Closing Date by book entry in
accordance with the customary practices of such depositories and Custodian for
Acquiring Fund. The cash to be transferred by the Acquired Fund shall be
delivered by wire transfer of federal funds on the Closing Date.
3.4. Citi Fiduciary Trust Company (the "Transfer Agent"), on behalf of the
Acquired Fund, shall deliver at the Closing a certificate of an authorized
officer stating that its records contain the names and addresses of the
Acquired Fund Shareholders and the number and percentage ownership (to three
decimal places) of outstanding Acquired Fund Shares owned by each such
shareholder immediately prior to the Closing. The Acquiring Fund shall issue
and deliver a confirmation evidencing the Acquiring Fund Shares to be credited
on the Closing Date to the Acquired Fund or provide evidence satisfactory to
the Acquired Fund that such Acquiring Fund Shares have been credited to the
Acquired Fund's account on the books of the Acquiring Fund. At the Closing,
each party shall deliver to the other such bills of sale, checks, assignments,
share certificates, if any, receipts or other documents as such other party or
its counsel may reasonably request to effect the transactions contemplated by
this Agreement.
3.5. In the event that immediately prior to the Valuation Time (a) the NYSE
or another primary trading market for portfolio securities of the Acquiring
Fund or the Acquired Fund shall be closed to trading or trading thereupon
shall be restricted, or (b) trading or the reporting of trading on such
Exchange or elsewhere shall be
A-3
<PAGE>
disrupted so that, in the judgment of the Board of Directors of either Fund,
accurate appraisal of the value of the net assets with respect to the
Acquiring Fund Shares or the Acquired Fund Shares is impracticable, the
Closing Date shall be postponed until the first business day after the day
when trading shall have been fully resumed and reporting shall have been
restored.
4. Representations and Warranties
4.1. Sector Series, on behalf of the Acquired Fund, represents and warrants
to the Acquiring Fund as follows:
(a) Sector Series is a corporation duly organized and validly existing
under the laws of the State of Maryland with power under Sector Series'
Articles of Incorporation, as amended, to own all of its properties and
assets and to carry on its business as it is now being conducted;
(b) Sector Series is registered with the Commission as an open-end
management investment company under the 1940 Act and such registration is
in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquired
Fund of the transactions contemplated herein, except such as have been
obtained under the Securities Act of 1933, as amended (the "1933 Act"), the
Securities Exchange Act of 1934 (the "1934 Act") and the 1940 Act and such
as may be required by state securities laws;
(d) Other than with respect to contracts entered into in connection with
the portfolio management of the Acquired Fund which shall terminate on or
prior to the Closing Date, Sector Series is not, and the execution,
delivery and performance of this Agreement by Sector Series will not
result, in violation of Maryland law or of Sector Series' Articles of
Incorporation, as amended, or By-Laws, or of any material agreement,
indenture, instrument, contract, lease or other undertaking known to
counsel to which the Acquired Fund is a party or by which it is bound, and
the execution, delivery and performance of this Agreement by the Acquired
Fund will not result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, indenture, instrument,
contract, lease, judgment or decree to which the Acquired Fund is a party
or by which it is bound;
(e) No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against the Acquired Fund or any properties or assets
held by it. The Acquired Fund knows of no facts which might form the basis
for the institution of such proceedings which would materially and
adversely affect its business and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
(f) The Statements of Assets and Liabilities, including the Investment
Portfolio, Operations, and Changes in Net Assets, and the Financial
Highlights of the Acquired Fund at and for the year ended October 31, 1999,
has been audited by KPMG LLP, independent certified public accountants, and
are in accordance with GAAP consistently applied, and such statements
(copies of which have been furnished to the Acquiring Fund) present fairly,
in all material respects, the financial position, results of operations,
changes in net assets and financial highlights of the Acquired Fund as of
such date in accordance with GAAP, and there are no known contingent
liabilities of the Acquired Fund required to be reflected on a statement of
assets and liabilities (including the notes thereto) in accordance with
GAAP as of such date not disclosed therein;
A-4
<PAGE>
(g) Since October 31, 1999, there has not been any material adverse
change in the Acquired Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by the Acquired Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred except as otherwise
disclosed to and accepted in writing by the Acquiring Fund. For purposes of
this subsection (g), a decline in net asset value per share of the Acquired
Fund due to declines in market values of securities in the Acquired Fund's
portfolio, the discharge of Acquired Fund liabilities, or the redemption of
Acquired Fund shares by Acquired Fund Shareholders shall not constitute a
material adverse change;
(h) At the date hereof and at the Closing Date, all federal and other tax
returns and reports of the Acquired Fund required by law to have been filed
by such dates (including any extensions) shall have been filed and are or
will be correct in all material respects, and all federal and other taxes
shown as due or required to be shown as due on said returns and reports
shall have been paid or provision shall have been made for the payment
thereof, and, to the best of the Acquired Fund's knowledge, no such return
is currently under audit and no assessment has been asserted with respect
to such returns;
(i) For each taxable year of its operation, the Acquired Fund has met the
requirements of Subchapter M of the Code for qualification as a regulated
investment company and has elected to be treated as such, has been eligible
to and has computed its federal income tax under Section 852 of the Code,
and will have distributed all of its investment company taxable income and
net capital gain (as defined in the Code) that has accrued through the
Closing Date;
(j) All issued and outstanding shares of the Acquired Fund (i) have been
offered and sold in every state and the District of Columbia in compliance
in all material respects with applicable registration requirements of the
1933 Act and state securities laws, (ii) are, and on the Closing Date will
be, duly and validly issued and outstanding, fully paid and non-assessable,
and (iii) will be held at the time of the Closing by the persons and in the
amounts set forth in the records of the Transfer Agent, as provided in
section 3.3. The Acquired Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of the Acquired
Fund shares, nor is there outstanding any security convertible into any of
the Acquired Fund shares;
(k) At the Closing Date, the Acquired Fund will have good and marketable
title to the Acquired Fund's assets to be transferred to the Acquiring Fund
pursuant to section 1.2 and full right, power, and authority to sell,
assign, transfer and deliver such assets hereunder free of any liens or
other encumbrances, except those liens or encumbrances as to which the
Acquiring Fund has received notice at or prior to the Closing, and upon
delivery and payment for such assets, the Acquiring Fund will acquire good
and marketable title thereto, subject to no restrictions on the full
transfer thereof, including such restrictions as might arise under the 1933
Act and the 1940 Act, except those restrictions as to which the Acquiring
Fund has received notice and necessary documentation at or prior to the
Closing;
(l) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on
the part of the Directors of Sector Series, and, subject to the approval of
the Acquired Fund Shareholders, this Agreement constitutes a valid and
binding obligation of Sector Series, on behalf of the Acquired Fund,
enforceable in accordance with its terms, subject, as to enforcement, to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
other laws relating to or affecting creditors' rights and to general equity
principles;
(m) The information to be furnished by the Acquired Fund for use in
applications for orders, registration statements or proxy materials or for
use in any other document filed or to be filed with any
A-5
<PAGE>
federal, state or local regulatory authority (including the National
Association of Securities Dealers, Inc.), which may be necessary in
connection with the transactions contemplated hereby, shall be accurate and
complete in all material respects and shall comply in all material respects
with federal securities and other laws and regulations applicable thereto;
and
(n) The current prospectus and statement of additional information of the
Acquired Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations
of the Commission thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not materially misleading; and
(o) The proxy statement of the Acquired Fund to be included in the
Registration Statement referred to in section 5.7 (the "Proxy Statement"),
insofar as it relates to the Acquired Fund, will, on the effective date of
the Registration Statement and on the Closing Date, not contain any untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of
the circumstances under which such statements are made, not materially
misleading; provided, however, that the representations and warranties in
this section shall not apply to statements in or omissions from the Proxy
Statement and the Registration Statement made in reliance upon and in
conformity with information that was furnished or should have been
furnished by the Acquiring Fund for use therein.
4.2. The Acquiring Fund represents and warrants to Sector Series, on behalf
of the Acquired Fund, as follows:
(a) The Acquiring Fund is a corporation duly organized and validly
existing under the laws of the State of Maryland with power under its
Articles of Incorporation, as amended, to own all of its properties and
assets and to carry on its business as it is now being conducted;
(b) The Acquiring Fund is registered with the Commission as an open-end
management investment company under the 1940 Act, and such registration is
in full force and effect;
(c) No consent, approval, authorization, or order of any court or
governmental authority is required for the consummation by the Acquiring
Fund of the transactions contemplated herein, except such as have been
obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may
be required by state securities laws;
(d) The Acquiring Fund is not, and the execution, delivery and
performance of this Agreement by the Acquiring Fund will not result, in
violation of Maryland law or of the Acquiring Fund's Articles of
Incorporation, as amended, or By-Laws, or of any material agreement,
indenture, instrument, contract, lease or other undertaking known to
counsel to which the Acquiring Fund is a party or by which it is bound, and
the execution, delivery and performance of this Agreement by the Acquiring
Fund will not result in the acceleration of any obligation, or the
imposition of any penalty, under any agreement, indenture, instrument,
contract, lease, judgment or decree to which the Acquiring Fund is a party
or by which it is bound;
(e) No material litigation or administrative proceeding or investigation
of or before any court or governmental body is presently pending or to its
knowledge threatened against the Acquiring Fund or any properties or assets
held by it. The Acquiring Fund knows of no facts which might form the basis
for the institution of such proceedings which would materially and
adversely affect its business and is not a party to or subject to the
provisions of any order, decree or judgment of any court or governmental
body which materially and adversely affects its business or its ability to
consummate the transactions herein contemplated;
A-6
<PAGE>
(f) The Statements of Assets and Liabilities, including the Investment
Portfolio, Operations, and Changes in Net Assets, and the Financial
Highlights of the Acquiring Fund at and for the year ended September 30,
1999 has been audited by Deloitte & Touche LLP, independent certified
public accountants, and are in accordance with GAAP consistently applied,
and such statements (copies of which have been furnished to the Acquired
Fund) present fairly, in all material respects, the financial position,
results of operations, changes in net assets and financial highlights of
the Acquiring Fund as of such date in accordance with GAAP, and there are
no known contingent liabilities of the Acquiring Fund required to be
reflected on a statement of assets and liabilities (including the notes
thereto) in accordance with GAAP as of such date not disclosed therein;
(g) Since September 30, 1999, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business,
or any incurrence by the Acquiring Fund of indebtedness maturing more than
one year from the date such indebtedness was incurred except as otherwise
disclosed to and accepted in writing by Sector Series on behalf of the
Acquired Fund. For purposes of this subsection (g), a decline in net asset
value per share of the Acquiring Fund due to declines in market values of
securities in the Acquiring Fund's portfolio, the discharge of Acquiring
Fund liabilities, or the redemption of Acquiring Fund shares by Acquiring
Fund shareholders shall not constitute a material adverse change;
(h) At the date hereof and at the Closing Date, all federal and other tax
returns and reports of the Acquiring Fund required by law to have been
filed by such dates (including any extensions) shall have been filed and
are or will be correct in all material respects, and all federal and other
taxes shown as due or required to be shown as due on said returns and
reports shall have been paid or provision shall have been made for the
payment thereof, and, to the best of the Acquiring Fund's knowledge, no
such return is currently under audit and no assessment has been asserted
with respect to such returns;
(i) For each taxable year of its operation, the Acquiring Fund has met
the requirements of Subchapter M of the Code for qualification as a
regulated investment company and has elected to be treated as such, has
been eligible to and has computed its federal income tax under Section 852
of the Code, and will do so for the taxable year including the Closing
Date;
(j) All issued and outstanding shares of the Acquiring Fund (i) have been
offered and sold in every state and the District of Columbia in compliance
in all material respects with applicable registration requirements of the
1933 Act and state securities laws and (ii) are, and on the Closing Date
will be, duly and validly issued and outstanding, fully paid and non-
assessable. The Acquiring Fund does not have outstanding any options,
warrants or other rights to subscribe for or purchase any of the Acquiring
Fund shares, nor is there outstanding any security convertible into any of
the Acquiring Fund shares;
(k) The Acquiring Fund Shares to be issued and delivered to the Acquired
Fund, for the account of the Acquired Fund Shareholders, pursuant to the
terms of this Agreement, will at the Closing Date have been duly authorized
and, when so issued and delivered, will be duly and validly issued and
outstanding Acquiring Fund Shares, and will be fully paid and non-
assessable;
(l) At the Closing Date, the Acquiring Fund will have good and marketable
title to the Acquiring Fund's assets, free of any liens or other
encumbrances, except those liens or encumbrances as to which the Acquired
Fund has received notice at or prior to the Closing;
(m) The execution, delivery and performance of this Agreement will have
been duly authorized prior to the Closing Date by all necessary action on
the part of the Directors of the Acquiring Fund and this
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Agreement will constitute a valid and binding obligation of the Acquiring
Fund, enforceable in accordance with its terms, subject, as to enforcement,
to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and other laws relating to or affecting creditors' rights and to general
equity principles;
(n) The information to be furnished by the Acquiring Fund for use in
applications for orders, registration statements or proxy materials or for
use in any other document filed or to be filed with any federal, state or
local regulatory authority (including the National Association of
Securities Dealers, Inc.), which may be necessary in connection with the
transactions contemplated hereby, shall be accurate and complete in all
material respects and shall comply in all material respects with federal
securities and other laws and regulations applicable thereto;
(o) The current prospectus and statement of additional information of the
Acquiring Fund conform in all material respects to the applicable
requirements of the 1933 Act and the 1940 Act and the rules and regulations
of the Commission thereunder and do not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not materially misleading;
(p) The Proxy Statement to be included in the Registration Statement,
only insofar as it relates to the Acquiring Fund, will, on the effective
date of the Registration Statement and on the Closing Date, not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which such statements were made, not
materially misleading; provided, however, that the representations and
warranties in this section shall not apply to statements in or omissions
from the Proxy Statement and the Registration Statement made in reliance
upon and in conformity with information that was furnished or should have
been furnished by the Acquired Fund for use therein; and
(q) The Acquiring Fund agrees to use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act and
such of the state securities laws as may be necessary in order to continue
its operations after the Closing Date.
5. Covenants of the Acquiring Fund and the Acquired Fund
5.1. The Acquiring Fund and Sector Series, on behalf of the Acquired Fund,
each covenants to operate its business in the ordinary course between the date
hereof and the Closing Date, it being understood that (a) such ordinary course
of business will include (i) the declaration and payment of customary
dividends and other distributions and (ii) such changes as are contemplated by
the Funds' normal operations; and (b) each Fund shall retain exclusive control
of the composition of its portfolio until the Closing Date.
5.2. Upon reasonable notice, the Acquiring Fund's officers and agents shall
have reasonable access to the Acquired Fund's books and records necessary to
maintain current knowledge of the Acquired Fund and to ensure that the
representations and warranties made by the Acquired Fund are accurate.
5.3. Sector Series, on behalf of the Acquired Fund, covenants to call a
meeting of the Acquired Fund Shareholders entitled to vote thereon to consider
and act upon this Agreement and to take all other reasonable action necessary
to obtain approval of the transactions contemplated herein. Such meeting shall
be scheduled for no later than November 22, 2000 (or such other date as the
Acquired Fund and the Acquiring Fund may agree to in writing).
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5.4. Sector Series, on behalf of the Acquired Fund, covenants that the
Acquiring Fund Shares to be issued hereunder are not being acquired for the
purpose of making any distribution thereof other than in accordance with the
terms of this Agreement.
5.5. Sector Series, on behalf of the Acquired Fund, covenants that it will
assist the Acquiring Fund in obtaining such information as the Acquiring Fund
reasonably requests concerning the beneficial ownership of the Acquired Fund
Shares and will provide the Acquiring Fund with a list of affiliates of the
Acquired Fund.
5.6. Subject to the provisions of this Agreement, the Acquiring Fund and
Sector Series, on behalf of the Acquired Fund, will each take, or cause to be
taken, all actions, and do or cause to be done, all things reasonably
necessary, proper, and/or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.7. Each Fund covenants to prepare the Registration Statement on Form N-14
(the "Registration Statement"), in compliance with the 1933 Act, the 1934 Act
and the 1940 Act in connection with the meeting of the Acquired Fund
Shareholders to consider approval of this Agreement and the transactions
contemplated herein. The Acquiring Fund will file the Registration Statement,
including the Proxy Statement, with the Commission. The Acquired Fund will
provide the Acquiring Fund with information reasonably necessary for the
preparation of a prospectus, which will include the Proxy Statement referred
to in section 4.1(o), all to be included in the Registration Statement, in
compliance in all material respects with the 1933 Act, the 1934 Act and the
1940 Act.
5.8. Sector Series, on behalf of the Acquired Fund, covenants that it will,
from time to time, as and when reasonably requested by the Acquiring Fund,
execute and deliver or cause to be executed and delivered all such assignments
and other instruments, and will take or cause to be taken such further action
as the Acquiring Fund may reasonably deem necessary or desirable in order to
vest in and confirm the Acquiring Fund's title to and possession of all the
assets and otherwise to carry out the intent and purpose of this Agreement.
5.9. The Acquiring Fund covenants to use all reasonable efforts to obtain
the approvals and authorizations required by the 1933 Act and 1940 Act, and
such of the state securities laws as it deems appropriate in order to continue
its operations after the Closing Date and to consummate the transactions
contemplated herein; provided, however, that the Acquiring Fund may take such
actions it reasonably deems advisable after the Closing Date as circumstances
change.
5.10. The Acquiring Fund covenants that it will, from time to time, as and
when reasonably requested by the Acquired Fund, execute and deliver or cause
to be executed and delivered all such assignments, assumption agreements,
releases, and other instruments, and will take or cause to be taken such
further action, as the Acquired Fund may reasonably deem necessary or
desirable in order to (i) vest and confirm to the Acquired Fund title to and
possession of all Acquiring Fund shares to be transferred to Acquired Fund
pursuant to this Agreement and (ii) assume all of the stated liabilities from
the Acquired Fund.
5.11. As soon as reasonably practicable after the Closing, the Acquired Fund
shall make a liquidating distribution to its shareholders consisting of the
Acquiring Fund Shares received at the Closing.
5.12. Sector Series, on behalf of the Acquired Fund, and the Acquiring Fund
shall each use its reasonable best efforts to fulfill or obtain the
fulfillment of the conditions precedent to effect the transactions
contemplated by this Agreement as promptly as practicable.
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6. Conditions Precedent to Obligations of the Acquired Fund
The obligations of the Acquired Fund to consummate the transactions provided
for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1. All representations and warranties of the Acquiring Fund, contained in
this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date, with the same force
and effect as if made on and as of the Closing Date; and there shall be (i) no
pending or threatened litigation brought by any person (other than Acquired
Fund, its adviser or any of their affiliates) against the Acquiring Fund, the
Acquired Fund or their advisers, trustees or officers arising out of this
Agreement and (ii) no facts known to the Acquired Fund which the Acquired Fund
reasonably believes might result in such litigation.
6.2. The Acquiring Fund shall have delivered to the Acquired Fund on the
Closing Date a certificate executed in its name by its President or a Vice
President, in a form reasonably satisfactory to the Acquired Fund and dated as
of the Closing Date, to the effect that the representations and warranties of
the Acquiring Fund made in this Agreement are true and correct on and as of
the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as the Acquired
Fund shall reasonably request;
6.3. The Acquired Fund shall have received on the Closing Date an opinion of
Willkie Farr & Gallagher, in a form reasonably satisfactory to the Acquired
Fund, and dated as of the Closing Date, to the effect that:
(a) The Acquiring Fund has been duly formed and is a validly existing
Maryland corporation;
(b) The Acquiring Fund has the corporate power to carry on its business
as presently conducted in accordance with the description thereof in the
Acquiring Fund's registration statement under the 1940 Act;
(c) the Agreement has been duly authorized, executed and delivered by the
Acquiring Fund, and constitutes a valid and legally binding obligation of
the Acquiring Fund, enforceable in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and
laws of general applicability relating to or affecting creditors' rights
and to general equity principles;
(d) the execution and delivery of the Agreement did not, and the exchange
of the Acquired Fund's assets for Acquiring Fund Shares pursuant to the
Agreement will not, violate the Acquiring Fund's Articles of Incorporation,
as amended, or By-laws; and
(e) to the knowledge of such counsel, all regulatory consents,
authorizations, approvals or filings required to be obtained or made by the
Acquiring Fund under the Federal laws of the United States or the laws of
the State of Maryland for the exchange of the Acquired Fund's assets for
Acquiring Fund Shares pursuant to the Agreement have been obtained or made.
Such opinion may state that it is solely for the benefit of the Acquired Fund,
its Directors and its officers. Such counsel may rely as to matters governed
by the laws of the State of Maryland on an opinion of Maryland counsel and/or
certificates of officers or Directors of the Acquiring Fund. Such opinion also
shall include such other matters incident to the transaction contemplated
hereby as the Acquired Fund may reasonably request.
6.4. The Acquiring Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by the Acquiring Fund on or before the Closing Date.
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7. Conditions Precedent to Obligations of the Acquiring Fund
The obligations of the Acquiring Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by
the Acquired Fund of all of the obligations to be performed by it hereunder on
or before the Closing Date and, in addition thereto, the following further
conditions:
7.1. All representations and warranties of Sector Series, with respect to
the Acquired Fund, contained in this Agreement shall be true and correct in
all material respects as of the date hereof and, except as they may be
affected by the transactions contemplated by this Agreement, as of the Closing
Date, with the same force and effect as if made on and as of the Closing Date;
and there shall be (i) no pending or threatened litigation brought by any
person (other than Acquiring Fund, its adviser or any of their affiliates)
against the Acquired Fund, the Acquiring Fund or their advisers, trustees or
officers arising out of this Agreement and (ii) no facts known to the
Acquiring Fund which the Acquiring Fund reasonably believes might result in
such litigation.
7.2. Sector Series shall have delivered to the Acquiring Fund a statement of
the Acquired Fund's assets and liabilities as of the Closing Date, certified
by the Controller of Sector Series;
7.3. Sector Series shall have delivered to the Acquiring Fund on the Closing
Date a certificate executed in its name by its President or a Vice President,
in a form reasonably satisfactory to the Acquiring Fund and dated as of the
Closing Date, to the effect that the representations and warranties of Sector
Series with respect to the Acquired Fund made in this Agreement are true and
correct on and as of the Closing Date, except as they may be affected by the
transactions contemplated by this Agreement, and as to such other matters as
the Acquiring Fund shall reasonably request;
7.4. The Acquiring Fund shall have received on the Closing Date an opinion
of Willkie Farr & Gallagher, in a form reasonably satisfactory to the
Acquiring Fund, and dated as of the Closing Date, to the effect that:
(a) Sector Series has been duly formed and is a validly existing Maryland
corporation;
(b) Sector Series, with respect to the Acquired Fund, has the corporate
power to carry on its business as presently conducted in accordance with
the description thereof in Sector Series' registration statement under the
1940 Act;
(c) the Agreement has been duly authorized, executed and delivered by
Sector Series, on behalf of the Acquired Fund, and constitutes a valid and
legally binding obligation of Sector Series, on behalf of the Acquired
Fund, enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and laws of
general applicability relating to or affecting creditors' rights and to
general equity principles;
(d) the execution and delivery of the Agreement did not, and the exchange
of the Acquired Fund's assets for Acquiring Fund Shares pursuant to the
Agreement will not, violate Sector Series' Articles of Incorporation, as
amended, or By-laws; and
(e) to the knowledge of such counsel, all regulatory consents,
authorizations, approvals or filings required to be obtained or made by the
Acquired Fund under the Federal laws of the United States or the laws of
the State of Maryland for the exchange of the Acquired Fund's assets for
Acquiring Fund Shares pursuant to the Agreement have been obtained or made.
Such opinion may state that it is solely for the benefit of the Acquiring
Fund, its Directors and its officers. Such counsel may rely as to matters
governed by the laws of the State of Maryland on an opinion of Maryland
counsel
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and/or certificates of officers or Directors of the Acquired Fund. Such
opinion also shall include such other matters incident to the transaction
contemplated hereby, as the Acquiring Fund may reasonably request.
7.5. The Acquired Fund shall have performed all of the covenants and
complied with all of the provisions required by this Agreement to be performed
or complied with by the Acquired Fund on or before the Closing Date.
8. Further Conditions Precedent to Obligations of the Acquiring Fund and the
Acquired Fund
If any of the conditions set forth below have not been met on or before the
Closing Date with respect to the Acquired Fund or the Acquiring Fund, the
other party to this Agreement shall, at its option, not be required to
consummate the transactions contemplated by this Agreement:
8.1. This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of the
Acquired Fund in accordance with the provisions of Sector Series' Articles of
Incorporation, as amended, and By-Laws, applicable Maryland law and the 1940
Act, and certified copies of the resolutions evidencing such approval shall
have been delivered to the Acquiring Fund. Notwithstanding anything herein to
the contrary, neither the Acquiring Fund nor the Acquired Fund may waive the
conditions set forth in this section 8.1;
8.2. On the Closing Date, no action, suit or other proceeding shall be
pending or to its knowledge threatened before any court or governmental agency
in which it is sought to restrain or prohibit, or obtain material damages or
other relief in connection with, this Agreement or the transactions
contemplated herein;
8.3. All consents of other parties and all other consents, orders and
permits of Federal, state and local regulatory authorities deemed necessary by
the Acquiring Fund or the Acquired Fund to permit consummation, in all
material respects, of the transactions contemplated hereby shall have been
obtained, except where failure to obtain any such consent, order or permit
would not involve a risk of a material adverse effect on the assets or
properties of the Acquiring Fund or the Acquired Fund, provided that either
party hereto may for itself waive any of such conditions;
8.4. The Registration Statement shall have become effective under the 1933
Act and no stop orders suspending the effectiveness thereof shall have been
issued and, to the best knowledge of the parties hereto, no investigation or
proceeding for that purpose shall have been instituted or be pending,
threatened or contemplated under the 1933 Act; and
8.5. The parties shall have received an opinion of Willkie Farr & Gallagher
addressed to Sector Series, on behalf of the Acquired Fund, and the Acquiring
Fund substantially to the effect that, based upon certain facts, assumptions
and representations, for Federal income tax purposes: (i) the transfer to the
Acquiring Fund of all of the assets of the Acquired Fund in exchange solely
for Shares and the assumption by the Acquiring Fund of all of the stated
liabilities of the Acquired Fund, followed by the distribution of such Shares
to Acquired Fund shareholders in exchange for their shares of the Acquired
Fund in complete liquidation of the Acquired Fund, will constitute a
"reorganization" within the meaning of Section 368(a)(1) of the Code, and the
Acquiring Fund and the Acquired Fund will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code; (ii) no gain
or loss will be recognized by the Acquired Fund upon the transfer of the
Acquired Fund's assets to the Acquiring Fund in exchange for the Acquiring
Fund Shares and the assumption by the Acquiring Fund of all of the stated
liabilities of the Acquired Fund or upon the distribution (whether actual or
constructive)
A-12
<PAGE>
of the Acquiring Fund Shares to the Acquired Fund's shareholders in exchange
for their shares of the Acquired Fund; (iii) the basis of the assets of the
Acquired Fund in the hands of the Acquiring Fund will be the same as the basis
of such assets of the Acquired Fund immediately prior to the transfer; (iv)
the holding period of the assets of the Acquired Fund in the hands of the
Acquiring Fund will include the period during which such assets were held by
the Acquired Fund; (v) no gain or loss will be recognized by the Acquiring
Fund upon the receipt of the assets of the Acquired Fund in exchange for
Shares and the assumption by the Acquiring Fund of all of the stated
liabilities of the Acquired Fund; (vi) no gain or loss will be recognized by
the shareholders of the Acquired Fund upon the receipt of Shares solely in
exchange for their shares of the Acquired Fund as part of the transaction;
(vii) the basis of Shares received by the shareholders of the Acquired Fund
will be the same as the basis of the shares of the Acquired Fund exchanged
therefor; and (viii) the holding period of Shares received by the shareholders
of the Acquired Fund will include the holding period during which the shares
of the Acquired Fund exchanged therefor were held, provided that at the time
of the exchange the shares of the Acquired Fund were held as capital assets in
the hands of the shareholders of the Acquired Fund. The delivery of such
opinion is conditioned upon receipt by Willkie Farr & Gallagher of
representations it shall request of each of Sector Series, on behalf of the
Acquired Fund, and the Acquiring Fund. Notwithstanding anything herein to the
contrary, neither the Acquiring Fund nor the Acquired Fund may waive the
condition set forth in this section 8.5.
9. Indemnification
9.1. The Acquiring Fund agrees to indemnify and hold harmless the Acquired
Fund and each of the Acquired Fund's directors and officers from and against
any and all losses, claims, damages, liabilities or expenses (including,
without limitation, the payment of reasonable legal fees and reasonable costs
of investigation) to which jointly and severally the Acquired Fund or any of
its trustees or officers may become subject, insofar as any such loss, claim,
damage, liability or expense (or actions with respect thereto) arises out of
or is based on any breach by the Acquiring Fund of any of its representations,
warranties, covenants or agreements set forth in this Agreement.
9.2. The Acquired Fund agrees to indemnify and hold harmless the Acquiring
Fund and each of the Acquiring Fund's directors and officers from and against
any and all losses, claims, damages, liabilities or expenses (including,
without limitation, the payment of reasonable legal fees and reasonable costs
of investigation) to which jointly and severally the Acquiring Fund or any of
its trustees or officers may become subject, insofar as any such loss, claim,
damage, liability or expense (or actions with respect thereto) arises out of
or is based on any breach by the Acquired Fund of any of its representations,
warranties, covenants or agreements set forth in this Agreement.
10. Fees and Expenses
10.1. The Acquiring Fund and Sector Series, on behalf of the Acquired Fund,
represents and warrants to the other that it has no obligations to pay any
brokers or finders fees in connection with the transactions provided for
herein.
10.2. Expenses of the Reorganization that relate to the Acquiring Fund and
the Acquired Fund will be borne by SSB Citi. Any such expenses which are so
borne by SSB Citi will be solely and directly related to the Reorganization.
11. Entire Agreement; Survival of Warranties
11.1. Sector Series, on behalf of the Acquiring Fund, and the Acquired Fund
agree that neither party has made any representation, warranty or covenant not
set forth herein and that this Agreement constitutes the entire agreement
between the parties.
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<PAGE>
11.2. Except as specified in the next sentence set forth in this section
11.2, the representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall not survive the consummation of the transactions contemplated
hereunder.
The covenants to be performed after the Closing and the obligations of each
of the Acquired Fund and Acquired Fund in Sections 9.1 and 9.2 shall survive
the Closing.
12. Termination
This Agreement may be terminated and the transactions contemplated hereby
may be abandoned by either party by (i) mutual agreement of the parties, or
(ii) by either party if the Closing shall not have occurred on or before
January 1, 2001, unless such date is extended by mutual agreement of the
parties, or (iii) by either party if the other party shall have materially
breached its obligations under this Agreement or made a material and
intentional misrepresentation herein or in connection herewith. In the event
of any such termination, this Agreement shall become void and there shall be
no liability hereunder on the part of any party or their respective directors
or officers, except for any such material breach or intentional
misrepresentation, as to each of which all remedies at law or in equity of the
party adversely affected shall survive.
13. Amendments
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of Sector
Series and the Acquiring Fund; provided, however, that following the meeting
of the Acquired Fund Shareholders called by the Acquired Fund pursuant to
section 5.3 of this Agreement, no such amendment may have the effect of
changing the provisions for determining the number of the Acquiring Fund
Shares to be issued to the Acquired Fund shareholders under this Agreement to
the detriment of such shareholders without their further approval.
14. Notices
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be deemed duly
given if delivered by hand (including by Federal Express or similar express
courier) or transmitted by facsimile or three days after being mailed by
prepaid registered or certified mail, return receipt requested, addressed to
the Acquired Fund, c/o Smith Barney Sector Series Inc., 7 World Trade Center,
New York, New York 10048, with a copy to Willkie Farr & Gallagher, 787 Seventh
Avenue, New York, N.Y. 10019-6099, Attn.: Burton M. Leibert, Esq., or to the
Acquiring Fund, 7 World Trade Center, New York, New York 10048, with a copy to
Willkie Farr & Gallagher, 787 Seventh Avenue, New York, N.Y. 10019-6099,
Attn.: Burton M. Leibert, Esq., or to any other address that the Acquired Fund
or the Acquiring Fund shall have last designated by notice to the other party.
15. Headings; Counterparts; Assignment
15.1. The Article and section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
15.2. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
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<PAGE>
15.3. This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other party. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any
person, firm or corporation, other than the parties hereto and the
shareholders of the Acquiring Fund and the Acquired Fund and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
15.4. This Agreement shall be governed by, and construed and enforced in
accordance with, the laws of the State of New York, without regard to its
principles of conflicts of laws.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its President or Vice President and its seal to be affixed
thereto and attested by its Secretary or Assistant Secretary.
Attest: Smith Barney Sector Series Inc. on
behalf of Smith Barney Natural
Resources Fund
By: _________________________________
Name:
Title:
Attest: Smith Barney Fundamental Value Fund
Inc.
By: _________________________________
Name:
Title:
Attest: SSB Citi Fund Management LLC
By: _________________________________
Name:
Title:
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION BY
SMITH BARNEY FUNDAMENTAL VALUE FUND, INC.
(THE "ACQUIRING FUND")
OF THE ASSETS OF
SMITH BARNEY NATURAL RESOURCES FUND (THE "FUND"),
A SERIES OF SMITH BARNEY SECTOR SERIES INC. ("SECTOR SERIES").
7 World Trade Center
New York, New York 10048
(800) 451-2010
Dated: October 18, 2000
This Statement of Additional Information, relating specifically to the
proposed transfer of all of the assets of the Fund, a series of Sector Series,
to the Acquiring Fund in exchange for shares of the corresponding class of the
Acquiring Fund and the assumption by the Acquiring Fund of the stated
liabilities of the Fund, consists of this cover page and the following described
documents, each of which accompanies this Statement of Additional Information
and is incorporated herein by reference.
1. Statement of Additional Information for the Acquiring Fund, dated
January 28, 2000.
2. Statement of Additional Information for the Fund, dated February 14,
2000.
3. Annual Report of the Acquiring Fund for the year ended September 30,
1999 and the Semi-Annual Report for the six-month period ended March
31, 2000.
4. Annual Report of the Fund for the year ended October 31, 1999, and the
Semi-Annual Report for the six-month period ended April 30, 2000.
This Statement of Additional Information is not a prospectus. A Prospectus/Proxy
Statement, dated October 18, 2000, relating to the above-referenced matter may
be obtained without charge by calling or writing the Acquiring Fund at the
telephone number or address set forth above. This Statement of Additional
Information should be read in conjunction with the Prospectus/Proxy Statement.
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<PAGE>
FINANCIAL STATEMENTS
The Annual Report of the Acquiring Fund for the year ended September 30,
1999 and the Annual Report of the Fund for the year ended October 31, 1999, each
including audited financial statements, notes to the financial statements and
report of the independent auditors, are incorporated by reference herein. To
obtain a copy of the Annual Reports (and, if applicable, any more recent
semi-annual report) without charge, please call 1-800-451-2010.
PRO FORMA FINANCIAL STATEMENTS
Because the net asset value of the Fund is less than 10% of the Acquiring
Fund's net asset value, pro forma financial statements are not required to be
and have not been prepared for inclusion in the Statement of Additional
Information filed in connection with the Reorganization.
