<PAGE>
[SB]Smith Barney
[MF]Mutual Funds
P R O S P E C T U S
Financial Services Fund
Health Sciences Fund
Technology Fund
Class A and B Shares
-------------------------
February 14, 2000
as amended on July 1, 2000
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Contents
<TABLE>
<S> <C>
Investments, risks and performance.......................................... 2
Smith Barney Financial Services Fund...................................... 2
Smith Barney Health Sciences Fund......................................... 6
Smith Barney Technology Fund.............................................. 10
More on the funds' investments.............................................. 14
Management.................................................................. 15
Choosing a class of shares to buy........................................... 16
Comparing the fund's classes................................................ 17
Sales charges............................................................... 18
More about deferred sales charges........................................... 20
Buying shares............................................................... 21
Exchanging shares........................................................... 22
Redeeming shares............................................................ 23
Other things to know about share transactions............................... 26
Dividends, distributions and taxes.......................................... 27
Share price................................................................. 28
</TABLE>
Each fund is a separate series of Smith Barney Sector Series Inc., a Maryland
corporation.
You should know: An investment in a fund is not a bank deposit and is not
insured or guaranteed by the FDIC or any other government agency.
Smith Barney Mutual Funds
1
<PAGE>
Investments, risks and performance
Smith Barney Financial Services Fund
Investment objective
Smith Barney Financial Services Fund (the "Financial Services Fund") seeks
long-term capital appreciation by investing primarily in common stocks.
Principal Investment Strategies
Key investments The fund normally invests at least 80% of its assets in securi-
ties of companies principally engaged in providing financial services to con-
sumers and industry. These companies may include, for example, commercial
banks, savings and loan associations, broker-dealers, investment banks, invest-
ment advisers, insurance companies, real estate-related companies, leasing com-
panies, and consumer and industrial finance companies. The fund may invest its
assets in securities of foreign issuers in addition to securities of domestic
issuers. The fund invests primarily in companies with medium and large market
capitalizations. To a lesser extent, the fund also may invest in common stocks
of companies with small market capitalizations. Small and medium market capi-
talization companies are those companies with market capitalizations under $5
billion.
Selection process The fund normally invests at least 80% of its assets in com-
panies doing business in the financial services sector. The remainder of the
fund's assets are not required to be invested in that sector. To determine
whether a potential investment is principally doing business in the sector, a
company must meet at least one of the following tests:
. At least 50% of its gross income or its net sales must come from activities
in the sector;
. At least 50% of its assets must be devoted to producing revenues from the
sector; or
. Based on other available information, the manager determines that the
company's primary business is within the sector.
In buying and selling securities, the fund relies on fundamental analysis of
each issuer and its potential for success in light of its current financial
condition and its industry position. Factors considered, among other things,
include long-term growth potential, earnings estimates and quality of manage-
ment.
The fund may lend its securities to earn income for the fund.
Sector Funds
2
<PAGE>
The fund may, but is not required to, use various techniques, such as buying
and selling futures and options contracts, to increase or decrease its exposure
to changing security prices or other factors that affect security values. The
fund may engage in foreign currency transactions solely to manage its exposure
to foreign securities. If the fund's strategies do not work as intended, the
fund may not achieve its objective.
Principal risks of investing in the fund
Investors could lose money on their investments 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. Dif-
ferent parts of the market can react differently to these developments.
. 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 fluc-
tuations may adversely impact the fund's investments.
. The financial services industries are subject to extensive government regula-
tion and relatively rapid change because of increasingly blurred distinctions
between service segments, and can be significantly affected by availability
and cost of capital funds, changes in interest rates, and price competition.
The performance of the financial services sector may differ in direction and
degree from that of the overall stock market.
. 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 mana-
gerial resources.
. The fund is "non-diversified," which means it may invest a larger percentage
of its assets in one issuer than a diversified fund. To the extent the fund
concentrates its assets in fewer issuers, the fund will be more susceptible
to negative events affecting those issuers. 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 invest-
ments 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 values of its portfolio investments
tend to increase and decrease more rapidly. As a result, the value of your
investment in the fund may rise or fall rapidly.
. The manager's judgment about the attractiveness, growth prospects, value or
potential appreciation of a particular stock may prove to be incorrect.
Smith Barney Mutual Funds
3
<PAGE>
Who may want to invest The fund may be an appropriate investment if you:
. Are seeking to participate in the long-term growth potential of the financial
services industry
. Are seeking capital appreciation and can tolerate short-term volatility.
. Are looking for an investment with potentially greater return but higher risk
than a fund investing primarily in fixed income securities
. Are comfortable with the risks of the stock market and the special risks of
foreign securities, including emerging market securities
. Currently have exposure to the stock market and can tolerate concentrated
investment in a single market sector
Performance
The fund is new and does not yet have the performance information which other
Smith Barney funds show in bar and table form in this part of the prospectus.
Fee table
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
Shareholder fees
<TABLE>
<CAPTION>
(fees paid directly from your investment) Class A Class B
<S> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a % of offering price) 5.00% None
Maximum deferred sales charge (load) (as a % of the lower of
net asset value at purchase or redemption) None* 5.00%
</TABLE>
Annual fund operating expenses
<TABLE>
<CAPTION>
(expenses deducted from fund assets) Class A Class B
<S> <C> <C>
Management fee 0.80% 0.80%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses** 0.27% 0.27%
----- -----
Total annual fund operating expenses 1.32% 2.07%
</TABLE>
* You may buy Class A shares in amounts of $1,000,000 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%.
** The fund is new and, therefore, has no historical expense data. The amounts
set forth in "Other expenses" have been estimated based on expenses the
fund expects to incur during its first full fiscal year.
Sector Funds
4
<PAGE>
Example
This example helps you compare the costs of investing in the fund with the
costs of investing in other mutual funds. Your actual costs may be higher or
lower. The example assumes:
. You invest $10,000 in the fund for the period shown
. Your investment has a 5% return each year
. You reinvest all distributions and dividends without a sales charge
. The fund's operating expenses remain the same
Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years
<S> <C> <C>
Class A (with or without redemption) $628 $897
Class B (redemption at end of period) $710 $949
Class B (no redemption) $210 $649
</TABLE>
Smith Barney Mutual Funds
5
<PAGE>
Investments, risks and performance
Smith Barney Health Sciences Fund
Investment objective
Smith Barney Health Sciences Fund (the "Health Sciences Fund") seeks long-term
capital appreciation by investing primarily in common stocks.
Principal Investment Strategies
Key investments The fund normally invests at least 80% of its assets in securi-
ties of companies principally engaged in the design, manufacture, or sale of
products or services used for or in connection with health care or medicine.
These companies may include, for example, pharmaceutical companies; companies
involved in biotechnology, medical diagnostic, biochemical or other health care
research and development; companies involved in the operation of health care
facilities; and other companies involved in the design, manufacture, or sale of
health care-related products or services such as medical, dental and optical
products, hardware, insurance or services. The fund may invest its assets in
securities of foreign issuers in addition to securities of domestic issuers.
The fund invests primarily in companies with medium and large market capital-
izations. To a lesser extent, the fund also may invest in common stocks of com-
panies with small market capitalizations. Small and medium market
capitalization companies are those companies with market capitalizations under
$5 billion.
Selection process The fund normally invests at least 80% of its assets in com-
panies doing business in the health sciences sector. The remainder of the
fund's assets are not required to be invested in that sector. To determine
whether a potential investment is principally doing business in the sector, a
company must meet at least one of the following tests:
. At least 50% of its gross income or its net sales must come from activities
in the sector;
. At least 50% of its assets must be devoted to producing revenues from the
sector; or
. Based on other available information, the manager determines that the
company's primary business is within the sector.
In buying and selling securities, the fund relies on fundamental analysis
of each issuer and its potential for success in light of its current financial
condition and its industry position. Factors considered, among other things,
include long-term growth potential, earnings estimates and quality of manage-
ment.
The fund may lend its securities to earn income for the fund.
Sector Funds
6
<PAGE>
The fund may, but is not required to, use various techniques, such as buying
and selling futures and options contracts, to increase or decrease the fund's
exposure to changing security prices or other factors that affect security val-
ues. The fund may engage in foreign currency transactions solely to manage its
exposure to foreign securities. If the fund's strategies do not work as intend-
ed, the fund may not achieve its objective.
Principal risks of investing in the fund
Investors could lose money on their investments 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. Dif-
ferent parts of the market can react differently to these developments.
. 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 fluc-
tuations may adversely impact the fund's investments.
. The health science industries are subject to government regulation and gov-
ernment approval of products and services, which could have a significant
effect on price and availability, and can be significantly affected by rapid
obsolescence. Lawsuits or other legal proceedings against the issuer of a
security may adversely affect the issuer, the market value of the security or
the fund's performance. The performance of the health sciences sector may
differ in direction and degree from that of the overall stock market.
. 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 mana-
gerial resources.
. The fund is "non-diversified," which means it may invest a larger percentage
of its assets in one issuer than a diversified fund. To the extent the fund
concentrates its assets in fewer issuers, the fund will be more susceptible
to events affecting those issuers. The fund's investments are spread across
the sector on which it focuses. However, because those investments are lim-
ited 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 vola-
tile than other mutual funds, and the values of its portfolio investments
tend to go up and down more rapidly. As a result, the value of your invest-
ment in the fund may rise or fall rapidly.
Smith Barney Mutual Funds
7
<PAGE>
. The manager's judgment about the attractiveness, growth prospects, value or
potential appreciation of a particular stock may prove to be incorrect.
Who may want to invest The fund may be an appropriate investment if you:
. Are seeking to participate in the long-term growth potential of the health
sciences industry
. Are seeking capital appreciation and can tolerate significant short-term vol-
atility
. Are looking for an investment with potentially greater return but higher risk
than a fund investing primarily in fixed income securities
. Are comfortable with the risks of the stock market and the special risks of
foreign securities, including emerging market securities
. Currently have exposure to the stock market and can tolerate concentrated
investment in a single market sector
Performance
The fund is new and does not yet have the performance information which other
Smith Barney funds show in bar and table form in this part of the prospectus.
Fee table
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
Shareholder fees
<TABLE>
<CAPTION>
(fees paid directly from your investment) Class A Class B
<S> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a % of offering price) 5.00% None
Maximum deferred sales charge (load)
(as a % of the lower of net asset value at purchase or
redemption) None* 5.00%
Annual fund operating expenses
<CAPTION>
(expenses deducted from fund assets) Class A Class B
<S> <C> <C>
Management fee 0.80% 0.80%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses** 0.27% 0.27%
----- -----
Total annual fund operating expenses 1.32% 2.07%
</TABLE>
Sector Funds
8
<PAGE>
* You may buy Class A shares in amounts of $1,000,000 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%.
** The fund is new, and therefore, has no historical expense data. The amounts
set forth in "Other expenses" have been estimated based on expenses the
fund expects to incur during its first full fiscal year.
Example
This example helps you compare the costs of investing in the fund with the
costs of investing in other mutual funds. Your actual costs may be higher or
lower. The example assumes:
. You invest $10,000 in the fund for the period shown
. Your investment has a 5% return each year
. You reinvest all distributions and dividends without a sales charge
. The fund's operating expenses remain the same
Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years
<S> <C> <C>
Class A (with or without redemption) $628 $897
Class B (redemption at end of period) $710 $949
Class B (no redemption) $210 $649
</TABLE>
Smith Barney Mutual Funds
9
<PAGE>
Investments, risks and performance
Smith Barney Technology Fund
Investment objective
Smith Barney Technology Fund (the "Technology Fund") seeks long-term capital
appreciation by investing primarily in common stocks.
Principal Investment Strategies
Key investments The fund normally invests at least 80% of its assets in securi-
ties of companies principally engaged in offering, using or developing prod-
ucts, processes or services that will provide or will benefit significantly
from technological advances and improvements. These companies may include, for
example, companies that develop, produce or distribute products or services in
the computer, semi-conductor, software, electronics, media, communications,
health care, and biotechnology sectors. The fund may invest its assets in secu-
rities of foreign issuers in addition to securities of domestic issuers. The
fund invests primarily in companies with medium and large market capitaliza-
tions. To a lesser extent, the fund also may invest in common stocks of compa-
nies with small market capitalizations. Small and medium market capitalization
companies are those companies with market capitalizations under $5 billion.
Selection process The fund normally invests at least 80% of its assets in com-
panies doing business in the technology sector. The remainder of the fund's
assets are not required to be invested in that sector. To determine whether a
potential investment is principally doing business in the sector, a company
must meet at least one of the following tests:
. At least 50% of its gross income or its net sales must come from activities
in the sector;
. At least 50% of its assets must be devoted to producing revenues from the
sector; or
. Based on other available information, the manager determines that the
company's primary business is within the sector.
In buying and selling securities, the fund relies on fundamental analysis of
each issuer and its potential for success in light of its current financial
condition and its industry position. Factors considered, among other things,
include long-term growth potential, earnings estimates and quality of
management.
The fund may lend its securities to earn income for the fund.
Sector Funds
10
<PAGE>
The fund may, but is not required to, use various techniques, such as buying
and selling futures and options contracts, to increase or decrease the fund's
exposure to changing security prices or other factors that affect security val-
ues. The fund may engage in foreign currency transactions solely to manage its
exposure to foreign securities. If the fund's strategies do not work as intend-
ed, the fund may not achieve its objective.
Principal risks of investing in the fund
Investors could lose money on their investments 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 develop-
ments. Different parts of the market can react differently to these
developments.
. 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 fluc-
tuations may adversely impact the fund's investments.
. Technology companies can be significantly affected by obsolescence of exist-
ing technology, short product cycles, falling prices and profits, and compe-
tition from new market entrants. The technology sector may be subject to
greater governmental regulation than many other areas, and changes in govern-
mental policies and the need for regulatory approvals may have a material
adverse effect on the sector. The performance of the technology sector may
differ in direction and degree from that of the overall stock market.
. 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 manage-
rial resources.
. The fund is "non-diversified," which means it may invest a larger percentage
of its assets in one issuer than a diversified fund. To the extent the fund
concentrates its assets in fewer issuers, the fund will be more susceptible
to negative events affecting those issuers. 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 invest-
ments 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 values of its portfolio investments
tend to go up and down more rapidly. As a result, the value of your invest-
ment in the fund may rise or fall rapidly.
Smith Barney Mutual Funds
11
<PAGE>
. The manager's judgment about the attractiveness, growth prospects, value or
potential appreciation of a particular stock may prove to be incorrect.
Who may want to invest The fund may be an appropriate investment if you:
. Are seeking to participate in the long-term growth potential of the technol-
ogy industry
. Are seeking capital appreciation and can tolerate significant short-term vol-
atility
. Are looking for an investment with potentially greater return but higher risk
than a fund investing primarily in fixed income securities
. Are comfortable with the risks of the stock market and the special risks of
foreign securities, including emerging market securities
. Currently have exposure to the stock market and can tolerate concentrated
investment in a single market sector.
Performance
The fund is new and does not yet have the performance information which other
Smith Barney funds show in bar and table form in this part of the prospectus.
Fee table
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
Shareholder fees
<TABLE>
<CAPTION>
(fees paid directly from your investment) Class A Class B
<S> <C> <C>
Maximum sales charge (load) imposed on purchases
(as a % of offering price) 5.00% None
Maximum deferred sales charge (load)
(as a % of the lower of net asset value at purchase or
redemption) None* 5.00%
Annual fund operating expenses
<CAPTION>
(expenses deducted from fund assets) Class A Class B
<S> <C> <C>
Management fee 0.95% 0.95%
Distribution and service (12b-1) fees 0.25% 1.00%
Other expenses** 0.23% 0.23%
----- -----
Total annual fund operating expenses 1.43% 2.18%
</TABLE>
Sector Funds
12
<PAGE>
* You may buy Class A shares in amounts of $1,000,000 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%.
** The fund is new and, therefore, has no historical expense data. The amounts
set forth in "Other expenses" have been estimated based on expenses the
fund expects to incur during its first full fiscal year.
Example
This example helps you compare the costs of investing in the fund with the
costs of investing in other mutual funds. Your actual costs may be higher or
lower. The example assumes:
. You invest $10,000 in the fund for the period shown
. You redeem all of your shares at the end of the period
. Your investment has a 5% return each year
. You reinvest all distributions and dividends without a sales charge
. The fund's operating expenses remain the same
Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years
<S> <C> <C>
Class A (with or without redemption) $638 $930
Class B (redemption at end of period) $721 $982
Class B (no redemption) $221 $682
</TABLE>
Smith Barney Mutual Funds
13
<PAGE>
More on the funds' investments
Foreign investments Each fund's investments in securities of foreign issuers
involves greater risk than investments in securities of U.S. issuers. Many for-
eign countries the funds may invest in have markets that are less liquid and
more volatile than markets in the U.S. In some foreign countries, less informa-
tion is available about foreign issuers and markets because of less rigorous
accounting and regulatory standards than in the U.S. Currency fluctuations
could erase investment gains or add to investment losses. The risks of invest-
ing in foreign securities are greater for securities of emerging market issuers
because political or economic instability, lack of market liquidity, and nega-
tive government actions like currency controls or seizure of private businesses
or property are more likely.
Derivatives and hedging techniques Each fund may, but need not, use derivate
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
. Settle transactions in securities quoted in foreign currencies
. As a substitute for buying or selling securities
A derivative contract will obligate or entitle the fund to deliver or receive
an asset or cash payment based on the change in value of one or more securi-
ties, currencies or indices. Even a small investment in derivative contracts
can have a big impact on each fund's stock market, currency and interest rate
exposure. Therefore, using derivatives can disproportionately increase losses
and reduce opportunities for gains when stock prices, currency rates or inter-
est rates are changing. Each fund may not fully benefit from or may lose money
on derivatives if changes in their value do not correspond accurately to
changes in the value of the fund's holdings. The other parties to certain
derivative contracts present the same types of credit risk as issuers of fixed
income securities. Derivatives can also make a fund less liquid and harder to
value, especially in declining markets.
Defensive investing Each fund may depart from its principal investment strate-
gies 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. If a fund takes a temporary defensive position, it may be unable to
achieve its investment goal.
Master/feeder option Each of the Financial Services Fund, Health Sciences Fund
and Technology Fund may in the future seek to achieve its investment objective
by investing all of its net assets in another investment
Sector Funds
14
<PAGE>
company having the same investment objective and substantially the same invest-
ment policies and restrictions as those applicable to the fund.
Management
Manager Each fund's investment manager is SSB Citi Fund Management LLC, an
affiliate of Salomon Smith Barney Inc. The manager's address is 388 Greenwich
Street, New York, New York 10013. The manager oversees the selection of the
fund's investments and its general operations. The manager and Salomon Smith
Barney are subsidiaries of Citigroup Inc. Citigroup businesses offer a broad
range of financial services--asset management, banking and consumer finance,
credit and charge cards, insurance, investments, investment banking and trad-
ing--and use diverse channels to make them available to consumer and corporate
customers around the world.
Pursuant to a written agreement, State Street Bank and Trust Company provides
certain fund accounting services and calculates the daily net asset value for
each fund. The principal business address of State Street is 225 Franklin
Street, Boston, Massachusetts 02110.
Subadviser Citibank, N.A., through its Citibank Global Asset Management divi-
sion, an affiliate of the manager located at 100 First Stamford Place, Stam-
ford, Connecticut 06902, serves as subadviser to each of the Financial Services
Fund, Health Sciences Fund and Technology Fund. The manager, and not the funds,
pays the subadviser for its services out of its management fee. The subadviser,
utilizing a portfolio management team approach, manages the fund's investment
portfolio, subject to the supervision of the manager. The subadviser provides
investment management and advisory services to other mutual funds and, with its
affiliates, currently manages over $351 billion in assets worldwide.
Management fees For services provided to the funds, each fund pays the manager
the annual investment management fee described below (based on a percentage of
the fund's average daily net assets):
Financial Services
Fund: 0.80%
Health Sciences Fund: 0.80%
Technology Fund: 0.95%
Sub-Advisory fees For services provided to the funds, the manager pays the
subadviser the annual subadvisory fee described below (based on a percentage of
the fund's average daily net assets):
Financial Services
Fund: 0.50%
Health Sciences Fund: 0.50%
Technology Fund: 0.65%
Smith Barney Mutual Funds
15
<PAGE>
Distributor Each fund has entered into an agreement with Salomon Smith Barney
Inc. to distribute the fund's shares. Through selling agreements PFS Invest-
ments Inc. sells fund shares to the public.
Distribution plans Each fund has adopted a Rule 12b-1 distribution plan for its
Class A and B shares. Under each plan, the fund pays distribution and/or serv-
ice fees. These fees are an ongoing expense and, over time, may cost you more
than other types of sales charges.
Choosing a class of shares to buy
You can choose among two classes of shares: Classes A and B. Each class has
different sales charges and expenses, allowing you to choose the class that
best meets your needs. Which class is more beneficial to an investor depends on
the amount and intended length of the investment.
. If you plan to invest regularly or in large amounts, buying Class A shares
may help you reduce sales charges and ongoing expenses.
. For Class B shares, all of your purchase amount will be immediately invested.
This may help offset the higher expenses of Class B shares, but only if the
fund performs well.
Initial purchase of shares of the fund must be made through a PFS Investments
Registered Representative.
Investment minimums Minimum initial and additional investment amounts vary
depending on the class of shares you buy and the nature of your investment
account.
<TABLE>
<CAPTION>
Initial Additional
Classes Both
A and B Classes
<S> <C> <C>
General $1,000 $50
IRAs, Self Employed Retirement Plans, Uniform Gift to Minor
Accounts $ 250 $50
Qualified Retirement Plans* $ 25 $25
Monthly Systematic Investment Plans $ 25 $25
</TABLE>
* Qualified Retirement Plans are retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Internal Revenue Code, including 401(k)
plans
Sector Funds
16
<PAGE>
Comparing the fund's classes
Your PFS Investments Registered Representative can help you decide which class
meets your goals. They may receive different compensation depending upon which
class you choose.
Class A Class B
Key features . Initial sales . No initial sales
charge charge
. You may qualify for . Deferred sales
B reduction or charge declines
waiver of initial over time
sales charge . Converts to Class A
. Lower annual after 8 years
expenses than . Higher annual
Class B expenses than
Class A
--------------------------------------------------------------------------------
Initial sales Up to 5.00%; reduced None
charge for large purchases
and waived for cer-
tain investors; no
charge for purchases
of $500,000 or more
--------------------------------------------------------------------------------
Deferred sales 1% on purchases of Up to 5% charged when
charge $500,000 or more if you redeem shares.
you redeem within 1 The charge is reduced
year of purchase over time and there
is no deferred sales
charge after 6 years
--------------------------------------------------------------------------------
Annual distribu- 0.25% of average 1% of average daily
tion and service daily net assets net assets
fees
--------------------------------------------------------------------------------
Exchange privi- Class A shares of Class B shares of
lege* most Smith Barney most Smith Barney
funds funds
--------------------------------------------------------------------------------
* Ask your PFS Investments Registered Representative for the Smith Barney funds
available for exchange.
Smith Barney Mutual Funds
17
<PAGE>
Sales charges
Class A shares
You buy Class A shares at the offering price, which is the net asset value plus
a sales charge. You pay a lower sales charge as the size of your investment
increases to certain levels called breakpoints. You do not pay a sales charge
on the fund's distributions or dividends you reinvest in additional Class A
shares.
<TABLE>
<CAPTION>
Sales Charge as a % of
Offering Net amount
Amount of purchase price (%) invested (%)
<S> <C> <C>
Less than $25,000 5.00 5.26
$25,000 but less than $50,000 4.25 4.44
$50,000 but less than $100,000 3.75 3.90
$100,000 but less than $250,000 3.25 3.36
$250,000 but less than $500,000 2.75 2.83
$500,000 but less than $1,000,000 2.00 2.04
$1,000,000 or more 0.00 0.00
</TABLE>
Investments of $1,000,000 or more You do not pay an initial sales charge when
you buy $1,000,000 or more of Class A shares. However, if you redeem these
Class A shares within one year of purchase, you will pay a deferred sales
charge of 1%.
Qualifying for a reduced Class A sales charge There are several ways you can
combine multiple purchases of Class A shares of Smith Barney funds to take
advantage of the breakpoints in the sales charge schedule.
. Accumulation privilege - lets you combine the current value of Class A shares
owned
. by you, or
. by members of your immediate family,
and for which a sales charge was paid, with the amount of your next purchase
of Class A shares for purposes of calculating the initial sales charge. Cer-
tain trustees and fiduciaries may be entitled to combine accounts in deter-
mining their sales charge.
. Letter of intent - lets you purchase Class A shares of the fund and other
Smith Barney funds over a 13-month period and pay the same sales
Sector Funds
18
<PAGE>
charge, if any, as if all shares had been purchased at once. You may include
purchases on which you paid a sales charge made within 90 days before you
sign the letter.
Waivers for certain Class A investors Class A initial sales charges are waived
for certain types of investors, including:
. Employees of members of the NASD
. 403(b) or 401(k) retirement plans, if certain conditions are met
. Investors who redeemed Class A shares of a Smith Barney fund in the past 60
days, if your PFS Investments Registered Representative is notified
. Participants in the Primerica Corporation Savings and Retirement Plan
. Investors who purchase through a PFS Investments Registered Representative
with proceeds from a prior mutual fund redemption if certain conditions are
met
If you want to learn about additional waivers of Class A initial sales charges,
contact your PFS Investments Registered Representative or consult the Statement
of Additional Information ("SAI").
Class B shares
You buy Class B shares at net asset value without paying an initial sales
charge. However, if you redeem your Class B shares within six years of pur-
chase, you will pay a deferred sales charge. The deferred sales charge
decreases as the number of years since your purchase increases.
<TABLE>
<CAPTION>
Year after purchase 1st 2nd 3rd 4th 5th 6th through 8th
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge 5% 4% 3% 2% 1% 0%
</TABLE>
Class B conversion After 8 years, Class B shares automatically convert into
Class A shares. This helps you because Class A shares have lower annual
expenses. Your Class B shares will convert to Class A shares as follows:
<TABLE>
<CAPTION>
Shares issued: Shares issued:
On reinvestment of Upon exchange from
Shares issued: dividends and another Smith Barney
At initial purchase distributions fund
<S> <C> <C>
Eight years after the date In same proportion On the date the
of purchase as the number of shares originally
Class B shares acquired would
converting is to have converted
total Class B into Class A
shares you own shares
(excluding shares
issued as a divi-
dend)
</TABLE>
Smith Barney Mutual Funds
19
<PAGE>
More about deferred sales charges
The deferred sales charge is based on the net asset value at the time of pur-
chase or redemption, whichever is less, and therefore, you do not pay a sales
charge on amounts representing appreciation or depreciation.
In addition, you do not pay a deferred sales charge on:
. Shares exchanged for shares of another Smith Barney fund
. Shares representing reinvested distributions and dividends
. Shares no longer subject to the deferred sales charge
Each time you place a request to redeem shares, the fund will first redeem any
shares in your account that are not subject to a deferred sales charge and then
the shares in your account that have been held the longest.
If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value and be credited with the amount of the deferred sales charge, if you
notify your PFS Investments Registered Representative.
PFS Distributions Inc., an affiliate of PFS Investments Inc., receives deferred
sales charges as partial compensation for its expenses in selling shares,
including the payment of compensation to your PFS Investments Registered Repre-
sentative.
Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:
. On payments made through certain systematic withdrawal plans
. On certain distributions from a retirement plan
. For involuntary redemptions of small account balances
. For 12 months following the death or disability of a shareholder
If you want to learn more about additional waivers of deferred sales charges,
contact your PFS Investments Registered Representative or consult the SAI.
Sector Funds
20
<PAGE>
Buying shares
Buying shares . Initial purchases of shares of each fund must be made
by mail through a PFS Investments Registered Representative by
completing the appropriate appli-cation. The completed
application should be forwarded to the Fund's subtransfer
agent, PFS- Shareholder Services.
. Subsequent investments may be sent by mail directly to PFS
Shareholder Services.
. The address and telephone number of PFS Shareholder Serv-
ices is: 3100 Breckinridge Blvd., Bldg. 200, Duluth, Geor-
gia 30099-0062; (800) 544-5445.
. You may also reach PFS Shareholder Services by calling
(800) 544-7278 for Spanish speaking representatives or
(800) 824-1721 for the TDD Line for the hearing impaired.
. Checks drawn on foreign banks must be payable in U.S. dol-
lars and have the routing number of the U.S. bank encoded
on the check.
--------------------------------------------------------------------------------
Buying shares Initial purchases of shares for $10,000 may be made by wire
by wire order from your bank account. Contact PFS Shareholder Serv-
ices for details. In addition, once an account is open, you
may make additional wire orders through you PFS Investments
Registered Representative.
--------------------------------------------------------------------------------
Through a You may authorize PFS Shareholder Services to transfer funds
systematic automatically from a regular bank account, or other financial
investment institutions to buy shares of a fund.
plan
. Amounts transferred should be at least $25 monthly
. If you do not have sufficient funds in your account on a
transfer date, PFS Shareholder Services may charge you a
fee
For more information, contact your PFS Investments Registered
Representative or consult the SAI.
Smith Barney Mutual Funds
21
<PAGE>
Exchanging shares
Smith Barney You should contact your PFS Investments Registered Represen-
offers a tative to exchange into other Smith Barney funds. Be sure to
distinctive read the prospectus of the Smith Barney fund you are exchang-
family of ing into. An exchange is a taxable transaction.
funds
tailored to . You may exchange shares only for shares of the same class
help meet the of another Smith Barney fund. Not all Smith Barney funds
varying needs offer all classes.
of both large . Not all Smith Barney funds may be offered in your state of
and small residence. Contact your PFS Investments Registered Repre-
investors sentative.
. You must meet the minimum investment amount for each fund.
(Except for systematic exchange)
. If you hold share certificates, PFS Shareholder Services
must receive the certificates endorsed for transfer or with
signed stock powers (documents transferring ownership of
certificates) before the exchange is effective.
. The fund may suspend or terminate your exchange privilege
if you engage in an excessive pattern of exchanges.
--------------------------------------------------------------------------------
Waiver of Your shares will not be subject to an initial sales charge at
additional the time of the exchange.
sales charges
Your deferred sales charge (if any) will continue to be mea-
sured from the date of your original purchase. If the fund
you exchange into has a higher deferred sales charge, you
will be subject to that charge. If you exchange at any time
into a fund with a lower charge, the sales charge will not be
reduced.
By telephone You may exchange shares by telephone up to a maximum of
$500,000 if you elect telephone transactions on your account
application.
To learn more about the exchange privileges and Smith Barney
mutual funds you may be eligible to exchange into, contact
your PFS Investments Registered Representative or consult the
SAI.
Sector Funds
22
<PAGE>
Redeeming shares
Redemptions Generally, a properly completed Redemption Form with any
by mail required signature guarantee is all that is required for a
redemption. In some cases, however, other documents may be
necessary.
You may redeem some or all of your shares by sending a Redemp-
tion Form or other written request in proper form to PFS
Shareholder Services, 3100 Breckinridge Blvd., Bldg. 200,
Duluth, Georgia 30099-0062. You may also reach PFS Shareholder
Services by calling (800) 544-5445 or (800) 544-7278 for Span-
ish speaking representatives or (800) 824-1721 for the TDD
Line for the hearing impaired. The written request for redemp-
tion must be in good order. This means that you have provided
the following information. Your request will not be processed
without this information.
. Name of the fund
. Account number
. Dollar amount or number of shares to redeem
. Signature of each owner exactly as account is registered
. Other documentation required by PFS Shareholder Services
To be in good order, your request must include a signature
guarantee if:
. The proceeds of the redemption exceed $50,000
. The proceeds are not paid to the record owner(s) at the rec-
ord address
. The shareholder(s) has had an address change in the past 45
days
. The shareholder(s) is a corporation, sole proprietor, part-
nership, trust or fiduciary
You can obtain a signature guarantee from most banks, dealers,
brokers, credit unions and federal savings and loans, but not
from a notary public.
In all cases, your redemption price is the net asset value
next determined after your request is received in good order.
Redemption proceeds normally will be sent within three days.
However, if you recently purchased
Smith Barney Mutual Funds
23
<PAGE>
your shares by check, your redemption proceeds will not be
sent to you until your original check clears, which may take
up to 15 days. Any request that your redemption proceeds be
sent to a destination other than your bank account or address
of record must be in writing and must include signature
guarantees.
--------------------------------------------------------------------------------
Redemptions You may redeem shares by telephone unless you elect to decline
by telephone the telephone transactions option on your account application.
This is available only for redemptions of $50,000 or less, and
the proceeds must be mailed to your address of record. In
addition, you must be able to provide proper identification
information. You may not redeem by telephone if your address
has changed within the past 45 days or if your shares are in
certificate form. Telephone redemption requests may be made by
calling PFS Shareholder Services at (800) 544-5445 between
8:00 a.m. and 8:00 p.m. eastern time on any day the New York
Stock Exchange is open. Requests received after the close of
regular trading on the Exchange are priced at the net asset
value next computed. If telephone redemptions are not avail-
able for any reason, you may use the Fund's regular redemption
procedure described above.
--------------------------------------------------------------------------------
Payment of You may elect to have your redemption proceeds sent by check
redemption to your address of record or deposited in your bank account by
proceeds the Automated Clearinghouse (ACH). You will be charged a serv-
ice fee for transfers made directly to your bank account by
the ACH. Wire transfers are not available on telephone redemp-
tions.
--------------------------------------------------------------------------------
Automatic You can arrange for the automatic redemption of a portion of
cash with- your shares on a monthly or quarterly basis. To qualify you
drawal plans must own shares of the fund with a value of at least $10,000
($5,000 for retirement plan accounts) and each automatic
redemption must be at least $50. If your shares are subject to
a deferred sales charge, the sales charge will be waived if
your automatic payments are equal to or less than 1% per month
of the value of your shares subject to a deferred sales
charge.
Sector Funds
24
<PAGE>
The following conditions apply:
. Your shares may not be represented by certificates
. All dividends and distributions must be reinvested
. You can establish a withdrawal plan for a retirement account
only if you are eligible to receive distributions from the
account
For more information contact your PFS Investments Registered
Representative or consult the SAI.
Smith Barney Mutual Funds
25
<PAGE>
Other things to know about share transactions
When you buy, exchange or redeem shares, your request must be in good order.
This means you have provided the following information without which your
request will not be processed:
. Name of the fund
. Account number
. Class of shares being bought, exchanged or redeemed
. Dollar amount or number of shares being bought, exchanged or redeemed
. Signature of each owner exactly as the account is registered
Signature guarantees To be in good order, your redemption request must include
a signature guarantee:
. if proceeds of the redemption exceed $50,000
. if proceeds are not paid to the record owner at the record address
. if shareholder has had an address change in the past 45 days
. if shareholder is a corporation, sole proprietor, partnership, trust or fidu-
ciary.
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
Each fund has the right to:
. Suspend the offering of shares
. Waive or change minimum and additional investment amounts
. Reject any purchase or exchange order
. Change, revoke or suspend the exchange privilege
. Suspend telephone transactions
. Suspend or postpone redemptions of shares on any day when trading on the New
York Stock Exchange is restricted, or as otherwise permitted by the Securi-
ties and Exchange Commission
. Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities
Small account balances If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.
Sector Funds
26
<PAGE>
Excessive exchange transactions The manager may determine that a pattern of
frequent exchanges is detrimental to a fund's performance and other sharehold-
ers. Each fund may limit additional purchases and/or exchanges by a sharehold-
er.
Share certificates The funds do not issue share certificates unless a written
request signed by all registered owners is made to PFS Shareholder Services. If
you hold share certificates it will take longer to exchange or redeem shares.
Dividends, distributions and taxes
Dividends Each fund generally pays dividends, if any, and makes capital gain
distributions, if any, once a year, typically in December. Each fund may pay
additional distributions and dividends at other times if necessary for the fund
to avoid a federal tax. Each fund expects distributions to be primarily from
capital gains. Capital gain distributions and dividends are reinvested in addi-
tional fund shares of the same class you hold. Alternatively, you can instruct
your PFS Investments Registered Representative to have your distributions
and/or dividends paid in cash. You can change your choice at any time to be
effective as of the next distribution or dividend, except that any change given
to PFS Shareholder Services transfer agent less than five days before the pay-
ment date will not be effective until the next distribution or dividend is
paid.
Taxes In general, redeeming shares, exchanging shares and receiving distribu-
tions (whether in cash or additional shares) are all taxable events.
<TABLE>
<CAPTION>
Transaction Federal tax status
<S> <C>
Redemption or exchange of shares Usually capital gain or loss;
long-term only if shares owned
more than one year
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
Dividends Ordinary income
</TABLE>
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when the fund is about to declare a long-term capital gain dis-
tribution or a dividend, because it will be taxable to you even though it may
actually be a return of a portion of your investment.
Smith Barney Mutual Funds
27
<PAGE>
After the end of each year, each fund will provide you with information about
the distributions and dividends you received and any redemptions of shares dur-
ing the previous year. If you do not provide the fund with your correct tax-
payer identification number and any required certifications, you may be subject
to back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special
tax rules may apply, you should consult your tax adviser about your investment
in the fund.
Share price
You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in good
order. Each fund's net asset value is the value of its assets minus its liabil-
ities. Net asset value is calculated separately for each class of shares. Each
fund calculates its net asset value every day the New York Stock Exchange is
open. This calculation is done when regular trading closes on the Exchange
(normally 4:00 p.m., Eastern time). The Exchange is closed on certain holidays
listed in the SAI.
Each fund's currency conversions are done when the London stock exchange
closes. When reliable market prices or quotations are not readily available, or
when the value of a security has been materially affected by events occurring
after a foreign exchange closes, a fund may price those securities at fair val-
ue. Fair value is determined in accordance with procedures approved by the
fund's board. Each fund that uses fair value to price securities may value
those securities higher or lower than another fund using market quotations to
price the same securities.
International markets may be open on days when U.S. markets are closed and the
value of foreign securities owned by a fund could change on days when you can-
not buy or redeem shares.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with PFS Shareholder Services before the New York Stock Exchange
closes. If the Exchange closes early, you must place your order prior to the
actual closing time. Otherwise, you will receive the next business day's price.
PFS Shareholder Services must transmit all orders to buy, exchange or redeem
shares to the fund's agent before the agent's close of business.
Sector Funds
28
<PAGE>
[LOGO OF PFS INVESTMENTS INC.]
Financial Services
Fund
Health Sciences Fund
Technology Fund
Each an investment portfolio of Smith Barney Sector Series Inc.
Shareholder reports Annual and semiannual reports to shareholders provide addi-
tional information about the fund's investments. These reports discuss the mar-
ket conditions and investment strategies that affected the fund's performance.
Statement of additional information The statement of additional information
provides more detailed information about the fund and is incorporated by refer-
ence into (is legally a part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your PFS
Investments Registered Representative, by calling PFS Shareholder Services at
1-800-544-5445, or by writing to the fund at 3100 Breckinridge Blvd, Bldg. 200,
Duluth, Georgia, 30099-0062.
Information about the Fund (including the SAI) can be reviewed and copied at
the Securities and Ex-change Commission's (the "Commission") Public Reference
Room in Washington, D.C. In addition, information on the operation of the Pub-
lic Reference Room may be obtained by calling the Commission at 1-202-942-8090.
Reports and other information about the Fund are available on the EDGAR Data-
base on the Commission's Internet site at http://www.sec.gov. Copies of this
information may be obtained for a duplicating fee by electronic request at the
following E-mail address: [email protected], or by writing the Commission's
Public Reference Section, Washington, D.C. 20549-0102.
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not law-
fully sell its shares.
(Investment Company Act
file no. 811-01940)
PFS Investments Inc.
February 14, 2000
as amended July 1, 2000
STATEMENT OF ADDITIONAL INFORMATION
SMITH BARNEY SECTOR SERIES INC.
Smith Barney Financial Services Fund
Smith Barney Health Sciences Fund
Smith Barney Technology Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
This Statement of Additional Information ("SAI") is
meant to be read in conjunction with the combined
prospectus of Smith Barney Financial Services Fund
("Financial Services Fund"), Smith Barney Health
Sciences Fund ("Health Sciences Fund") and Smith
Barney Technology Fund ("Technology Fund") (each, a
"Fund") dated February 14, 2000, as amended or
supplemented from time to time (the "prospectus"), and
is incorporated by reference in its entirety into the
prospectus. Each Fund is a series of the Smith Barney
Sector Series Inc. (the "Company") which also offers
one other series: Smith Barney Natural Resources Fund.
The prospectus and copies of other information on the
funds may be obtained free of charge by contacting a
Salomon Smith Barney Financial Consultant, PFS
Investments Registered Representative, or by writing
or calling Salomon Smith Barney at the address or
telephone number above.
TABLE OF CONTENTS
Investment Objective and Management Policies 2
Risk Factors 8
Investment Restrictions 18
Directors and Executive Officers of the Company 20
Investment Management and Other Services 22
Portfolio Transactions 26
Portfolio Turnover 28
Purchase of Shares 28
Redemption of Shares 36
Valuation of Shares 39
Exchange Privilege 39
Performance Information 40
Dividends, Distributions and Taxes 42
Other Information About the Company 48
Financial Statements 49
Other Information 49
INVESTMENT OBJECTIVE AND MANAGEMENT POLICIES
The prospectus discusses each Fund's investment
objective and policies. This section contains
supplemental information concerning the types of
securities and other instruments in which each Fund
may invest, the investment policies and portfolio
strategies each Fund may utilize and certain risks
associated with these investments, policies and
strategies. SSB Citi Fund Management LLC ("SSB Citi"
or the "Manager") serves as Investment Manager to each
Fund. Citibank, N.A., through its Citibank Global
Asset Management division ("CGAM" or the "Sub-
Adviser"), an affiliate of the Manager, serves as the
sub-adviser to each Fund.
Financial Services Fund
Financial Services Fund seeks long-term capital
appreciation by investing primarily in common stocks.
The Fund invests at least 80% of its assets in
securities of companies principally engaged in
providing financial services to consumers and
industry. These companies may include, for example,
commercial banks, savings and loan associations,
brokerage companies, insurance companies, real estate-
related companies, leasing companies, and consumer and
industrial finance companies.
Health Sciences Fund
Health Sciences Fund seeks long-term capital
appreciation by investing primarily in common stocks.
The Fund invests at least 80% of its assets in
securities of companies principally engaged in the
design, manufacture, or sale of products or services
used for or in connection with health care or
medicine. These companies may include, for example,
pharmaceutical companies; companies involved in
biotechnology, medical diagnostic, biochemical or
other health care research and development; companies
involved in the operation of health care facilities;
and other companies involved in the design,
manufacture, or sale of health care-related products
or services such as medical, dental and optical
products, hardware, insurance or services.
Technology Fund
Technology Fund seeks long-term capital appreciation
by investing its assets primarily in common stocks.
The Fund normally invests at least 80% of its assets
in securities of companies principally engaged in
offering, using or developing products, processes or
services that will provide or will benefit
significantly from technological advances and
improvements. These companies may include, for
example, companies that develop, produce or distribute
products or services in the computer, semi-conductor,
software, electronics, media, communications, health
care, and biotechnology sectors.
Each Fund
Each fund may invest its assets in securities of
foreign issuers in addition to securities of domestic
issuers. Because each Fund is considered non-
diversified, the Fund may invest a significant
percentage of its assets in a single issuer.
In buying and selling securities for each fund, the
CGAM relies on fundamental analysis of each issuer and
its potential for success in light of its current
financial condition and its industry position. Factors
considered include long-term growth potential,
earnings estimates and quality of management.
CGAM may lend each Fund's securities to broker-dealers
or other institutions to earn income for the Fund.
CGAM may, but is not required to, use various
techniques, such as buying and selling futures and
options contracts, to increase or decrease a Fund's
exposure to changing security prices or other factors
that affect security values. If CGAM's strategies do
not work as intended, a Fund may not achieve its
objective.
Under normal market conditions, the majority of a
Fund's portfolio will consist of common stock, but it
also may contain money market instruments for cash
management purposes. Each Fund reserves the right, as
a defensive measure, to hold money market securities,
including repurchase agreements or cash, in such
proportions as, in the opinion of management,
prevailing market or economic conditions warrant. If a
Fund takes a temporary defensive position, it may be
unable to achieve its investment goal.
Equity Securities. Each Fund will normally invest at
least 80% of its assets in equity securities,
including primarily common stocks and, to a lesser
extent, securities convertible into common stock and
rights to subscribe for common stock. Common stocks
represent an equity (ownership) interest in a
corporation. Although equity securities have a
history of long-term growth in value, their prices
fluctuate based on changes in a company's financial
condition and on overall market and economic
conditions.
When-Issued Securities and Delayed-Delivery
Transactions. Each Fund may purchase securities on a
"when-issued" basis, for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement
date at a stated price and yield) or on a forward
commitment basis. A Fund does not intend to engage in
these transactions for speculative purposes, but only
in furtherance of its investment goal. These
transactions occur when securities are purchased or
sold by a Fund with payment and delivery taking place
in the future to secure what is considered an
advantageous yield and price to a Fund at the time of
entering into the transaction. The payment obligation
and the interest rate that will be received on
when-issued securities are fixed at the time the buyer
enters into the commitment. Because of fluctuations
in the value of securities purchased or sold on a
when-issued, delayed-delivery basis or forward
commitment basis, the prices obtained on such
securities may be higher or lower than the prices
available in the market on the dates when the
investments are actually delivered to the buyers.
When the Fund agrees to purchase when-issued or
delayed-delivery securities, the Fund will set aside
cash or liquid securities equal to the amount of the
commitment in a segregated account on the Fund's
books. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment,
and in such a case the Fund may be required
subsequently to place additional assets in the
segregated account in order to ensure that the value
of the account remains equal to the amount of the
Fund's commitment. The assets contained in the
segregated account will be marked-to-market daily. It
may be expected that the Fund's net assets will
fluctuate to a greater degree when it sets aside
portfolio securities to cover such purchase
commitments than when it sets aside cash. When the
Fund engages in when-issued or delayed-delivery
transactions, it relies on the other party to
consummate the trade. Failure of the seller to do so
may result in the Fund's incurring a loss or missing
an opportunity to obtain a price considered to be
advantageous.
Foreign Securities. Each Fund may invest in
securities of foreign issuers. Such investments
involve certain risks not ordinarily associated with
investments in securities of domestic issuers. Such
risks include currency exchange control regulations
and costs, the possibility of expropriation, seizure,
or nationalization of foreign deposits, less liquidity
and volume and more volatility in foreign securities
markets and the impact of political, social, economic
or diplomatic developments or the adoption of other
foreign government restrictions that might adversely
affect the payment of principal and interest on or
market value of securities. If it should become
necessary, the Fund might encounter greater
difficulties in invoking legal processes abroad than
would be the case in the United States. In addition,
there may be less publicly available information about
a non-U.S. company, and non-U.S. companies are not
generally subject to uniform accounting and financial
reporting standards, practices and requirements
comparable to those applicable to U.S. companies.
Furthermore, some of these securities may be subject
to foreign brokerage and withholding taxes.
Each Fund may also invest in securities of foreign
issuers in the form of American Depository Receipts
("ADRs"), European Depository Receipts ("EDRs") or
similar securities representing interests in the
common stock of foreign issuers. ADRs are receipts,
typically issued by a U.S. bank or trust company,
which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts
issued in Europe which evidence a similar ownership
arrangement. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets and
EDRs are designed for use in European securities
markets. The underlying securities are not always
denominated in the same currency as the ADRs or EDRs.
Although investment in the form of ADRs or EDRs
facilitates trading in foreign securities, it does not
mitigate the risks associated with investing in
foreign securities. However, by investing in ADRs or
EDRs rather than directly in foreign issuers' stock,
the Portfolio can avoid currency risks during the
settlement period for either purchases or sales. In
general, there is a large, liquid market in the United
States for many ADRs and EDRs. The information
available for ADRs and EDRs is subject to the
accounting, auditing and financial reporting standards
of the domestic market or exchange on which they are
traded, which standards are more uniform and more
exacting than those to which many foreign issuers may
be subject.
Investments in foreign securities incur higher costs
than investments in U.S. securities, including higher
costs in making securities transactions as well as
foreign government taxes which may reduce the
investment return of the Fund. In addition, foreign
investments may include additional risks associated
with currency exchange rates, less complete financial
information about individual companies, less market
liquidity and political instability.
Currency Risks. The U.S. dollar value of securities
denominated in a foreign currency will vary with
changes in currency exchange rates, which can be
volatile. Accordingly, changes in the value of the
currency in which a fund's investments are denominated
relative to the U.S. dollar will affect the fund's net
asset value. Exchange rates are generally affected by
the forces of supply and demand in the international
currency markets, the relative merits of investing in
different countries and the intervention or failure to
intervene of U.S. or foreign governments and central
banks. However, currency exchange rates may fluctuate
based on factors intrinsic to a country's economy.
Some emerging market countries also may have managed
currencies, which are not free floating against the
U.S. dollar. In addition, emerging markets are
subject to the risk of restrictions upon the free
conversion of their currencies into other currencies.
Any devaluations relative to the U.S. dollar in the
currencies in which a fund's securities are quoted
would reduce the fund's net asset value per share.
Securities of Developing/Emerging Markets Countries.
A developing or emerging markets country generally is
considered to be a country that is in the initial
stages of its industrialization cycle. Investing in
the equity 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.
One or more of the risks discussed above could affect
adversely the economy of a developing market or a
fund's investments in such a market. The claims of
many property owners against those of governments may
remain unsettled. There can be no assurance that any
investments that a fund might make in such emerging
markets would not be expropriated, nationalized or
otherwise confiscated at some time in the future. In
such an event, the fund could lose its entire
investment in the market involved. Moreover, changes
in the leadership or policies of such markets could
halt the expansion or reverse the liberalization of
foreign investment policies now occurring in certain
of these markets and adversely affect existing
investment opportunities.
Money Market Instruments. Each Fund may invest for
temporary defensive purposes in short-term corporate
and government bonds and notes and money market
instruments. Money market instruments include:
obligations issued or guaranteed by the United States
government, its agencies or instrumentalities ("U.S.
government securities"); certificates of deposit, time
deposits and bankers' acceptances issued by domestic
banks (including their branches located outside the
United States and subsidiaries located in Canada),
domestic branches of foreign banks, savings and loan
associations and similar institutions; high grade
commercial paper; and repurchase agreements with
respect to the foregoing types of instruments.
Certificates of deposit ("CDs") are short-term,
negotiable obligations of commercial banks. Time
deposits ("TDs") are non-negotiable deposits
maintained in banking institutions for specified
periods of time at stated interest rates. Bankers'
acceptances are time drafts drawn on commercial banks
by borrowers, usually in connection with international
transactions.
Repurchase Agreements. Each Fund may agree to
purchase securities from a bank or recognized
securities dealer and simultaneously commit to resell
the securities to the bank or dealer at an agreed-upon
date and price reflecting a market rate of interest
unrelated to the coupon rate or maturity of the
purchased securities ("repurchase agreements"). The
Fund would maintain custody of the underlying
securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase
price on the date agreed to would be, in effect,
secured by such securities. If the value of such
securities were less than the repurchase price, plus
interest, the other party to the agreement would be
required to provide additional collateral so that at
all times the collateral is at least 102% of the
repurchase price plus accrued interest. Default by or
bankruptcy of a seller would expose the Fund to
possible loss because of adverse market action,
expenses and/or delays in connection with the
disposition of the underlying obligations. The
financial institutions with which the Fund may enter
into repurchase agreements will be banks and non-bank
dealers of U.S. Government securities on the Federal
Reserve Bank of New York's list of reporting dealers,
if such banks and non-bank dealers are deemed
creditworthy by the Fund's Manager. The Manager will
continue to monitor creditworthiness of the seller
under a repurchase agreement, and will require the
seller to maintain during the term of the agreement
the value of the securities subject to the agreement
to equal at least 102% of the repurchase price
(including accrued interest). In addition, the
Manager will require that the value of this
collateral, after transaction costs (including loss of
interest) reasonably expected to be incurred on a
default, be equal to 102% or greater than the
repurchase price (including accrued premium) provided
in the repurchase agreement or the daily amortization
of the difference between the purchase price and the
repurchase price specified in the repurchase
agreement. The Manager will mark-to-market daily the
value of the securities. Repurchase agreements are
considered to be loans by the Fund under the
Investment Company Act of 1940, as amended (the "1940
Act").
Reverse Repurchase Agreements. Each Fund may enter
into reverse repurchase agreements which involve the
sale of Fund securities with an agreement to
repurchase the securities at an agreed-upon price,
date and interest payment and have the characteristics
of borrowing. Since the proceeds of borrowings under
reverse repurchase agreements are invested, this would
introduce the speculative factor known as "leverage."
The securities purchased with the funds obtained from
the agreement and securities collateralizing the
agreement will have maturity dates no later than the
repayment date. Generally the effect of such a
transaction is that the Fund can recover all or most
of the cash invested in the portfolio securities
involved during the term of the reverse repurchase
agreement, while in many cases it will be able to keep
some of the interest income associated with those
securities. Such transactions are only advantageous
if the Fund has an opportunity to earn a greater rate
of interest on the cash derived from the transaction
than the interest cost of obtaining that cash.
Opportunities to realize earnings from the use of the
proceeds equal to or greater than the interest
required to be paid may not always be available, and
the Fund intends to use the reverse repurchase
technique only when CGAM believes it will be
advantageous to the Fund. The use of reverse
repurchase agreements may exaggerate any interim
increase or decrease in the value of the Fund's
assets. The Fund's custodian bank will maintain a
separate account for the Fund with securities having a
value equal to or greater than such commitments.
Lending of Portfolio Securities. Consistent with
applicable regulatory requirements, each Fund may lend
portfolio securities to brokers, dealers and other
financial organizations that meet capital and other
credit requirements or other criteria established by
the Board. The Fund will not lend portfolio
securities to affiliates of the Manager unless they
have applied for and received specific authority to do
so from the Securities and Exchange Commission
("SEC"). Loans of portfolio securities 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 102% of the
current market value of the loaned securities. Any
gain or loss in the market price of the securities
loaned that might occur during the term of the loan
would be for the account of the Fund. From time to
time, the Fund may return a part of the interest
earned from the investment of collateral received for
securities loaned to the borrower and/or a third party
that is unaffiliated with the Fund and that is acting
as a "finder."
By lending its securities, the Fund can increase its
income by continuing to receive interest and any
dividends on the loaned securities as well as by
either investing the collateral received for
securities loaned in short-term instruments or
obtaining yield in the form of interest paid by the
borrower when U.S. Government Securities are used as
collateral. Although the generation of income is not
the primary investment goal of the Fund, income
received could be used to pay the Fund's expenses and
would increase an investor's total return. The Fund
will adhere to the following conditions whenever its
portfolio securities are loaned: (i) the Fund must
receive at least 102% cash collateral or equivalent
securities of the type discussed in the preceding
paragraph from the borrower; (ii) the borrower must
increase such collateral whenever the market value of
the securities rises above the level of such
collateral; (iii) the Fund must be able to terminate
the loan at any time; (iv) the Fund must receive
reasonable interest on the loan, as well as any
dividends, interest or other distributions on the
loaned securities and any increase in market value;
(v) the Fund may pay only reasonable custodian fees in
connection with the loan; and (vi) voting rights on
the loaned securities may pass to the borrower,
provided, however, that if a material event adversely
affecting the investment occurs, the Board must
terminate the loan and regain the right to vote the
securities. Loan agreements 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 recover the loaned securities or
dispose of the collateral for the loan.
Borrowing. Each Fund also may borrow for temporary or
emergency purposes, but not for leveraging purposes,
in an amount up to 331/3% of its total assets, and may
pledge its assets in connection with such borrowings.
If a fund borrows money, its share price may be
subject to greater fluctuation until the borrowing is
paid off. If a fund makes additional investments while
borrowings are outstanding, this may be considered a
form of leverage.
Illiquid Securities. Each Fund may invest up to an
aggregate amount of 15% of its net assets in illiquid
securities, which term includes securities subject to
contractual or other restrictions on resale and other
instruments that lack readily available markets.
RISK FACTORS
Financial Services Fund
This sector generally is subject to extensive
governmental regulation, which may change frequently.
In addition, the profitability of businesses in
financial services depends heavily upon the
availability and cost of money, and may fluctuate
significantly in response to changes in interest
rates, as well as changes in general economic
conditions. From time to time, severe competition may
also affect the profitability of financial services
companies.
Most financial services companies are subject to
extensive governmental regulation which limits their
activities and may (as with insurance rate regulation)
affect the ability to earn a profit from a given line
of business. Certain financial services businesses are
subject to intense competitive pressures, including
market share and price competition. The removal of
regulatory barriers to participation in certain
segments of the financial services sector may also
increase competitive pressures on different types of
firms. The availability and cost of funds to financial
services firms is crucial to their profitability.
Consequently, volatile interest rates and general
economic conditions can adversely affect their
financial performance.
Financial services companies in foreign countries are
subject to similar regulatory and interest rate
concerns. In particular, government regulation in
certain foreign countries may include controls on
interest rates, credit availability, prices and
currency movements. In some cases, foreign governments
have taken steps to nationalize the operations of
banks and other financial services companies.
CGAM believes that the deregulation of many segments
of the financial services sector provides new
opportunities for issuers in this sector. As new
segments of the financial services sector are opened
to certain larger financial services firms formerly
prohibited from doing business in these segments (such
as national and money center banks); certain
established companies in these market segments (such
as regional banks or securities firms) may become
attractive acquisition candidates for the larger firm
seeking entrance into the segment. Typically,
acquisitions accelerate the capital appreciation of
the shares of the company to be acquired.
CGAM will seek to invest in those financial services
companies that it believes are well positioned to take
advantage of the ongoing changes in the financial
services sector. A financial services company may be
well positioned for a number of reasons. It may be an
attractive acquisition for another company wishing to
strengthen its presence in a line of business or a
geographic region or to expand into new lines of
business or geographic regions, or it may be planning
a merger to strengthen its position in a line of
business or a geographic area. The financial services
company may be engaged in a line or lines of business
experiencing or likely to experience strong economic
growth; it may be linked to a geographic region
experiencing or likely to experience strong economic
growth and may be actively seeking to participate in
such growth; or it may be expanding into financial
services or geographic regions previously unavailable
to it (because of an easing of regulatory constraints)
in order to take advantage of new market
opportunities.
Health Sciences Fund
Many faster-growing health care companies have limited
operating histories and their potential profitability
may be dependent on regulatory approval of their
products, which increases the volatility of these
companies' security prices. Many of these activities
are funded or subsidized by governments; withdrawal or
curtailment of this support could lower the
profitability and market prices of such companies.
Changes in government regulation could also have an
adverse impact. Continuing technological advances may
mean rapid obsolescence of products and services.
Technology Fund
Many technological products and services are subject
to rapid obsolescence, which may lower the market
value of the securities of the companies in this
sector. Also, the portfolio consists of faster-
growing, more volatile technology companies that CGAM
believes to be emerging leaders in their fields. The
market prices of these companies tend to rise and fall
more rapidly than those of larger, more established
companies.
Technology and Health Science Areas. CGAM believes
that because of rapid advances in technology and
science, an investment in companies with business
operations in these areas will offer substantial
opportunities for long-term capital appreciation. Of
course, prices of common stocks of even the best
managed, most profitable corporations are subject to
market risk, which means their stock prices can
decline. In addition, swings in investor psychology or
significant trading by large institutional investors
can result in price fluctuations. Industries likely to
be represented in the portfolio include computers,
networking and internetworking software, computer
aided design, telecommunications, media and
information services, medical devices and
biotechnology. The Fund may also invest in the stocks
of companies that should benefit from the
commercialization of technological advances, although
they may not be directly involved in research and
development.
The technology and science areas have exhibited and
continue to exhibit rapid growth, both through
increasing demand for existing products and services
and the broadening of the technology market. In
general, the stocks of large capitalized companies
that are well established in the technology market can
be expected to grow with the market and will
frequently be found in the Fund's portfolio. The
expansion of technology and its related industries,
however, also provides a favorable environment for
investment in small to medium capitalized companies.
The Fund's investment policy is not limited to any
minimum capitalization requirement and the Fund may
hold securities without regard to the capitalization
of the issuer. CGAM's overall stock selection for the
Fund is not based on the capitalization or size of the
company but rather on an assessment of the company's
fundamental prospects.
Companies in the rapidly changing fields of technology
and science face special risks. For example, their
products or services may not prove commercially
successful or may become obsolete quickly. The value
of the Fund's shares may be susceptible to factors
affecting the technology and science areas and to
greater risk and market fluctuation than an investment
in a fund that invests in a broader range of portfolio
securities not concentrated in any particular
industry. As such, the Fund is not an appropriate
investment for individuals who are not long-term
investors and who, as their primary objective, require
safety of principal or stable income from their
investments. The technology and science areas may be
subject to greater governmental regulation than many
other areas and changes in governmental policies and
the need for regulatory approvals may have a material
adverse effect on these areas. Additionally, companies
in these areas may be subject to risks of developing
technologies, competitive pressures and other factors
and are dependent upon consumer and business
acceptance as new technologies evolve.
Risks Associated with Particular Investments
Market Risk. Equity stock prices vary and may fall,
thus reducing the value of your Fund's investment.
Certain stocks selected for any Fund's portfolio may
decline in value more than the overall stock market.
Foreign Securities. Investments in foreign and
emerging markets carry special risks, including
currency, political, regulatory and diplomatic risks.
Each Fund has the ability to invest more than 25% of
their respective assets in the securities of non-U.S.
issuers.
Currency Risk. A change in the exchange rate between
U.S. dollars and a foreign currency may reduce the
value of a Fund's investment in a security valued in
the foreign currency, or based on that currency value.
Political Risk. Political actions, events or
instability may result in unfavorable changes in the
value of a security.
Regulatory Risk. Government regulations may affect
the value of a security. In foreign countries,
securities markets that are less regulated than those
in the U.S. may permit trading practices that are not
allowed in the U.S.
Diplomatic Risk. A change in diplomatic relations
between the U.S. and a foreign country could affect
the value or liquidity of investments.
Liquidity Risk. A Fund's portfolio is liquid if the
Fund is able to sell the securities it owns at a fair
price within a reasonable time. Liquidity is generally
related to the market trading volume for a particular
security. Investments in smaller companies or in
foreign companies or companies in emerging markets are
subject to a variety of risks, including potential
lack of liquidity.
Smaller Capitalized Companies. The Manager believes
that smaller capitalized companies generally have
greater earnings and sales growth potential than
larger capitalized companies. The level of risk will
be increased to the extent each Fund has significant
exposure to smaller capitalized or unseasoned
companies (those with less than a three-year operating
history). Investments in smaller capitalized companies
may involve greater risks, such as limited product
lines, markets and financial or managerial resources.
In addition, less frequently traded securities may be
subject to more abrupt price movements than securities
of larger capitalized companies.
Derivatives Risk. A Fund's use of options, futures
and options on futures ("derivatives") involves
additional risks and transaction costs, such as, (i)
adverse changes in the value of these instruments,
(ii) imperfect corrrelation between the price of
derivatives and movements in the price of the
underlying securities, index or futures contracts,
(iii) the fact that use of derivatives requires
different skill than those needed to select portfolio
securities, and (iv) the possible absence of a liquid
secondary market for a particular derivative at any
moment in time.
Counterparty Risk. This is a risk associated
primarily with repurchase agreements and some
derivatives transactions. It is the risk that the
other party in such a transaction will not fulfill its
contractual obligation to complete a transaction with
a Fund.
Lack of Timely Information Risk. Timely information
about a security or its issuer may be unavailable,
incomplete or inaccurate. This risk is more common to
smaller company securities issued by foreign companies
and companies in emerging markets than it is to the
securities of U.S.-based companies.
Non-Diversified Classification. Each Fund is
classified as a non-diversified fund under the 1940
Act which means the Fund is not limited by the Act in
the proportion of its assets it may invest in the
obligations of a single issuer. As a result, the
Funds may be subject to greater volatility with
respect to their portfolio securities than funds that
are more broadly diversified. Each Fund intends to
conduct its operations, however, so as to qualify as a
"regulated investment company" for purposes of the
Internal Revenue Code of 1986, as amended (the
"Code"), which will relieve the Fund of any liability
for Federal income tax to the extent its earnings are
distributed to shareholders. To qualify as a
regulated investment company, the Fund will, among
other things, limit its investments so that, at the
close of each quarter of the taxable year (a) not more
than 25% of the market value of the Fund's total
assets will be invested in the securities of a single
issuer and (b) with respect to 50% of the market value
of its total assets, not more than 5% of the market
value of its total assets will be invested in the
securities of a single issuer and the Fund will not
own more than 10% of the outstanding voting securities
of a single issuer.
Master/feeder fund structure. The Board of Directors
has the discretion to retain the current distribution
arrangement for the Funds while investing their assets
in a master fund in a master/feeder fund structure. A
master/feeder fund structure is one in which a fund (a
"feeder fund"), instead of investing directly in a
portfolio of securities, invests most or all of its
investment assets in a separate registered investment
company (the "master fund") with substantially the
same investment objective and policies as the feeder
fund. Such a structure permits the pooling of assets
of two or more feeder funds, preserving separate
identities or distribution channels at the feeder fund
level. Based on the premise that certain of the
expenses of operating an investment portfolio are
relatively fixed, a larger investment portfolio may
eventually achieve a lower ratio of operating expenses
to average net assets. An existing investment company
is able to convert to a feeder fund by selling all of
its investments, which involves brokerage and other
transaction costs and realization of a taxable gain or
loss, or by contributing its assets to the master fund
and avoiding transaction costs and, if proper
procedures are followed, the realization of taxable
gain or loss.
Options, Futures and Currency Strategies. Each Fund
may, but is not required to, use forward currency
contracts and certain options and futures strategies
to seek to increase total return or hedge its
portfolio, i.e., reduce the overall level of
investment risk normally associated with the Fund.
There can be no assurance that such efforts will
succeed.
In order to assure that the Fund will not be deemed to
be a "commodity pool" for purposes of the Commodity
Exchange Act, regulations of the Commodity Futures
Trading Commission ("CFTC") require that the Fund
enter into transactions in futures contracts and
options on futures only (i) for bona fide hedging
purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided the aggregate initial
margin and premiums on such non-hedging positions do
not exceed 5% of the liquidation value of the Fund's
assets. To attempt to hedge against adverse movements
in exchange rates between currencies, the Fund may
enter into forward currency contracts for the purchase
or sale of a specified currency at a specified future
date. Such contracts may involve the purchase or sale
of a foreign currency against the U.S. dollar or may
involve two foreign currencies. The Fund may enter
into forward currency contracts either with respect to
specific transactions or with respect to its portfolio
positions. For example, when the Manager anticipates
making a purchase or sale of a security, it may enter
into a forward currency contract in order to set the
rate (either relative to the U.S. dollar or another
currency) at which the currency exchange transaction
related to the purchase or sale will be made
("transaction hedging"). Further, when the Manager
believes a particular currency may decline compared to
the U.S. dollar or another currency, the Fund may
enter into a forward contract to sell the currency the
Manager expects to decline in an amount approximating
the value of some or all of the Fund's securities
denominated in that currency, or when the Manager
believes one currency may decline against a currency
in which some or all of the portfolio securities held
by the Fund are denominated, it may enter into a
forward contract to buy the currency expected to
decline for a fixed amount ("position hedging"). In
this situation, the Fund may, in the alternative,
enter into a forward contract to sell a different
currency for a fixed amount of the currency expected
to decline where the investment Manager believes the
value of the currency to be sold pursuant to the
forward contract will fall whenever there is a decline
in the value of the currency in which portfolio
securities of the Fund are denominated ("cross
hedging"). The Fund places (i) cash, (ii) U.S.
Government securities or (iii) equity securities or
debt securities (of any grade) in certain currencies
provided such assets are liquid, unencumbered and
marked to market daily, or other high-quality debt
securities denominated in certain currencies in a
separate account of the Fund having a value equal to
the aggregate amount of the Fund's commitments under
forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the
securities placed in a separate account declines,
additional cash or securities are placed in the
account on a daily basis so that the value of the
amount will equal the amount of the Fund's commitments
with respect to such contracts.
For hedging purposes, the Fund may write covered call
options and purchase put and call options on
currencies to hedge against movements in exchange
rates and on debt securities to hedge against the risk
of fluctuations in the prices of securities held by
the Fund or which the Manager intends to include in
its portfolio. The Fund also may use interest rates
futures contracts and options thereon to hedge against
changes in the general level in interest rates.
The Fund may write call options on securities and
currencies only if they are covered, and such options
must remain covered so long as the Fund is obligated
as a writer. A call option written by the Fund is
"covered" if the Fund owns the securities or currency
underlying the option or has an absolute and immediate
right to acquire that security or currency without
additional cash consideration (or for additional cash
consideration held in a segregated account on the
Fund's books) upon conversion or exchange of other
securities or currencies held in its portfolio. A
call option is also covered if the Fund holds on a
share-for-share basis a call on the same security or
holds a call on the same currency as the call written
where the exercise price of the call held is equal to
less than the exercise price of the call written or
greater than the exercise price of the call written if
the difference is maintained by the Fund in cash,
Treasury bills or other high-grade, short-term
obligations in a segregated account on the Fund's
books.
The Fund may purchase put and call options in
anticipation of declines in the value of portfolio
securities or increases in the value of securities to
be acquired. If the expected changes occur, the Fund
may be able to offset the resulting adverse effect on
its portfolio, in whole or in part, through the
options purchased. The risk assumed by the Fund in
connection with such transactions is limited to the
amount of the premium and related transaction costs
associated with the option, although the Fund may lose
such amounts if the prices of securities underlying
the options do not move in the direction or to the
extent anticipated.
Although the portfolio may not use forward currency
contracts, options and futures, the use of any of
these strategies would involve certain investment
risks and transaction costs. These risks include:
dependence on the CGAM's ability to predict movements
in the prices of individual 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 the Fund invests; and
lack of assurance that a liquid market will exist for
any particular option, futures contract or option
thereon at any particular time.
Over-the-counter options in which the Fund may invest
differ from exchange traded options in that they are
two-party contracts, with price and other terms
negotiated between buyer and seller, and generally do
not have as much market liquidity as exchange-traded
options. The Fund may be required to treat as
illiquid over-the-counter options purchased and
securities being used to cover certain written over-
the-counter options.
Options on Securities. As discussed more generally
above, each Fund may engage in writing covered call
options. Each Fund may also purchase put options and
enter into closing transactions. The principal reason
for writing covered call options on securities is to
attempt to realize, through the receipt of premiums, a
greater return than would be realized on the
securities alone. In return for a premium, the writer
of a covered call option forgoes the right to any
appreciation in the value of the underlying security
above the strike price for the life of the option (or
until a closing purchase transaction can be effected).
Nevertheless, the call writer retains the risk of a
decline in the price of the underlying security.
Similarly, the principal reason for writing covered
put options is to realize income in the form of
premiums. The writer of a covered put option accepts
the risk of a decline in the price of the underlying
security. The size of the premiums the Fund may
receive may be adversely affected as new or existing
institutions, including other investment companies,
engage in or increase their option-writing activities.
Options written by the Fund will normally have
expiration dates between one and six months from the
date written. The exercise price of the options may be
below, equal to, or above the current market values of
the underlying securities when the options are
written. In the case of call options, these exercise
prices are referred to as "in-the-money," "at-the-
money" and "out-of-the-money," respectively.
The Fund may write (a) in-the-money call options when
CGAM expects the price of the underlying security to
remain flat or decline moderately during the option
period, (b) at-the-money call options when CGAM
expects the price of the underlying security to remain
flat or advance moderately during the option period
and (c) out-of-the-money call options when CGAM
expects that the price of the security may increase
but not above a price equal to the sum of the exercise
price plus the premiums received from writing the call
option. In any of the preceding situations, if the
market price of the underlying security declines and
the security is sold at this lower price, the amount
of any realized loss will be offset wholly or in part
by the premium received. Out-of-the-money, at-the-
money and in-the-money put options (the reverse of
call options as to the relation of exercise price to
market price) may be utilized in the same market
environments as such call options are used in
equivalent transactions.
So long as the obligation of the Fund as the writer of
an option continues, the Fund may be assigned an
exercise notice by the broker-dealer through which the
option was sold, requiring it to deliver, in the case
of a call, or take delivery of, in the case of a put,
the underlying security against payment of the
exercise price. This obligation terminates when the
option expires or the Fund effects a closing purchase
transaction. The Fund can no longer effect a closing
purchase transaction with respect to an option once it
has been assigned an exercise notice. To secure its
obligation to deliver the underlying security when it
writes a call option, or to pay for the underlying
security when it writes a put option, the Fund will be
required to deposit in escrow the underlying security
or other assets in accordance with the rules of the
Options Clearing Corporation ("Clearing Corporation")
or similar clearing corporation and the securities
exchange on which the option is written.
An option position may be closed out only where there
exists a secondary market for an option of the same
series on a recognized securities exchange or in the
over-the-counter market. The Fund expects to write
options only on national securities exchanges or in
the over-the-counter market. The Fund may purchase
put options issued by the Clearing Corporation or in
the over-the-counter market.
The Fund may realize a profit or loss upon entering
into a closing transaction. In cases in which the Fund
has written an option, it will realize a profit if the
cost of the closing purchase transaction is less than
the premium received upon writing the original option
and will incur a loss if the cost of the closing
purchase transaction exceeds the premium received upon
writing the original option. Similarly, when the Fund
has purchased an option and engages in a closing sale
transaction, whether it recognizes a profit or loss
will depend upon whether the amount received in the
closing sale transaction is more or less than the
premium the Fund initially paid for the original
option plus the related transaction costs.
Although the Fund generally will purchase or write
only those options for which the Manager and/or CGAM
believes there is an active secondary market so as to
facilitate closing transactions, there is no assurance
that sufficient trading interest to create a liquid
secondary market on a securities exchange will exist
for any particular option or at any particular time,
and for some options no such secondary market may
exist. A liquid secondary market in an option may
cease to exist for a variety of reasons. In the past,
for example, higher than anticipated trading activity
or order flow, or other unforeseen events, have at
times rendered certain of the facilities of the
Clearing Corporation and national securities exchanges
inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on
certain types of orders or trading halts or
suspensions in one or more options. There can be no
assurance that similar events, or events that may
otherwise interfere with the timely execution of
customers' orders, will not recur. In such event, it
might not be possible to effect closing transactions
in particular options. If, as a covered call option
writer, the Fund is unable to effect a closing
purchase transaction in a secondary market, it will
not be able to sell the underlying security until the
option expires or it delivers the underlying security
upon exercise.
Securities exchanges generally have established
limitations governing the maximum number of calls and
puts of each class which may be held or written, or
exercised within certain periods, by an investor or
group of investors acting in concert (regardless of
whether the options are written on the same or
different securities exchanges or are held, written or
exercised in one or more accounts or through one or
more brokers). It is possible that the Fund and other
clients of the Manager and certain of their affiliates
may be considered to be such a group. A securities
exchange may order the liquidation of positions found
to be in violation of these limits, and it may impose
certain other sanctions.
In the case of options written by the Fund that are
deemed covered by virtue of the Fund's holding
convertible or exchangeable preferred stock or debt
securities, the time required to convert or exchange
and obtain physical delivery of the underlying common
stocks with respect to which the Fund has written
options may exceed the time within which the Fund must
make delivery in accordance with an exercise notice.
In these instances, the Fund may purchase or
temporarily borrow the underlying securities for
purposes of physical delivery. By so doing, the Fund
will not bear any market risk because the Fund will
have the absolute right to receive from the issuer of
the underlying security an equal number of shares to
replace the borrowed stock, but the Fund may incur
additional transaction costs or interest expenses in
connection with any such purchase or borrowing.
Although CGAM will attempt to take appropriate
measures to minimize the risks relating to the Fund's
writing of call options and purchasing of put and call
options, there can be no assurance that the Fund will
succeed in its option-writing program.
Stock Index Options. As described generally above,
each Fund may purchase put and call options and write
call options on domestic stock indexes listed on
domestic exchanges in order to realize its investment
objective of long-term capital appreciation or for the
purpose of hedging its portfolio. A stock index
fluctuates with changes in the market values of the
stocks included in the index. Some stock index options
are based on a broad market index such as the New York
Stock Exchange Composite Index or the Canadian Market
Portfolio Index, or a narrower market index such as
the Standard & Poor's 100. Indexes also are based on
an industry or market segment such as the American
Stock Exchange Oil and Gas Index or the Computer and
Business Equipment Index.
Options on stock indexes are generally similar to
options on stock except that the delivery requirements
are different. Instead of giving the right to take or
make delivery of stock at a specified price, an option
on a stock index gives the holder the right to receive
a cash "exercise settlement amount" equal to (a) the
amount, if any, by which the fixed exercise price of
the option exceeds (in the case of a put) or is less
than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied
by (b) a fixed "index multiplier." Receipt of this
cash amount will depend upon the closing level of the
stock index upon which the option is based being
greater than, in the case of a call, or less than, in
the case of a put, the exercise price of the option.
The amount of cash received will be equal to such
difference between the closing price of the index and
the exercise price of the option expressed in dollars
or a foreign currency, as the case may be, times a
specified multiple. The writer of the option is
obligated, in return for the premium received, to make
delivery of this amount. The writer may offset its
position in stock index options prior to expiration by
entering into a closing transaction on an exchange or
it may let the option expire unexercised.
The effectiveness of purchasing or writing stock index
options as a hedging technique will depend upon the
extent to which price movements in the portion of the
securities portfolio of the Fund correlate with price
movements of the stock index selected. Because the
value of an index option depends upon movements in the
level of the index rather than the price of a
particular stock, whether the Fund will realize a gain
or loss from the purchase or writing of options on an
index depends upon movements in the level of stock
prices in the stock market generally or, in the case
of certain indexes, in an industry or market segment,
rather than movements in the price of a particular
stock. Accordingly, successful use by the Fund of
options on stock indexes will be subject to the
Manager's and/or CGAM's ability to predict correctly
movements in the direction of the stock market
generally or of a particular industry. This requires
different skills and techniques than predicting
changes in the price of individual stocks.
Futures Contracts and Options on Futures Contracts.
As described generally above, each Fund may invest in
stock index futures contracts and options on futures
contracts traded on a domestic exchange or board of
trade. Futures contracts provide for the future sale
by one party and purchase by another party of a
specified amount of a specific security at a specified
future time and at a specified price. The primary
purpose of entering into a futures contract by the
Fund is to protect the Fund from fluctuations in the
value of securities without actually buying or selling
the securities. The Fund may enter into futures
contracts and options on futures to seek higher
investment returns when a futures contract is priced
more attractively than stocks comprising a benchmark
index, to facilitate trading or to reduce transaction
costs. The Fund will enter into futures contracts and
options only on futures contracts that are traded on a
domestic exchange and board of trade. Assets
committed to futures contracts will be segregated on
the Fund's books to the extent required by law.
The purpose of entering into a futures contract by the
Fund is to protect the Fund from fluctuations in the
value of securities without actually buying or selling
the securities. For example, in the case of stock
index futures contracts, if the Fund anticipates an
increase in the price of stocks it intends to purchase
at a later time, the Fund could enter into contracts
to purchase the stock index (known as taking a "long"
position) as a temporary substitute for the purchase
of stocks. If an increase in the market occurs that
influences the stock index as anticipated, the value
of the futures contracts increases and thereby serves
as a hedge against the Fund's not participating in a
market advance. The Fund then may close out the
futures contracts by entering into offsetting futures
contracts to sell the stock index (known as taking a
"short" position) as it purchases individual stocks.
The Fund can accomplish similar results by buying
securities with long maturities and selling securities
with short maturities. But by using futures contracts
as an investment tool to reduce risk, given the
greater liquidity in the futures market, it may be
possible to accomplish the same result more easily and
more quickly.
No consideration will be paid or received by the Fund
upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with
the broker an amount of cash or cash equivalents equal
to approximately 1% to 10% of the contract amount
(this amount is subject to change by the exchange or
board of trade on which the contract is traded and
brokers or members of such board of trade may charge a
higher amount). This amount is known as "initial
margin" and is in the nature of a performance bond or
good faith deposit on the contract which is returned
to the Fund, upon termination of the futures contract,
assuming all contractual obligations have been
satisfied. Subsequent payments, known as "variation
margin," to and from the broker, will be made daily as
the price of the index or securities underlying the
futures contract fluctuates, making the long and short
positions in the futures contract more or less
valuable, a process known as "marking-to-market." In
addition, when the Fund enters into a long position in
a futures contract or an option on a futures contract,
it must deposit into a segregated account with the
Fund's custodian an amount of cash or cash equivalents
equal to the total market value of the underlying
futures contract, less amounts held in the Fund's
commodity brokerage account at its broker. At any time
prior to the expiration of a futures contract, the
Fund may elect to close the position by taking an
opposite position, which will operate to terminate the
Fund's existing position in the contract.
There are several risks in connection with the use of
futures contracts as a hedging device. Successful use
of futures contracts by the Fund is subject to the
ability of the Manager to predict correctly 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 the
Fund intend 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, the 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 completely 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.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 7 below
and each Fund's investment objective have been adopted
by the Company as fundamental policies of each Fund.
Under the 1940 Act, a fundamental policy may not be
changed with respect to a fund without the vote of a
majority of the outstanding voting securities of the
Fund. Majority is defined in the 1940 Act as the
lesser of (a) 67% or more of the shares present at a
fund meeting, if the holders of more than 50% of the
outstanding shares of the fund are present or
represented by proxy, or (b) more than 50% of
outstanding shares. The remaining restrictions may be
changed by a vote of a majority of the Company's Board
of Directors at any time.
Under the investment restrictions adopted by the
Company with respect to each Fund, each Fund will not:
1. Purchase or sell the securities of any issuer,
if, as a result of such purchase or sale, less than
25% of the assets of the Fund would be invested in the
securities of issuers principally engaged in the
business activities having the specific
characteristics denoted by the Fund.
2. Borrow money, except that (a) the Fund may
borrow from banks for temporary or emergency (not
leveraging) purposes, including the meeting of
redemption requests which might otherwise require the
untimely disposition of securities, and (b) the Fund
may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements,
forward roll transactions and similar investment
strategies and techniques. To the extent that it
engages in transactions described in (a) and (b), the
Fund will be limited so that no more than 331/3% of
the value of its total assets (including the amount
borrowed), valued at the lesser of cost or market,
less liabilities (not including the amount borrowed)
valued at the time the borrowing is made, is derived
from such transactions.
3. Issue "senior securities" as defined in the 1940
Act and the rules, regulations and orders thereunder,
except as permitted under the 1940 Act and the rules,
regulations and orders thereunder.
4. Make loans. This restriction does not apply to:
(a) the purchase of debt obligations in which the Fund
may invest consistent with its investment objectives
and policies; (b) repurchase agreements; and (c) loans
of its portfolio securities, to the fullest extent
permitted under the 1940 Act.
5. Purchase or sell real estate, real estate
mortgages, commodities or commodity contracts, but
this restriction shall not prevent the Fund from (a)
investing in securities of issuers engaged in the real
estate business or the business of investing in real
estate (including interests in limited partnerships
owning or otherwise engaging in the real estate
business or the business of investing in real estate)
and securities which are secured by real estate or
interests therein; (b) holding or selling real estate
received in connection with securities it holds or
held; (c) trading in futures contracts and options
on futures contracts (including options on currencies
to the extent consistent with the Fund's investment
objective and policies); or (d) investing in real
estate investment trust securities.
6. Engage in the business of underwriting
securities issued by other persons, except to the
extent that the Fund may technically be deemed to be
an underwriter under the Securities Act of 1933, as
amended, in disposing of portfolio securities.
7. Purchase or otherwise acquire any illiquid
security except as permitted under the 1940 Act for
open-end investment companies, which currently permits
up to 15% of the Fund's net assets to be invested in
illiquid securities.
If any percentage restriction described above is
complied with at the time of an investment, a later
increase or decrease in percentage resulting from a
change in values or assets will not constitute a
violation of such restriction.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Directors and executive officers of the Company,
together with information as to their principal
business occupations during the past five years, are
shown below. Each Director who is an "interested
person" of each Fund, as defined in the 1940 Act, is
indicated by an asterisk.
HERBERT BARG (Age 76). Private Investor. Director or
trustee of 18 investment companies associated with
Citigroup Inc. ("Citigroup") His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania, 19004.
*ALFRED J. BIANCHETTI (Age 77). Retired; formerly
Senior Consultant to Dean Witter Reynolds Inc.
Director or trustee of 13 investment companies
associated with Citigroup. His address is 19 Circle
End Drive, Ramsey, New Jersey 07466.
MARTIN BRODY (Age 78). Consultant, HMK Associates.
Retired Vice Chairman of the Board of Restaurant
Associates Corp. Director or trustee of 22 investment
companies associated with Citigroup. His address is
c/o HMK Associates, 30 Columbia Turnpike, Florham
Park, New Jersey 07932.
DWIGHT B. CRANE (Age 62). Professor, Harvard Business
School. Director or trustee of 25 investment
companies associated with Citigroup. His address is
c/o Harvard Business School, Soldiers Field Road,
Boston, Massachusetts 02163.
BURT N. DORSETT (Age 69). Managing Partner of the
investment counseling firm Dorsett McCabe Management,
Inc. Director of Research Corporation Technologies,
Inc., a nonprofit patent clearing and licensing firm.
Director or trustee of 13 investment companies
associated with Citigroup. His address is 201 East
62nd Street, New York, New York 10021.
ELLIOT S. JAFFE (Age 73). Chairman of the Board and
President of The Dress Barn, Inc. Director or trustee
of 13 investment companies associated with Citigroup.
His address is 30 Dunnigan Drive, Suffern, New York
10021.
STEPHEN E. KAUFMAN (Age 67). Attorney. Director or
trustee of 15 investment companies associated with
Citigroup. His address is 277 Park Avenue, New York,
New York 10172.
JOSEPH J. McCANN (Age 69). Financial Consultant.
Retired Financial Executive, Ryan Homes, Inc.
Director or trustee of 13 investment companies
associated with Citigroup. His address is 200 Oak
Park Place, Pittsburgh, Pennsylvania 15243.
*HEATH B. McLENDON (Age 66). Chairman of the Board,
President and Investment Officer. Managing Director
of Salomon Smith Barney Inc. ("Salomon Smith Barney"),
President of SSB Citi and Travelers Investment
Adviser, Inc. ("TIA"); Chairman or Co-Chairman of the
Board of 71 investment companies associated with
Citigroup. His address is 7 World Trade Center, New
York, New York 10048.
CORNELIUS C. ROSE, JR. (Age 67). President, Cornelius
C. Rose Associates, Inc., financial consultants, and
Chairman and Director of Performance Learning Systems,
an educational consultant. Director or trustee of 13
investment companies associated with Citigroup. His
address is Meadowbrook Village, Building 4, Apt. 6,
West Lebanon, New Hampshire 03784.
LEWIS E. DAIDONE (Age 42). Senior Vice President and
Treasurer. Managing Director of Salomon Smith Barney,
Chief Financial Officer of the Smith Barney Mutual
funds; Director and Senior Vice President of SSB Citi
and TIA; Senior Vice President and Treasurer of 61
investment companies associated with Citigroup.
PAUL BROOK (Age 46). Controller. Director of Salomon
Smith Barney; from 1997-1998 Managing Director of AMT
Capital Services Inc.; prior to 1997 Partner with
Ernst & Young LLP; Controller or Assistant Treasurer
of 43 investment companies associated with Citigroup.
CHRISTINA T. SYDOR (Age 47). Secretary. Managing
Director of Salomon Smith Barney. General Counsel and
Secretary of SSB Citi and TIA; Secretary of 61
investment companies associated with Citigroup.
As of January 12, 2000, the Directors and officers of
the Company, as a group, owned less than 1% of the
outstanding shares of common stock of the Company. As
of January 12, 2000, to the knowledge of the Company
and the Board no single shareholder or "group" (as
that term is used in Section 13(d) of the Securities
Act of 1934) beneficially owned more than 5% of the
outstanding shares of the Company.
No officer, Director or employee of Salomon Smith
Barney or any of its affiliates receives any
compensation from the Company for serving as an
officer or director of the Company. The Company pays
each Director who is not an officer, director or
employee of Salomon Smith Barney or any of its
affiliates a fee of $2000 per annum plus $250 per in-
person meeting and $100 per telephonic meeting. All
Directors are reimbursed for travel and out-of-pocket
expenses incurred to attend such meetings.
The following table shows the compensation paid by the
Company and other Smith Barney Mutual Funds to each
Director during the Company's last fiscal year. None
of the officers of the Company received any
compensation from the Company for such period. The
Company does not pay retirement benefits to its
Directors and officers. Officers and interested
Directors of the Company are compensated by Salomon
Smith Barney.
Name of Person
Aggregate
Compensat
ion
From
Company
Total
Pension or
Retirement
Benefits
Accrued
as part of
Company
Expenses
Compensation
from Company
and Fund
Complex
Paid to
Directors
Number of
Funds for
Which
Director
Serves
Within
Fund Complex
Herbert Barg**
Alfred
Bianchetti* **
Martin Brody**
Dwight B.
Crane**
Burt N.
Dorsett**
Elliot S.
Jaffe**
Stephen E.
Kaufman**
Joseph J.
McCann**
Heath B.
McLendon*
Cornelius C.
Rose, Jr.**
$3,250.00
$3,000.00
$2,750.00
$3,250.00
$3,250.00
$2,500.00
$3,250.00
$3,250.00
$
0.00
$3,000.00
$0
0
0
0
0
0
0
0
0
0
$105,425.00
$
51,200.00
$132,500.00
$139,975.00
$
51,200.00
$
47,550.00
$
96,400.00
$
51,200.00
$
0.00
$
51,200.00
18
13
22
25
13
13
15
13
71
13
* Designates an "interested" Director.
** Designates member of Audit Committee.
Upon attainment of age 80, Company Directors are
required to change to emeritus status. Directors
Emeritus are entitled to serve in emeritus status for
a maximum of 10 years, during which time they are paid
50% of the annual retainer fee and meeting fees
otherwise applicable to Company Directors, together
with reasonable out-of-pocket expenses for each
meeting attended. Directors Emeritus may attend
meetings but have no voting rights. During the
Company's last fiscal year, aggregate compensation
paid to Directors Emeritus was $1,500.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Manager - SSB Citi
SSB Citi serves as Manager to each Fund pursuant to an
investment management agreement (the "Investment
Management Agreement") with each Fund which was
approved by the Board of Directors, including a
majority of directors who are not "interested persons"
of the Fund or the Manager. The Manager is a wholly
owned subsidiary of Salomon Smith Barney Holdings
Inc., which in turn, is a wholly owned subsidiary of
Citigroup Inc. Subject to the supervision and
direction of the Company's Board of Directors, the
Manager manages each Fund's portfolio in accordance
with the Fund's stated investment objective and
policies, makes investment decisions for the Fund,
places orders to purchase and sell securities, and
employs professional portfolio managers and securities
analysts who provide research services to the Fund.
The Manager pays the salary of any officer and
employee who is employed by both it and the Company.
The Manager bears all expenses in connection with the
performance of its services. The Manager also: (a)
assists in supervising all aspects of the Fund's
operations; (b) supplies the Fund with office
facilities (which may be in SSB Citi's own offices),
statistical and research data, data processing
services, clerical, accounting and bookkeeping
services, including, but not limited to, the
calculation of (i) the net asset value of shares of
the Fund, (ii) applicable contingent deferred sales
charges and similar fees and charges and (iii)
distribution fees, internal auditing and legal
services, internal executive and administrative
services, and stationary and office supplies; and (c)
prepares reports to shareholders of the Fund, tax
returns and reports to and filings with the SEC and
state blue sky authorities.
As compensation for investment management services,
the respective Fund pays the Manager the annual
investment management fee described below (based on a
percentage of the fund's average daily net assets):
Financial Services Fund: 0.80%
Health Sciences Fund: 0.80%
Technology Fund: 0.95%
Sub-adviser - Citibank, N.A.
CGAM serves as investment sub-adviser to each Fund
pursuant to a sub-advisory agreement (the "Sub-
advisory Agreement") with each Fund which was approved
by the Board of Directors, including a majority of
directors who are not "interested persons" of the Fund
or the Manager. CGAM is a division of Citigroup and,
together with its affiliates, managed more than $351
billion in assets as of December 31, 1999. CGAM
offers a wide range of investment services to
customers across the United States and throughout the
world. Its portfolio managers are responsible for
investing in money market, equity and fixed income
securities. CGAM manages the assets of various mutual
funds and provides certain administrative services to
those funds. CGAM employs a disciplined approach to
investing where its portfolio managers, fundamental
and quantitative analysts work together to meet client
objectives.
As compensation for investment sub-advisory services,
the Manager pays the sub-adviser the fee described
below (based on a percentage of the Fund's average
daily net assets):
Financial Services Fund: 0.50%
Health Sciences Fund: 0.50%
Technology Fund: 0.65%
Sub-administration
State Street Bank and Trust Company ("State Street"),
whose principal business address is 225 Franklin
Street, Boston, Massachusetts, 02110, serves as sub-
administrator for each Fund, pursuant to a written
agreement (the "Agreement") with the manager and each
Fund.
Under the Agreement, State Street has agreed to
oversee the computation of each Fund's net asset
value, net income and realized capital gains, if any;
furnish statistical and research data, clerical
services, and stationery and office supplies; prepare
and file various reports with the appropriate
regulatory agencies; and prepare various materials
required by the Securities and Exchange Commission.
Custodian
State Street is the custodian of each Fund's assets
pursuant to a custodian agreement (the "Custody
Contract") with the Company. State Street is also the
custodian with respect to the custody of foreign
securities held by the Funds. Under the Custody
Contract, State Street (i) holds and transfers
portfolio securities on account of each Fund, (ii)
accepts receipts and makes disbursements of money on
behalf of each Fund, (iii) collects and receives all
income and other payments and distributions on account
of each Fund's securities and (iv) makes periodic
reports to the Board of Directors concerning the
Funds' operations.
Transfer Agent and Sub-Transfer Agent
Smith Barney Private Trust Company ("SBPT" or the
"transfer agent") located at 388 Greenwich Street, New
York, New York 10013, serves as each Fund's transfer
agent. Under the transfer agency agreement, SBPT
maintains the shareholder account records for the
Fund, handles certain communications between
shareholders and the Fund and distributes dividends
and distributions payable by the Fund. For these
services, SBPT receives a monthly fee computed on the
basis of the number of shareholder accounts it
maintains for the Fund during the month and is
reimbursed for out-of-pocket expenses.
PFPC Global Fund Services (formerly known as First
Data Investor Services Group, Inc.) ("sub-transfer
agent") located at Exchange Place, Boston,
Massachusetts 02109, a subsidiary of PNC Bank, serves
as each Fund's sub-transfer agent. Under the sub-
transfer agency agreement, the sub-transfer agent
maintains the shareholder account records for the
Fund, handles certain communications between
shareholders and the Fund and distributes dividends
and distributions payable by the Fund. For these
services, the sub-transfer agent receives a monthly
fee from SBPT computed on the basis of the number of
shareholder accounts it maintains for the Fund during
the month and is reimbursed for out-of-pocket
expenses.
The Fund has also engaged the services of PFS
Shareholder Services as a sub-transfer agent for PFS
Accounts ("PFS" or "sub-transfer agent"). PFS is
located at 3100 Breckinridge Blvd, Bldg 200, Duluth,
Georgia 30099-0062.
Auditors
KPMG LLP, independent auditors, 345 Park Avenue, New
York, New York 10154, have been selected to serve as
auditors of the Company and to render opinions on each
Fund's financial statements.
Counsel
Willkie Farr & Gallagher, 787 Seventh Avenue, New
York, New York 10019, serves as counsel to the Company
and each Fund.
Code of Ethics Pursuant to Rule 17j-1 of the 1940
Act, the fund, its investment adviser and principal
underwriter has adopted a code of ethics that permits
personnel to invest in securities for their own
accounts, including securities that may be purchased
or held by the fund. All personnel must place the
interests of clients first and avoid activities,
interests and relationships that might interfere with
the duty to make decisions in the best interests of
the clients. All personal securities transactions by
employees must adhere to the requirements of the code
and must be conducted in such a manner as to avoid any
actual or potential conflict of interest, the
appearance of such a conflict, or the abuse of an
employee's position of trust and responsibility.
A copy of the fund's Code of Ethics is on file with
the Securities and Exchange Commission.
Distributor
CFBDS, Inc., located at 20 Milk Street, Boston,
Massachusetts 02109-5408 serves as the Funds'
distributor pursuant to a written agreement with the
Company dated October 8, 1998 (the "Distribution
Agreement") which was approved by the Company's Board
of Directors, including a majority of the independent
directors, on July 15, 1998, as amended on January 31,
2000.
When payment is made by the investor before the
settlement date, unless otherwise noted by the
investor, the funds will be held as a free credit
balance in the investor's brokerage account and
Salomon Smith Barney may benefit from the temporary
use of the funds. The Company's Board of Directors
has been advised of the benefits to Salomon Smith
Barney resulting from these settlement procedures and
will take such benefits into consideration when
reviewing the Investment Management Agreement for
continuance.
Distribution Arrangements
To compensate Salomon Smith Barney for the services it
provides and for the expense it bears under the
Distribution Agreement, each Fund has adopted a
services and distribution plan (the "Plan") pursuant
to Rule l2b-1 under the 1940 Act. Under the Plan, the
Fund pays Salomon Smith Barney a service fee, accrued
daily and paid monthly, calculated at the annual rate
of 0.25% of the value of the Fund's average daily net
assets attributable to the Class A, Class B and Class
L shares. In addition, the Fund pays Salomon Smith
Barney a distribution fee with respect to the Class B
and Class L shares primarily intended to compensate
Salomon Smith Barney for its initial expense of paying
Financial Consultants a commission upon sales of those
shares. The Class B and Class L distribution fee is
calculated at the annual rate of 0.75% of the value of
the Fund's average daily net assets attributable to
the shares of the respective Class.
Under its terms, the Plan continues from year to year,
provided such continuance is approved annually by vote
of the Board of Directors, including a majority of the
directors who are not interested persons of the Fund
and who have no direct or indirect financial interest
in the operation of the Plan or in the Distribution
Agreement (the "independent directors"). The Plan may
not be amended to increase the amount of the service
and distribution fees without shareholder approval,
and all amendments of the Plan also must be approved
by the directors including all of the independent
directors in the manner described above. The Plan may
be terminated with respect to a Class at any time,
without penalty, by vote of a majority of the
independent directors or, with respect to the Fund, by
vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act).
Pursuant to the Plan, Salomon Smith Barney will
provide the Board of Directors with periodic reports
of amounts expended under the Plan and the purpose for
which such expenditures were made.
The only classes of shares being offered for sale
through PFS Distributors is Class A shares and Class B
shares. Pursuant to the Plan (described above), PFS
Distributors is paid an annual service fee with
respect to Class A and Class B shares of the fund sold
through PFS Distributors at the annual rate of 0.25%
of the average daily net assets of the respective
class. PFS Distributors is also paid an annual
distribution fee with respect to Class B shares at the
annual rate of 0.75% of the average daily net assets
attributable to that Class. Class B shares 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 paid to
PFS Distributors, which in turn, pays PFS Investments
Inc. ("PFS Investments") to pay its PFS Investments
Registered Representatives for servicing shareholder
accounts and, in the case of Class B shares, to cover
expenses primarily intended to result in the sale of
those shares. These expenses include: advertising
expenses; the cost of printing and mailing
prospectuses to potential investors; payments to and
expenses of PFS Investments Registered Representatives
and other persons who provide support services in
connection with the distribution of shares; interest
and/or carrying charges; and indirect and overhead
costs of PFS Investments associated with the sale of
fund shares, including lease, utility, communications
and sales promotion expenses.
The payments to PFS Investments Registered
Representatives for selling shares of a class include
a commission or fee paid by the investor or PFS at the
time of sale and, with respect to Class A and Class B
shares, a continuing fee for servicing shareholder
accounts for as long as a shareholder remains a holder
of that class. PFS Investments Registered
Representatives may receive different levels of
compensation for selling different classes of shares.
PFS Investments may be deemed to be an underwriter for
purposes of the Securities Act of 1933. From time to
time, PFS or its affiliates may also pay for certain
non-cash sales incentives provided to PFS Investments
Registered Representatives. Such incentives do not
have any effect on the net amount invested. In
addition to the reallowances from the applicable
public offering price described above, PFS may from
time to time, pay or allow additional reallowances or
promotional incentives, in the form of cash or other
compensation to PFS Investments Registered
Representatives who sell shares of the fund.
PORTFOLIO TRANSACTIONS
The Manager arranges for the purchase and sale of the
Fund's securities and selects brokers and dealers
(including Salomon Smith Barney) which in its best
judgment provide prompt and reliable execution at
favorable prices and reasonable commission rates. The
Manager may select brokers and dealers that provide it
with research services and may cause the Fund to pay
such brokers and dealers commissions which exceed
those other brokers and dealers may have charged, if
it views the commissions as reasonable in relation to
the value of the brokerage and/or research services.
In selecting a broker, including Salomon Smith Barney,
for a transaction, the primary consideration is prompt
and effective execution of orders at the most
favorable prices. Subject to that primary
consideration, dealers may be selected for research
statistical or other services to enable the Manager or
its affiliates to supplement its own research and
analysis.
Decisions to buy and sell securities for the Fund are
made by CGAM, subject to the overall supervision and
review of the Company's Board of Directors. Portfolio
securities transactions for the Fund are effected by
or under the supervision of the Manager.
Transactions on stock exchanges involve the payment of
negotiated brokerage commissions. There is generally
no stated commission in the case of securities traded
in the over-the-counter market, but the price of those
securities includes an undisclosed commission or mark-
up. Over-the-counter purchases and sales are
transacted directly with principal market makers
except in those cases in which better prices and
executions may be obtained elsewhere. The cost of
securities purchased from underwriters includes an
underwriting commission or concession, and the prices
at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down.
In executing portfolio transactions and selecting
brokers or dealers, it is the Fund's policy to seek
the best overall terms available. CGAM, in seeking the
most favorable price and execution, considers all
factors it deems relevant, including, for example, the
price, the size of the transaction, the reputation,
experience and financial stability of the broker-
dealer involved and the quality of service rendered by
the broker-dealer in other transactions. CGAM receives
research, statistical and quotation services from
several broker-dealers with which it places the Fund's
portfolio transactions. It is possible that certain of
the services received primarily will benefit one or
more other accounts for which the CGAM exercises
investment discretion. Conversely, the Fund may be the
primary beneficiary of services received as a result
of portfolio transactions effected for other accounts.
The sub-adviser's fee under the management agreement
is not reduced by reason of its receiving such
brokerage and research services. The Company's Board
of Directors, in its discretion, may authorize the
Manager to cause the Fund to pay a broker that
provides brokerage and research services to the
Manager a commission in excess of that which another
qualified broker would have charged for effecting the
same transaction. Salomon Smith Barney will not
participate in commissions from brokerage given by the
Fund to other brokers or dealers and will not receive
any reciprocal brokerage business resulting therefrom.
In accordance with Section 17(e) of the 1940 Act and
Rule 17e-1 thereunder, the Company's Board of
Directors has determined that any portfolio
transaction for the Fund may be executed through
Salomon Smith Barney or an affiliate of Salomon Smith
Barney if, in the Manager's judgment, the use of
Salomon Smith Barney or an affiliate is likely to
result in price and execution at least as favorable as
those of other qualified brokers and if, in the
transaction, Salomon Smith Barney or the affiliate
charges the Fund a commission rate consistent with
those charged by Salomon Smith Barney or an affiliate
to comparable unaffiliated customers in similar
transactions. In addition, under SEC rules, Salomon
Smith Barney may directly execute such transactions
for the Fund on the floor of any national securities
exchange, provided: (a) the Board of Directors has
expressly authorized Salomon Smith Barney to effect
such transactions; and (b) Salomon Smith Barney
annually advises the Fund of the aggregate
compensation it earned on such transactions.
Even though investment decisions for the Fund are made
independently from those of the other accounts managed
by CGAM, investments of the kind made by the Fund also
may be made by those other accounts. When the Fund and
one or more accounts managed by CGAM are prepared to
invest in, or desire to dispose of, the same security,
available investments or opportunities for sales will
be allocated in a manner believed by CGAM to be
equitable. In some cases, this procedure may adversely
affect the price paid or received by the Fund or the
size of the position obtained for or disposed of by
the Fund.
The Fund will not purchase securities during the
existence of any underwriting or selling group
relating to the securities, of which the Manager or
any affiliates is a member, except to the extent
permitted by the SEC. Under certain circumstances,
the Fund may be at a disadvantage because of this
limitation in comparison with other Funds that have
similar investment objectives but that are not subject
to a similar limitation.
PORTFOLIO TURNOVER
Each Fund's portfolio turnover rate (the lesser of
purchases or sales of portfolio securities during the
year, excluding purchases or sales of short-term
securities, divided by the monthly average value of
portfolio securities) is generally not expected to
exceed 100%. The rate of turnover will not be a
limiting factor, however, when the Fund deems it
desirable to sell or purchase securities.
The Manager may cause the Fund to sell or purchase
securities to ensure compliance with the Fund's
investment policies.
PURCHASE OF SHARES
Sales Charge Alternatives
The following classes of shares are available for
purchase. See the prospectus for a discussion of
factors to consider in selecting which Class of shares
to purchase.
Class A Shares. Class A shares are sold to investors
at the public offering price, which is the net asset
value plus an initial sales charge as follows:
Amount
of
Investme
nt
Sales Charge
as a %
of
Transaction
Sales
Charge as a
% of Amount
Invested
Dealers'
Reallowance as
%
of Offering
Price
Less than
$25,000
5.00%
5.26%
4.50%
$ 25,000 -
49,999
4.00
4.17
3.60
50,000 -
99,999
3.50
3.63
3.15
100,000 -
249,999
3.00
3.09
2.70
250,000 -
499,999
2.00
2.04
1.80
500,000 and
over
*
*
*
* Purchases of Class A shares of $500,000 or more
will be made at net asset value without any
initial sales charge, but will be subject to a
deferred sales charge of 1.00% on redemptions
made within 12 months of purchase. The deferred
sales charge on Class A shares is payable to
Salomon Smith Barney, which compensates Salomon
Smith Barney Financial Consultants and other
dealers whose clients make purchases of $500,000
or more. The deferred sales charge is waived in
the same circumstances in which the deferred
sales charge applicable to Class B and Class L
shares is waived. See "Deferred Sales Charge
Provisions" and "Waivers of Deferred Sales
Charge."
Members of the selling group may receive up to 90% of
the sales charge and may be deemed to be underwriters
of the Fund as defined in the 1933 Act. The reduced
sales charges shown above apply to the aggregate of
purchases of Class A shares of the Fund made at one
time by "any person," which includes an individual and
his or her immediate family, or a trustee or other
fiduciary of a single trust estate or single fiduciary
account.
Class B Shares. Class B shares are sold without an
initial sales charge but are subject to a deferred
sales charge payable upon certain redemptions. See
"Deferred Sales Charge Provisions" below.
Class L Shares. Class L shares are sold with an
initial sales charge of 1.00% (which is equal to 1.01%
of the amount invested) and are subject to a deferred
sales charge payable upon certain redemptions. See
"Deferred Sales Charge Provisions" below. Until June
22, 2001, purchases of Class L shares by investors who
were holders of Class C shares of other Smith Barney
Mutual Funds on June 12, 1998 will not be subject to
the 1.00% initial sales charge.
Class Y Shares. Class Y shares are sold without an
initial sales charge or deferred sales charge and are
available only to investors investing a minimum of
$15,000,000 (except purchases of Class Y shares by
Smith Barney Concert Allocation Series Inc., for which
there is no minimum purchase amount).
General
The Funds' shares are continuously offered to new
investors. See "Purchase of Shares"
Investors may purchase shares from a Salomon Smith
Barney Financial Consultant or a broker that clears
through Salomon Smith Barney ("Dealer
Representative"). In addition, certain investors,
including qualified retirement plans purchasing
through certain Dealer Representatives, may purchase
shares directly from the Fund. When purchasing shares
of the Fund, investors must specify whether the
purchase is for Class A, Class B, Class L or Class Y
shares. Salomon Smith Barney and Dealer
Representatives may charge their customers an annual
account maintenance fee in connection with a brokerage
account through which an investor purchases or holds
shares. Accounts held directly at the transfer agent
are not subject to a maintenance fee.
Investors in Class A, Class B and Class L shares may
open an account in the Fund by making an initial
investment of at least $1,000 for each account, or
$250 for an IRA or a Self-Employed Retirement Plan, in
the Fund. Investors in Class Y shares may open an
account by making an initial investment of
$15,000,000. Subsequent investments of at least $50
may be made for all Classes. For participants in
retirement plans qualified under Section 403(b)(7) or
Section 401(c) of the Code, the minimum initial
investment required for Class A, Class B and Class L
shares and the subsequent investment requirement for
all Classes in the Fund is $25. There are no minimum
investment requirements for Class A shares for
employees of Citigroup and its subsidiaries, including
Salomon Smith Barney, unitholders who invest
distributions from a Unit Investment Trust ("UIT")
sponsored by Salomon Smith Barney, and
Directors/Trustees of any of the Smith Barney Mutual
Funds, and their spouses and children. The Fund
reserves the right to waive or change minimums, to
decline any order to purchase its shares and to
suspend the offering of shares from time to time.
Shares purchased will be held in the shareholder's
account by the sub-transfer agent. Share certificates
are issued only upon a shareholder's written request
to the sub-transfer agent.
Purchase orders received by the Fund or a Salomon
Smith Barney Financial Consultant prior to the close
of regular trading on the New York Stock Exchange
("NYSE"), on any day the Fund calculates its net asset
value, are priced according to the net asset value
determined on that day (the ''trade date''). Orders
received by a Dealer Representative prior to the close
of regular trading on the NYSE on any day the Fund
calculates its net asset value, are priced according
to the net asset value determined on that day,
provided the order is received by the Fund or the
Fund's agent prior to its close of business. For
shares purchased through Salomon Smith Barney or a
Dealer Representative purchasing through Salomon Smith
Barney, payment for shares of the Fund is due on the
third business day after the trade date. In all other
cases, payment must be made with the purchase order.
Sales Charge Waivers and Reductions
Initial Sales Charge Waivers. Purchases of Class A
shares may be made at net asset value without a sales
charge in the following circumstances: (a) sales to
(i) Board Members and employees of Citigroup and its
subsidiaries and any Citigroup affiliated funds
including the Smith Barney Mutual Funds (including
retired Board Members and employees); the immediate
families of such persons (including the surviving
spouse of a deceased Board Member or employee); and to
a pension, profit-sharing or other benefit plan for
such persons and (ii) employees of members of the
National Association of Securities Dealers, Inc.,
provided such sales are made upon the assurance of the
purchaser that the purchase is made for investment
purposes and that the securities will not be resold
except through redemption or repurchase; (b) offers of
Class A shares to any other investment company to
effect the combination of such company with the Fund
by merger, acquisition of assets or otherwise;
(c) purchases of Class A shares by any client of a
newly employed Salomon Smith Barney Financial
Consultant (for a period up to 90 days from the
commencement of the Financial Consultant's employment
with Salomon Smith Barney), on the condition the
purchase of Class A shares is made with the proceeds
of the redemption of shares of a mutual fund which (i)
was sponsored by the Financial Consultant's prior
employer, (ii) was sold to the client by the Financial
Consultant and (iii) was subject to a sales charge;
(d) purchases by shareholders who have redeemed Class
A shares in the Fund (or Class A shares of another
Smith Barney Mutual Fund that is offered with a sales
charge) and who wish to reinvest their redemption
proceeds in the Fund, provided the reinvestment is
made within 60 calendar days of the redemption; (e)
purchases by accounts managed by registered investment
advisory subsidiaries of Citigroup; (f) direct
rollovers by plan participants of distributions from a
401(k) plan offered to employees of Citigroup or its
subsidiaries (Note: subsequent investments will be
subject to the applicable sales charge); (g) purchases
by a separate account used to fund certain
unregistered variable annuity contracts; (h)
investments of distributions from a UIT sponsored by
Salomon Smith Barney; (i) purchases by investors
participating in a Salomon Smith Barney fee-based
arrangement; and (j) purchases of Class A shares by
Section 403(b) or Section 401(a) or (k) accounts
associated with Copeland Retirement Programs. In order
to obtain such discounts, the purchaser must provide
sufficient information at the time of purchase to
permit verification that the purchase would qualify
for the elimination of the sales charge.
Right of Accumulation. Class A shares of the Fund may
be purchased by "any person" (as defined above) at a
reduced sales charge or at net asset value determined
by aggregating the dollar amount of the new purchase
and the total net asset value of all Class A shares of
the Fund and of other Smith Barney Mutual Funds that
are offered with a sales charge as currently listed
under "Exchange Privilege" then held by such person
and applying the sales charge applicable to such
aggregate. In order to obtain such discount, the
purchaser must provide sufficient information at the
time of purchase to permit verification that the
purchase qualifies for the reduced sales charge. The
right of accumulation is subject to modification or
discontinuance at any time with respect to all shares
purchased thereafter.
Letter of Intent - Class A Shares. A Letter of Intent
for an amount of $50,000 or more provides an
opportunity for an investor to obtain a reduced sales
charge by aggregating investments over a 13 month
period, provided the investor refers to such Letter
when placing orders. For purposes of a Letter of
Intent, the ''Amount of Investment'' as referred to in
the preceding sales charge table includes (i) all
Class A shares of the Fund and other Smith Barney
Mutual Funds offered with a sales charge acquired
during the term of the letter plus (ii) the value of
all Class A shares previously purchased and still
owned. Each investment made during the period
receives the reduced sales charge applicable to the
total amount of the investment goal. If the goal is
not achieved within the period, the investor must pay
the difference between the sales charges applicable to
the purchases made and the charges previously paid, or
an appropriate number of escrowed shares will be
redeemed. The term of the Letter will commence upon
the date the Letter is signed, or at the options of
the investor, up to 90 days before such date. Please
contact a Salomon Smith Barney Financial Consultant or
the sub-transfer agent to obtain a Letter of Intent
application.
Letter of Intent - Class Y Shares. A Letter of Intent
may also be used as a way for investors to meet the
minimum investment requirement for Class Y shares
(except purchases of Class Y shares by Smith Barney
Concert Allocation Series Inc., for which there is no
minimum purchase amount). Such investors must make an
initial minimum purchase of $5,000,000 in Class Y
shares of the Fund and agree to purchase a total of
$15,000,000 of Class Y shares of the Fund within 13
months from the date of the Letter. If a total
investment of $15,000,000 is not made within the 13-
month period, all Class Y shares purchased to date
will be transferred to Class A shares, where they will
be subject to all fees (including a service fee of
0.25%) and expenses applicable to the Fund's Class A
shares, which may include a deferred sales charge of
1.00%. Please contact a Salomon Smith Barney Financial
Consultant or the sub-transfer agent for further
information.
Deferred Sales Charge Provisions
"Deferred sales charge shares" are: (a) Class B
shares; (b) Class L shares; and (c) Class A shares
that were purchased without an initial sales charge
but are subject to a deferred sales charge. A
deferred sales charge may be imposed on certain
redemptions of these shares.
Any applicable deferred sales charge will be assessed
on an amount equal to the lesser of the original cost
of the shares being redeemed or their net asset value
at the time of redemption. Deferred sales charge
shares that are redeemed will not be subject to a
deferred sales charge to the extent that the value of
such shares represents: (a) capital appreciation of
Fund assets; (b) reinvestment of dividends or capital
gain distributions; (c) with respect to Class B
shares, shares redeemed more than five years after
their purchase; or (d) with respect to Class L shares
and Class A shares that are deferred sales charge
shares, shares redeemed more than 12 months after
their purchase.
Class L shares and Class A shares that are deferred
sales charge shares are subject to a 1.00% deferred
sales charge if redeemed within 12 months of purchase.
In circumstances in which the deferred sales charge is
imposed on Class B shares, the amount of the charge
will depend on the number of years since the
shareholder made the purchase payment from which the
amount is being redeemed. Solely for purposes of
determining the number of years since a purchase
payment, all purchase payments made during a month
will be aggregated and deemed to have been made on the
last day of the preceding Salomon Smith Barney
statement month. The following table sets forth the
rates of the charge for redemptions of Class B shares
by shareholders.
Year Since Purchase Payment Was
Made
Deferred Sales Charge
First
5.00%
Second
4.00
Third
3.00
Fourth
2.00
Fifth
1.00
Sixth and thereafter
0.00
Class B shares will convert automatically to Class A
shares eight years after the date on which they were
purchased and thereafter will no longer be subject to
any distribution fees. There will also be converted at
that time such proportion of Class B Dividend Shares
owned by the shareholder as the total number of his or
her Class B shares converting at the time bears to the
total number of outstanding Class B shares (other than
Class B Dividend Shares) owned by the shareholder.
In determining the applicabilty of any Deferred Sales
Charge, it will be assumed that a redemption is made
first of shares representing capital appreciation,
next of shares representing the reinvestment of
dividends and capital gain distributions and finally
of other shares held by the shareholder for the
longest period of time. The length of time that
deferred sales charge shares acquired through an
exchange have been held will be calculated from the
date that the shares exchanged were initially acquired
in one of the other Smith Barney Mutual Funds, and
fund shares being redeemed will be considered to
represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments
in such other funds. For Federal income tax purposes,
the amount of the deferred sales charge will reduce
the gain or increase the loss, as the case may be, on
the amount realized on redemption. The amount of any
deferred sales charge will be paid to Salomon Smith
Barney. To provide an example, assume an investor
purchased 100 Class B shares of the Fund at $10 per
share for a cost of $1,000. Subsequently, the
investor acquired 5 additional shares of the Fund
through dividend reinvestment. During the fifteenth
month after the purchase, the investor decided to
redeem $500 of his or her investment. Assuming at the
time of the redemption the net asset value had
appreciated to $12 per share, the value of the
investor's shares would be $1,260 (105 shares at $12
per share). The deferred sales charge would not be
applied to the amount which represents appreciation
($200) and the value of the reinvested dividend shares
($60). Therefore, $240 of the $500 redemption
proceeds ($500 minus $260) would be charged at a rate
of 4.00% (the applicable rate for Class B shares) for
a total deferred sales charge of $9.60.
Waivers of Deferred Sales Charge
The deferred sales charge will be waived on: (a)
exchanges (see "Exchange Privilege"); (b) redemptions
of shares within 12 months following the death or
disability of the shareholder; (c) redemptions of
shares made in connection with qualified distributions
from retirement plans or IRAs upon the attainment of
age 591/2; (d) involuntary redemptions; and
(e) redemptions of shares to effect a combination of
the Fund with any investment company by merger,
acquisition of assets or otherwise. In addition, a
shareholder who has redeemed shares from other Smith
Barney Mutual Funds may, under certain circumstances,
reinvest all or part of the redemption proceeds within
60 days and receive pro rata credit for any deferred
sales charge imposed on the prior redemption.
Deferred sales charge waivers will be granted subject
to confirmation (by Salomon Smith Barney in the case
of shareholders who are also Salomon Smith Barney
clients or by the sub-transfer agent in the case of
all other shareholders) of the shareholder's status or
holdings, as the case may be.
Salomon Smith Barney Retirement Programs
You may be eligible to participate in a retirement
program sponsored by Salomon Smith Barney or one of
its affiliates. The fund offers Class A and Class L
shares at net asset value to participating plans under
the programs. You can meet minimum investment and
exchange amounts, if any, by combining the plan's
investments in any of the Smith Barney mutual funds.
There are no sales charges when you buy or sell shares
and the class of shares you may purchase depends on
the amount of your initial investment and/or the date
your account is opened. Once a class of shares is
chosen, all additional purchases must be of the same
class.
For plans opened on or after March 1, 2000 that are
not plans for which Paychex Inc. or an affiliate
provides administrative services (a "Paychex plan"),
Class A shares may be purchased regardless of the
amount invested.
For plans opened prior to March 1, 2000 and for
Paychex plans, the class of shares you may purchase
depends on the amount of your initial investment:
Class A Shares. Class A shares may be purchased by
plans investing at least $1 million.
Class L Shares. Class L shares may be purchased by
plans investing less than $1 million. Class L shares
are eligible to exchange into Class A shares not later
than 8 years after the plan joined the program. They
are eligible for exchange in the following
circumstances:
If the plan was opened on or after June 21, 1996 and a
total of $1 million is invested in Smith Barney Funds
Class L shares (other than money market funds), all
Class L shares are eligible for exchange after the
plan is in the program for 5 years.
If the plan was opened before June 21, 1996 and a
total of $500,000 is invested in Smith Barney Funds
Class L shares (other than money market funds) on
December 31 in any year, all Class L shares are
eligible for exchange on or about March 31 of the
following year.
For more information, call your Salomon Smith Barney
Financial Consultant or the transfer agent.
Retirement Programs Opened On or After June 21, 1996.
If, at the end of the fifth year after the date the
participating plan enrolled in the Smith Barney 401(k)
Program or the ExecChoiceTM Program, a participating
plan's total Class L holdings in all non-money market
Smith Barney mutual funds equal at least $1,000,000,
the participating plan will be offered the opportunity
to exchange all of its Class L shares shares for Class
A shares of the fund. (For participating plans that
were originally established through a Salomon Smith
Barney retail brokerage account, the five-year period
will be calculated from the date the retail brokerage
account was opened.) Such participating plans will be
notified of the pending exchange in writing within 30
days after the fifth anniversary of the enrollment
date and, unless the exchange offer has been rejected
in writing, the exchange will occur on or about the
90th day after the fifth anniversary date. If the
participating plan does not qualify for the five-year
exchange to Class A shares, a review of the
participating plan's holdings will be performed each
quarter until either the participating plan qualifies
or the end of the eighth year.
Retirement Programs Opened Prior to June 21, 1996. In
any year after the date a participating plan enrolled
in the Smith Barney 401(k) Program, if a participating
plan's total Class L holdings in all non-money market
Smith Barney mutual funds equal at least $500,000 as
of the calendar year-end, the participating plan will
be offered the opportunity to exchange all of its
Class L shares for Class A shares of the fund. Such
Plans will be notified in writing within 30 days after
the last business day of the calendar year and, unless
the exchange offer has been rejected in writing, the
exchange will occur on or about the last business day
of the following March.
Any participating plan in the Smith Barney 401(k) or
the ExecChoiceTM Program, whether opened before or
after June 21, 1996, that has not previously qualified
for an exchange into Class A shares will be offered
the opportunity to exchange all of its Class L shares
for Class A shares of the fund, regardless of asset
size, at the end of the eighth year after the date the
participating plan enrolled in the Smith Barney 401(k)
Program or ExecChoiceTM Program. Such plans will be
notified of the pending exchange in writing
approximately 60 days before the eighth anniversary of
the enrollment date and, unless the exchange has been
rejected in writing, the exchange will occur on or
about the eighth anniversary date. Once an exchange
has occurred, a participating plan will not be
eligible to acquire additional Class L shares, but
instead may acquire Class A shares of the same fund.
Any Class L shares not converted will continue to be
subject to the distribution fee.
Participating plans wishing to acquire shares of the
fund through the Smith Barney 401(k) Program or the
Smith Barney ExecChoiceTM Program must purchase such
shares directly from the transfer agent. For further
information regarding these Programs, investors should
contact a Salomon Smith Barney Financial Consultant.
Retirement Programs Investing in Class B Shares:
Class B shares of a fund are not available for
purchase by participating plans opened on or after
June 21, 1996, but may continue to be purchased by any
participating plan in the Smith Barney 401 (k) Program
opened prior to such date and originally investing in
such Class. Class B shares acquired are subject to a
deferred sales charge of 3.00% of redemption proceeds
if the participating plan terminates within eight
years of the date the participating plan first
enrolled in the Smith Barney 401 (k) Program.
At the end of the eighth year after the date the
participating plan enrolled in the Smith Barney 401
(k) Program, the participating plan will be offered
the opportunity to exchange all of its Class B shares
for Class A shares of the same fund. Such
participating plan will be notified of the pending
exchange in writing approximately 60 days before the
eighth anniversary of the enrollment date and, unless
the exchange has been rejected in writing, the
exchange will occur on or about the eighth anniversary
date. Once the exchange has occurred, a participating
plan will not be eligible to acquire additional Class
B shares, but instead may acquire Class A shares of
the same fund. If the participating elects not to
exchange all of its Class B shares at that time, each
Class B share held by the participating plan will have
the same conversion feature as Class B shares held by
other investors. See "Purchase of Shares-deferred
sales charge Alternatives."
No deferred sales charge is imposed on redemptions of
Class B shares to the extent that the net asset value
of the shares redeemed does not exceed the current net
asset value of the shares purchased through
reinvestment of dividends or capital gain
distributions, plus the current net asset value of
Class B shares purchased more than eight years prior
to the redemption, plus increases in the net asset
value of the shareholder's Class B shares above the
purchase payments made during the preceding eight
years. Whether or not the deferred sales charge
applies to the redemption by a participating plan
depends on the number of years since the participating
plan first became enrolled in the Smith Barney 401(k)
Program, unlike the applicability of the deferred
sales charge to redemptions by other shareholders,
which depends on the number of years since those
shareholders made the purchase payment from which the
amount is being redeemed.
The deferred sales charge will be waived on
redemptions of Class B shares in connection with lump-
sum or other distributions made by a participating
plan as a result of (a) the retirement of an employee
in the participating plan; (b) the termination of
employment of an employee in the participating plan;
(c) the death or disability or an employee in the
participating plan; (d) the attainment of age 59 1/2 by
an employee in the participating plan; (e) hardship of
an employee in the participating plan to the extent
permitted under Section 401(k) of the Code; or (f)
redemptions of shares in connection with a loan made
by the participating plan to an employee.
Determination of Public Offering Price
The Fund offers its shares to current shareholders of
the Fund on a continuous basis. The public offering
price for a Class A, Class B and Class Y share of the
Fund is equal to the net asset value per share at the
time of purchase, plus for Class A shares an initial
sales charge based on the aggregate amount of the
investment. The public offering price for Class A
share purchases, including applicable rights of
accumulation, equaling or exceeding $500,000 is equal
to the net asset value per share at the time of
purchase and no sales charge is imposed at the time of
purchase. The public offering price for a Class L
share includes a 1.00% initial sales charge. A
contingent deferred sales charge ("CDSC") is imposed
on certain redemptions of Class B shares, and on Class
L shares and Class A shares (purchased in amounts
exceeding $500,000) redeemed within one year of
purchase.
REDEMPTION OF SHARES
The right of redemption of shares of the Fund may be
suspended or the date of payment postponed (a) for any
periods during which the New York Stock Exchange, Inc.
(the "NYSE") is closed (other than for customary
weekend and holiday closings), (b) when trading in the
markets the Fund normally utilizes is restricted, or
an emergency exists, as determined by the SEC, so that
disposal of the Fund's investments or determination of
its net asset value is not reasonably practicable or
(c) for any other periods as the SEC by order may
permit for the protection of the Fund's shareholders.
If the shares to be redeemed were issued in
certificate form, the certificates must be endorsed
for transfer (or be accompanied by an endorsed stock
power) and must be submitted to the sub-transfer agent
together with the redemption request. Any signature
appearing on a share certificate, stock power or
written redemption request in excess of $10,000 must
be guaranteed by an eligible guarantor institution
such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Federal
Reserve System or member firm of a national securities
exchange. Written redemption requests of $10,000 or
less do not require a signature guarantee unless more
than one such redemption request is made in any 10-day
period or the redemption proceeds are to be sent to an
address other than the address of record. Unless
otherwise directed, redemption proceeds will be mailed
to an investor's address of record. The sub-transfer
agent may require additional supporting documents for
redemptions made by corporations, executors,
administrators, trustees or guardians. A redemption
request will not be deemed properly received until the
sub-transfer agent receives all required documents in
proper form.
If a shareholder holds shares in more than one Class,
any request for redemption must specify the Class
being redeemed. In the event of a failure to specify
which Class, or if the investor owns fewer shares of
the Class than specified, the redemption request will
be delayed until the transfer agent receives further
instructions from Salomon Smith Barney, or if the
shareholder's account is not with Salomon Smith
Barney, from the shareholder directly. The redemption
proceeds will be remitted on or before the third
business day following receipt of proper tender,
except on any days on which the NYSE is closed or as
permitted under the 1940 Act, in extraordinary
circumstances. Generally, if the redemption proceeds
are remitted to a Salomon Smith Barney brokerage
account, these funds will not be invested for the
shareholder's benefit without specific instruction and
Salomon Smith Barney will benefit from the use of
temporarily uninvested funds. Redemption proceeds for
shares purchased by check, other than a certified or
official bank check, will be remitted upon clearance
of the check, which may take up to fifteen days.
Distributions in Kind
If the Board of Directors of the Fund determines that
it would be detrimental to the best interests of the
remaining shareholders to make a redemption payment
wholly in cash, the Fund may pay, in accordance with
SEC rules, any portion of a redemption in excess of
the lesser of $250,000 or 1.00% of the Fund's net
assets by a distribution in kind of portfolio
securities in lieu of cash. Securities issued as a
distribution in kind may incur brokerage commissions
when shareholders subsequently sell those securities.
Additional Information Regarding Telephone Redemption
And Exchange Program
Neither the Fund nor its agents will be liable for
following instructions communicated by telephone that
are reasonably believed to be genuine. The Fund and
its agents will employ procedures designed to verify
the identity of the caller and legitimacy of
instructions (for example, a shareholder's name and
account number will be required and phone calls may be
recorded). The Fund reserves the right to suspend,
modify or discontinue the telephone redemption and
exchange program or to impose a charge for this
service at any time following at least seven (7) days'
prior notice to shareholders.
PFS ACCOUNTS
Initial purchase of shares of the fund must be made
through a PFS Investments Registered Representative by
completing the appropriate application. The completed
application should be forwarded to PFS Shareholder
Services, the sub-transfer agent, with regard to PFS
Accounts, P.O. Box 105033, Atlanta, Georgia 30348-
5033. Checks drawn on foreign banks must be payable in
U.S. dollars and have the routing number of the U.S.
bank encoded on the check. Subsequent investments may
be sent directly to the sub-transfer agent. In
processing applications and investments, the transfer
agent acts as agent for the investor and for PFS
Investments and also as agent for the distributor, in
accordance with the terms of the prospectus. If the
transfer agent ceases to act as such, a successor
company named by the fund will act in the same
capacity so long as the account remains open.
Shares purchased will be held in the shareholder's
account by the sub-transfer agent. Share certificates
are issued only upon a shareholder's written request
to the sub-transfer agent. A shareholder that has
insufficient funds to complete any purchase will be
charged a fee of $30 per returned purchase by PFS.
A shareholder, enrolled in the Systematic Investment
Plan, who has insufficient funds to complete a
transfer will be charged a fee of up to $30.00.
Investors in Class A and Class B shares may open an
account by making an initial investment of at least
$1,000 for each account in each Class (except for
Systematic Investment Plan accounts), or $250 for an
IRA or a Self-Employed Retirement Plan in a fund.
Subsequent investments of at least $50 may be made for
each Class. For participants in retirement plans
qualified under Section 403(b)(7) or Section 401(a) of
the Code, the minimum initial investment requirement
for Class A and Class B shares and the subsequent
investment requirement for each Class in the fund is
$25. For the fund's Systematic Investment Plan, the
minimum initial investment requirement for Class A and
Class B shares and the subsequent investment
requirement for each Class is $25. There are no
minimum investment requirements in Class A shares for
employees of Citigroup and its subsidiaries, including
Salomon Smith Barney, directors or trustees of any of
the Smith Barney mutual funds, and their spouses and
children. The fund reserves the right to waive or
change minimums, to decline any order to purchase its
shares and to suspend the offering of shares from time
to time. Purchase orders received by the transfer
agent or sub-transfer agent prior to the close of
regular trading on the NYSE, on any day the fund
calculates its net asset value, are priced according
to the net asset value determined on that day.
Upon completion of certain automated systems,
shareholders who establish telephone transaction
authority on their account and supply bank account
information may make additions to their accounts at
any time. Initial purchases of fund shares may also
be made by wire. The minimum investment that can be
made by wire is $10,000. Once an account is open, a
shareholder may make additional investments by wire.
Prior to sending a wire, shareholders should contact
the sub-transfer agent at (800) 544-5445 between 8:00
a.m. and 8:00 p.m. eastern time any day that the NYSE
is open. If a shareholder does not wish to allow
telephone subsequent investments by any person in his
account, he should decline the telephone transaction
option on the account application. The minimum
telephone subsequent investment is $250 and can be up
to a maximum of $10,000. By requesting a subsequent
purchase by telephone, you authorize the sub-transfer
agent to transfer funds from the bank account provided
for the amount of the purchase. A shareholder that
has insufficient funds to complete the transfer will
be charged a fee of up to $30 by PFS or the sub-
transfer agent. A shareholder who places a stop
payment on a transfer or the transfer is returned
because the account has been closed, will also be
charged a fee of up to $30 by PFS or the sub-transfer
agent. Subsequent investments by telephone may not be
available if the shareholder cannot reach the sub-
transfer agent whether because all telephone lines are
busy or for any other reason; in such case, a
shareholder would have to use the fund's regular
subsequent investment procedure described above.
Redemption proceeds can be sent by check to the
address of record or by wire transfer to a bank
account designated on the application. A shareholder
will be charged a $25 service fee for wire transfers
and a nominal service fee for transfers made directly
to the shareholder's bank by the Automated Clearing
House.
Additional information regarding the sub-transfer
agent's services may be obtained by contacting the
Client Services Department at (800) 544-5445. The
sub-transfer agent will process and mail usually
within two or three business days after receiving the
redemption request in good order. The shareholder may
request the proceeds to be mailed by two days air
express for a $8 fee that will be deducted from the
shareholders account or by one day express for a $15
fee that will be deducted from the shareholder's
account.
VALUATION OF SHARES
The net asset value per share of the Fund's Classes is
calculated on each day, Monday through Friday, except
days on which the NYSE is closed. The NYSE currently
is scheduled to be closed on New Year's Day, Martin
Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day,
Thanksgiving and Christmas, and on the preceding
Friday or subsequent Monday when one of these holidays
falls on a Saturday or Sunday, respectively. Because
of the differences in distribution fees and
Class-specific expenses, the per share net asset value
of each Class may differ. The following is a
description of the procedures used by the Fund in
valuing its assets.
Securities listed on a national securities exchange
will be valued on the basis of the last sale on the
date on which the valuation is made or, in the absence
of sales, at the mean between the closing bid and
asked prices. Over-the-counter securities will be
valued at the mean between the closing bid and asked
prices on each day, or, if market quotations for those
securities are not readily available, at fair value,
as determined in good faith by the Company's Board of
Directors. Short-term obligations with maturities of
60 days or less are valued at amortized cost, which
constitutes fair value as determined by the Company's
Board of Directors. Amortized cost involves valuing an
instrument at its original cost to the Fund and
thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the
effect of fluctuating interest rates on the market
value of the instrument. All other securities and
other assets of the Fund will be valued at fair value
as determined in good faith by the Company's Board of
Directors.
EXCHANGE PRIVILEGE
Except as noted below and in the Prospectus,
shareholders of any of the Smith Barney Mutual Funds
may exchange all or part of their shares for shares of
the same class of other Smith Barney Mutual Funds, to
the extent such shares are offered for sale in the
shareholder's state of residence, on the basis of
relative net asset value per share at the time of
exchange as follows:
A. Class A and Class Y shares of the Fund may be
exchanged without a sales charge for the
respective shares of any of the Smith Barney
Mutual Funds.
B. Class B shares of any Fund may be exchanged
without a sales charge. Class B shares of the
Fund exchanged for Class B shares of another
Smith Barney Mutual Fund will be subject to the
higher applicable deferred sales charge of the
two funds and, for purposes of calculating
deferred sales charge rates and conversion
periods, will be deemed to have been held since
the date the shares being exchanged were deemed
to be purchased.
C. Class L shares of any Fund may be exchanged
without a sales charge. For purposes of deferred
sales charge applicability, Class L shares of
the Fund exchanged for Class L shares of another
Smith Barney Mutual Fund will be deemed to have
been owned since the date the shares being
exchanged were deemed to be purchased.
The exchange privilege enables shareholders to acquire
shares of the same Class in a Fund with different
investment objectives when they believe that a shift
between funds is an appropriate investment decision.
This privilege is available to shareholders residing
in any state in which fund shares being acquired may
legally be sold. Prior to any exchange, the
shareholder should obtain and review a copy of the
current prospectus of each fund into which an exchange
is being considered. Prospectuses may be obtained from
a Salomon Smith Barney Financial Consultant.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange
are redeemed at the then-current net asset value and
the proceeds are immediately invested, at a price as
described above, in shares of the Fund being acquired.
Salomon Smith Barney reserves the right to reject any
exchange request. The exchange privilege may be
modified or terminated at any time after written
notice to shareholders.
Additional Information Regarding the Exchange
Privilege. Although the exchange privilege is an
important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its
shareholders. The Manager may determine that a
pattern of frequent exchanges is excessive and
contrary to the best interests of the Fund's other
shareholders. In this event, the Fund may, at its
discretion, decide to limit additional purchases
and/or exchanges by a shareholder. Upon such a
determination, the Fund will provide notice in writing
or by telephone to the shareholder at least 15 days
prior to suspending the exchange privilege and during
the 15 day period the shareholder will be required to
(a) redeem his or her shares in the Fund or (b) remain
invested in the Fund or exchange into any of the funds
of the Smith Barney Mutual funds ordinarily available,
which position the shareholder would be expected to
maintain for a significant period of time. All
relevant factors will be considered in determining
what constitutes an abusive pattern of exchanges.
PERFORMANCE INFORMATION
From time to time, the Company may advertise the
Fund's total return and average annual total return in
advertisements and/or other types of sales literature.
These figures are computed separately for Class A,
Class B, Class L and Class Y shares of the Fund.
These figures are based on historical earnings and are
not intended to indicate future performance. Total
return is computed for a specified period of time
assuming deduction of the maximum sales charge, if
any, from the initial amount invested and reinvestment
of all income dividends and capital gain distributions
on the reinvestment dates at prices calculated as
stated in the prospectus, then dividing the value of
the investment at the end of the period so calculated
by the initial amount invested and subtracting 100%.
The standard average annual total return, as
prescribed by the SEC is derived from this total
return, which provides the ending redeemable value.
Such standard total return information may also be
accompanied with nonstandard total return information
for differing periods computed in the same manner but
without annualizing the total return or taking sales
charges into account. The Company may also include
comparative performance information in advertising or
marketing the Fund's shares. Such performance
information may include data from Lipper Analytical
Services, Inc. and other financial publications.
From time to time, the Company may quote the Fund's
yield or total return in advertisements or in reports
and other communications to shareholders. The Company
may include comparative performance information in
advertising or marketing the Fund's shares. Such
performance information may include the following
industry and financial publications- Barron's,
Business Week, CDA Investment Technologies, Inc.,
Changing Times, Forbes, Fortune, Institutional
Investor, Investors Daily, Money, Morningstar Mutual
Fund Values, The New York Times, USA Today and The
Wall Street Journal. To the extent any advertisement
or sales literature of the Fund describes the expenses
or performance of any Class it will also disclose such
information for the other Classes.
Average Annual Total Return
"Average annual total return" figures are computed
according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P (1 + T)n = ERV
Where: P = a hypothetical initial
payment of $ 1,000.
T = average annual total
return.
n = number of years.
ERV = Ending Redeemable Value
of a hypothetical $1,000
investment made at the
beginning of a 1-, 5- or 10-year
period at the end of the
1-, 5- or 10-year period (or
fractional portion
thereof), assuming reinvestment of all
dividends and
distributions.
The ERV assumes complete redemption of the
hypothetical investment at the end of the measuring
period. The Fund's net investment income changes in
response to fluctuations in interest rates and the
expenses of the Fund.
Aggregate Total Return
The Fund's "aggregate total return," as described
below, represents the cumulative change in the value
of an investment in the Fund for the specified period
and is computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial
payment of $10,000.
ERV = Ending Redeemable Value
of a hypothetical
$10,000 investment made
at the beginning of the
1-, 5- or 10-year period
at the end of the 1-, 5-
or 10-year period (or
fractional portion
thereof), assuming
reinvestment of all
dividends and
distributions.
The ERV assumes complete redemption of the
hypothetical investment at the end of the measuring
period.
Performance will vary from time to time depending on
market conditions, the composition of the Fund's
portfolio and operating expenses. Consequently, any
given performance quotation should not be considered
representative of the Fund's performance for any
specified period in the future. Because performance
will vary, it may not provide a basis for comparing an
investment in the Fund with certain bank deposits or
other investments that pay a fixed yield for a stated
period of time.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
Each Fund's policy is to distribute its net investment
income and net realized capital gains, if any,
annually. The Fund may also pay additional dividends
shortly before December 31 from certain amounts of
undistributed ordinary and capital gains realized, in
order to avoid a Federal excise tax liability.
If a shareholder does not otherwise instruct,
dividends and capital gains distributions will be
reinvested automatically in additional shares of the
same Class at net asset value, subject to no sales
charge or deferred sales charge. A shareholder may
change the option at any time by notifying his Salomon
Smith Barney Financial Consultant or Dealer
Representative. Shareholders whose account is held
directly at the sub-transfer agent should notify them
in writing, requesting a change to this reinvest
option.
The per share dividends on Class B and Class L shares
of a Fund may be lower than the per share dividends on
Class A and Class Y shares principally as a result of
the distribution fee applicable with respect to Class
B and Class L shares. The per share dividends on Class
A shares may be lower than the per share dividends on
Class Y shares principally as a result of the service
fee applicable to Class A shares. Distributions of
capital gains, if any, will be in the same amount for
Class A, Class B, Class L and Class Y shares.
Taxes
The following is a summary of the material United
States federal income tax considerations regarding the
purchase, ownership and disposition of shares of the
Funds. Each Fund will be treated as a separate
corporation for federal income taxes, including
qualification as a regulated investment company; and
the following discussion applies separately to each
Fund. Each prospective shareholder is urged to consult
his own tax adviser with respect to the specific
federal, state, local and foreign tax consequences of
investing in a Fund. The summary is based on the laws
in effect on the date of this SAI, which are subject
to change.
The Fund and Its Investments
The Fund intends to qualify to be treated as a
regulated investment company each taxable year under
the Code. To so qualify, the Fund must, among other
things: (a) derive at least 90% of its gross income in
each taxable year from dividends, interest, payments
with respect to securities loans and gains from the
sale or other disposition of stock or securities or
foreign currencies, or other income (including, but
not limited to, gains from options, futures or forward
contracts) derived with respect to its business of
investing in such stock, securities or currencies; and
(b) diversify its holdings so that, at the end of each
quarter of the Fund's taxable year, (i) at least 50%
of the market value of the Fund's assets is
represented by cash, securities of other regulated
investment companies, United States government
securities and other securities, with such other
securities limited, in respect of any one issuer, to
an amount not greater than 5% of the Fund's assets and
not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25%
of the value of its assets is invested in the
securities (other than United States government
securities or securities of other regulated investment
companies) of any one issuer or any two or more
issuers that the Fund controls and are determined to
be engaged in the same or similar trades or businesses
or related trades or businesses.
As a regulated investment company, the Fund will not
be subject to United States federal income tax on its
net investment income (i.e., income other than its net
realized long- and short-term capital gains) and its
net realized long- and short-term capital gains, if
any, that it distributes to its shareholders, provided
an amount equal to at least 90% of the sum of its
investment company taxable income (i.e., 90% of its
taxable income minus the excess, if any, of its net
realized long-term capital gains over its net realized
short-term capital losses (including any capital loss
carryovers), plus or minus certain other adjustments
as specified in the Code) and its net tax-exempt
income for the taxable year is distributed in
compliance with the Code's timing and other
requirements but will be subject to tax at regular
corporate rates on any taxable income or gains it does
not distribute. Furthermore, the Fund will be subject
to a United States corporate income tax with respect
to such distributed amounts in any year it fails to
qualify as a regulated investment company or fails to
meet this distribution requirement. The Code imposes a
4% nondeductible excise tax on the Fund to the extent
it does not distribute by the end of any calendar year
at least 98% of its net investment income for that
year and 98% of the net amount of its capital gains
(both long-and short-term) for the one-year period
ending, as a general rule, on October 31 of that year.
For this purpose, however, any income or gain retained
by the Fund that is subject to corporate income tax
will be considered to have been distributed by year-
end. In addition, the minimum amounts that must be
distributed in any year to avoid the excise tax will
be increased or decreased to reflect any
underdistribution or overdistribution, as the case may
be, from the previous year. The Fund anticipates that
it will pay such dividends and will make such
distributions as are necessary in order to avoid the
application of this tax.
If, in any taxable year, the Fund fails to qualify as
a regulated investment company under the Code or fails
to meet the distribution requirement, it would be
taxed in the same manner as an ordinary corporation
and distributions to its shareholders would not be
deductible by the Fund in computing its taxable
income. In addition, in the event of a failure to
qualify, the Fund's distributions, to the extent
derived from the Fund's current or accumulated
earnings and profits would constitute dividends
(eligible for the corporate dividends-received
deduction) which are taxable to shareholders as
ordinary income, even though those distributions might
otherwise (at least in part) have been treated in the
shareholders' hands as long-term capital gains. If
the Fund fails to qualify as a regulated investment
company in any year, it must pay out its earnings and
profits accumulated in that year in order to qualify
again as a regulated investment company. In addition,
if the Fund failed to qualify as a regulated
investment company for a period greater than one
taxable year, the Fund may be required to recognize
any net built-in gains (the excess of the aggregate
gains, including items of income, over aggregate
losses that would have been realized if it had been
liquidated) in order to qualify as a regulated
investment company in a subsequent year.
The Fund's transactions in foreign currencies, forward
contracts, options and futures contracts (including
options and futures contracts on foreign currencies)
will be subject to special provisions of the Code
(including provisions relating to "hedging
transactions" and "straddles") that, among other
things, may affect the character of gains and losses
realized by the Fund (i.e., may affect whether gains
or losses are ordinary or capital), accelerate
recognition of income to the Fund and defer Fund
losses. These rules could therefore affect the
character, amount and timing of distributions to
shareholders. These provisions also (a) will require
the Fund to mark-to-market certain types of the
positions in its portfolio (i.e., treat them as if
they were closed out) and (b) may cause the Fund to
recognize income without receiving cash with which to
pay dividends or make distributions in amounts
necessary to satisfy the distribution requirements for
avoiding income and excise taxes. The Fund will
monitor its transactions, will make the appropriate
tax elections and will make the appropriate entries in
its books and records when it acquires any foreign
currency, forward contract, option, futures contract
or hedged investment in order to mitigate the effect
of these rules and prevent disqualification of the
Fund as a regulated investment company.
The Fund's investment in Section 1256 contracts, such
as regulated futures contracts, most forward currency
contracts traded in the interbank market and options
on most stock indices, are subject to special tax
rules. All section 1256 contracts held by the Fund at
the end of its taxable year are required to be marked
to their market value, and any unrealized gain or loss
on those positions will be included in the Fund's
income as if each position had been sold for its fair
market value at the end of the taxable year. The
resulting gain or loss will be combined with any gain
or loss realized by the Fund from positions in section
1256 contracts closed during the taxable year.
Provided such positions were held as capital assets
and were not part of a "hedging transaction" nor part
of a "straddle," 60% of the resulting net gain or loss
will be treated as long-term capital gain or loss, and
40% of such net gain or loss will be treated as short-
term capital gain or loss, regardless of the period of
time the positions were actually held by the Fund.
Foreign Investments. Dividends or other income
(including, in some cases, capital gains) received by
the Fund from investments in foreign securities may be
subject to withholding and other taxes imposed by
foreign countries. Tax conventions between certain
countries and the United States may reduce or
eliminate such taxes in some cases. The Fund will not
be eligible to elect to treat any foreign taxes paid
by it as paid by its shareholders, who therefore will
not be entitled to credits for such taxes on their own
tax returns. Foreign taxes paid by the Fund will
reduce the return from the Fund's investments.
Passive Foreign Investment Companies. If the Fund
purchases shares in certain foreign investment
entities, called "passive foreign investment
companies" (a "PFIC"), it may be subject to United
States federal income tax on a portion of any "excess
distribution" or gain from the disposition of such
shares even if such income is distributed as a taxable
dividend by the Fund to its shareholders. Additional
charges in the nature of interest may be imposed on
the Fund in respect of deferred taxes arising from
such distributions or gains. If the Fund were to
invest in a PFIC and elected to treat the PFIC as a
"qualified electing fund" under the Code, in lieu of
the foregoing requirements, the Fund might be required
to include in income each year a portion of the
ordinary earnings and net capital gains of the
qualified electing fund, even if not distributed to
the Fund, and such amounts would be subject to the 90%
and excise tax distribution requirements described
above. In order to make this election, the Fund would
be required to obtain certain annual information from
the passive foreign investment companies in which it
invests, which may be difficult or not possible to
obtain.
Alternatively, the Fund may elect a mark-to-market
regime that would result in the Fund being treated as
if it had sold and repurchased all of the PFIC stock
at the end of each year. In this case, the Fund would
report gains as ordinary income and would deduct
losses as ordinary losses to the extent of previously
recognized gains. The election, once made, would be
effective for all subsequent taxable years of the
Fund, unless revoked with the consent of the IRS. By
making the election, the Fund could potentially
ameliorate the adverse tax consequences with respect
to its ownership of shares in a PFIC, but in any
particular year may be required to recognize income in
excess of the distributions it receives from PFICs and
its proceeds from dispositions of PFIC company stock.
The Fund may have to distribute this "phantom" income
and gain to satisfy its distribution requirement and
to avoid imposition of the 4% excise tax.
The Fund will make the appropriate tax elections, if
possible, and take any additional steps that are
necessary to mitigate the effect of these rules.
Taxation of United States Shareholders
Dividends and Distributions. Any dividend declared by
the Fund in October, November or December of any
calendar year and payable to shareholders of record on
a specified date in such a month shall be deemed to
have been received by each shareholder on December 31
of such calendar year and to have been paid by the
Fund not later than such December 31, provided such
dividend is actually paid by the Fund during January
of the following calendar year. The Fund intends to
distribute annually to its shareholders substantially
all of its investment company taxable income, and any
net realized long-term capital gains in excess of net
realized short-term capital losses (including any
capital loss carryovers).
Dividends of net investment income and distributions
of net realized short-term capital gains are taxable
to a United States shareholder as ordinary income,
whether paid in cash or in shares. Distributions of
net-long-term capital gains, if any, that the Fund
designates as capital gains dividends are taxable as
long-term capital gains, whether paid in cash or in
shares and regardless of how long a shareholder has
held shares of the Fund. Dividends and distributions
paid by the Fund attributable to dividends on stock of
U.S. corporations received by the Fund, with respect
to which the Fund meets certain holding period
requirements, will be eligible for the deduction for
dividends received by corporations. Distributions in
excess of the Fund's current and accumulated earnings
and profits will, as to each shareholder, be treated
as a tax-free return of capital to the extent of a
shareholder's basis in his shares of the Fund, and as
a capital gain thereafter (if the shareholder holds
his shares of the Fund as capital assets).
Shareholders receiving dividends or distributions in
the form of additional shares should be treated for
United States federal income tax purposes as receiving
a distribution in the amount equal to the amount of
money that the shareholders receiving cash dividends
or distributions will receive, and should have a cost
basis in the shares received equal to such amount.
Investors considering buying shares just prior to a
dividend or capital gain distribution should be aware
that, although the price of shares just purchased at
that time may reflect the amount of the forthcoming
distribution, such dividend or distribution may
nevertheless be taxable to them. If the Fund is the
holder of record of any stock on the record date for
any dividends payable with respect to such stock, such
dividends are included in the Fund's gross income not
as of the date received but as of the later of (a) the
date such stock became ex-dividend with respect to
such dividends (i.e., the date on which a buyer of the
stock would not be entitled to receive the declared,
but unpaid, dividends) or (b) the date the Fund
acquired such stock. Accordingly, in order to satisfy
its income distribution requirements, the Fund may be
required to pay dividends based on anticipated
earnings, and shareholders may receive dividends in an
earlier year than would otherwise be the case.
Sales of Shares. Upon the sale or exchange of his
shares, a shareholder will realize a taxable gain or
loss equal to the difference between the amount
realized and his basis in his shares. Such gain or
loss will be treated as capital gain or loss, if the
shares are capital assets in the shareholder's hands,
and will be long-term capital gain or loss if the
shares are held for more than one year and short-term
capital gain or loss if the shares are held for one
year or less. Any loss realized on a sale or exchange
will be disallowed to the extent the shares disposed
of are replaced, including replacement through the
reinvesting of dividends and capital gains
distributions in the Fund, within a 61-day period
beginning 30 days before and ending 30 days after the
disposition of the shares. In such a case, the basis
of the shares acquired will be increased to reflect
the disallowed loss. Any loss realized by a
shareholder on the sale of a Fund share held by the
shareholder for six months or less will be treated for
United States federal income tax purposes as a long-
term capital loss to the extent of any distributions
or deemed distributions of long-term capital gains
received by the shareholder with respect to such
share. If a shareholder incurs a sales charge in
acquiring shares of the Fund, disposes of those shares
within 90 days and then acquires shares in a mutual
fund for which the otherwise applicable sales charge
is reduced by reason of a reinvestment right (e.g., an
exchange privilege), the original sales charge will
not be taken into account in computing gain/loss on
the original shares to the extent the subsequent sales
charge is reduced. Instead, the disregarded portion
of the original sales charge will be added to the tax
basis in the newly acquired shares. Furthermore, the
same rule also applies to a disposition of the newly
acquired shares made within 90 days of the second
acquisition. This provision prevents a shareholder
from immediately deducting the sales charge by
shifting his or her investment in a family of mutual
funds.
Backup Withholding. The fund may be required to
withhold, for United States federal income tax
purposes, 31% of the dividends, distributions and
redemption proceeds payable to shareholders who fail
to provide the Fund with their correct taxpayer
identification number or to make required
certifications, or who have been notified by the IRS
that they are subject to backup withholding. Certain
shareholders are exempt from backup withholding.
Backup withholding is not an additional tax and any
amount withheld may be credited against a
shareholder's United States federal income tax
liabilities.
Notices. Shareholders will be notified annually by
the Fund as to the United States federal income tax
status of the dividends, distributions and deemed
distributions attributable to undistributed capital
gains (discussed above in "Taxes - Taxation of United
States Shareholders -Dividends and Distributions")
made by the Fund to its shareholders. Furthermore,
shareholders will also receive, if appropriate,
various written notices after the close of the Fund's
taxable year regarding the United States federal
income tax status of certain dividends, distributions
and deemed distributions that were paid (or that are
treated as having been paid) by the Fund to its
shareholders during the preceding taxable year.
Other Taxation
Distributions also may be subject to additional state,
local and foreign taxes depending on each
shareholder's particular situation.
The foregoing is only a summary of certain material
tax consequences affecting the Fund and its
shareholders. Shareholders are advised to consult
their own tax advisers with respect to the particular
tax consequences to them of an investment in the
Funds.
OTHER INFORMATION ABOUT THE COMPANY
The Company was incorporated under the laws of the
State of Maryland on July 16, 1986 under the name
Shearson Lehman Precious Metals and Minerals Fund Inc.
As the name of its sponsor has changed, the Company's
name has been changed on December 19, 1995 to Smith
Barney Natural Resources Fund Inc. (the "Natural
Resources Fund"). On November 29, 1999, the Board of
Directors voted to amend the Charter of the Company to
change its name to Smith Barney Sector Series Inc.,
with the Natural Resources Fund, Financial Services
Fund, Health Sciences Fund and Technology Fund each
classified as a series of the Company.
The Company offers shares of four separate series with
a par value of $.001 per share. Each Fund offers
shares currently classified into four Classes - A, B,
L and Y. Each Class of the Fund represents an
identical interest in the Fund's investment portfolio.
As a result, the Classes 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 pursuant to the Plan; (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. The
Company's Board of Directors does not anticipate that
there will be any conflicts among the interests of the
holders of the different Classes. The directors, on
an ongoing basis, will consider whether any such
conflict exists and, if so, take appropriate action.
As permitted by Maryland law, there will normally be
no meetings of shareholders for the purpose of
electing directors unless and until such time as less
than a majority of the directors holding office have
been elected by shareholders. At that time, the
directors then in office will call a shareholder's
meeting for the election of directors. The directors
must call a meeting of shareholders for the purpose of
voting upon the question of removal of any director
when requested in writing to do so by the record
holders of not less than 10% of the outstanding shares
of the Fund. At such a meeting, a director may be
removed after the holders of record of not less than a
majority of the outstanding shares of the Fund have
declared that the director be removed either by
declaration in writing or by votes cast in person or
by proxy. Except as set forth above, the directors
shall continue to hold office and may appoint
successor directors.
As used in the Prospectus and this Statement of
Additional Information, a "vote of a majority of the
outstanding voting securities" means the affirmative
vote of the lesser of (a) more than 50% of the
outstanding shares of the Company (or the affected
series or Class) or (b) 67% or more of such shares
present at a meeting if more than 50% of the
outstanding shares of the Company (or the affected
series or Class) are represented at the meeting in
person or by proxy. A series or Class shall be deemed
to be affected by a matter unless it is clear that the
interests of each series or Class in the matter are
identical or that the matter does not affect any
interest of the series or Class. The approval of a
management agreement or any change in a fundamental
investment policy would be effectively acted upon with
respect to the Fund only if approved by a "vote of a
majority of the outstanding voting securities" of the
Fund; however, the ratification of independent
accountants, the election of directors, and the
approval of a distribution agreement submitted to
shareholders are not subject to the separate voting
requirements and may be effectively acted upon by a
vote of the holders of a majority of all Company
shares voting without regard to series or Class.
Annual and Semi-annual Reports. The Fund sends its
shareholders a semi-annual report and an audited
annual report, which include listings of investment
securities held by the Fund at the end of the period
covered. In an effort to reduce the Fund's printing
and mailing costs, the Fund consolidates the mailing
of its semi-annual and annual reports by household.
This consolidation means that a household having
multiple accounts with the identical address of record
will receive a single copy of each report. In
addition, the Fund also consolidates the mailing of
its Prospectus so that a shareholder having multiple
accounts (that is, individual, IRA and/or Self-
Employed Retirement Plan accounts) will receive a
single Prospectus annually. Shareholders who do not
want this consolidation to apply to their accounts
should contact their Salomon Smith Barney Financial
Consultant or the transfer agent.
FINANCIAL STATEMENTS
As of the date of this SAI, the Funds had not yet
commenced operations. Consequently, there are no
financial statements for the Funds at this time.
OTHER INFORMATION
In an industry where the average portfolio manager has
seven years of experience (source: ICI, 1998), the
portfolio managers of Smith Barney Mutual Funds
average 21 years in the industry and 15 years with the
firm.
Smith Barney Mutual Funds offers more than 60 mutual
funds. We understand that many investors prefer an
active role in allocating the mix of funds in their
portfolio, while others want the asset allocation
decisions to be made by experienced managers.
That's why we offer four "styles" of fund management
that can be tailored to suit each investor's unique
financial goals.
Style Pure Series
Our Style Pure Series funds stay fully invested
within their asset class and investment style,
enabling investors to make asset allocation
decisions in conjunction with their Salomon
Smith Barney Financial Consultant.
Classic Investor Series
Our Classic Investor Series funds offer a range
of equity and fixed income strategies that seek
to capture opportunities across asset classes
and investment styles using disciplined
investment approaches.
The Concert Allocation Series
As a fund of funds, investors can select a
Concert Portfolio that may help their investment
needs. As needs change, investors can easily
choose another long-term, diversified investment
from our Concert family.
Special Discipline Series
Our Special Discipline Series funds are designed
for investors who are looking beyond more
traditional market categories: from natural
resources to a roster of state-specific
municipal funds.
SMITH BARNEY
SECTOR SERIES INC.
Financial Services Fund
Health Sciences Fund
Technology Fund
February 14, 2000
as amended July 1, 2000
SMITH BARNEY SECTOR SERIES INC.
388 Greenwich Street
New York, NY 10013
SALOMON SMITH
BARNEY
A Member of
Citigroup [Symbol]
2
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