<PAGE>
388 Greenwich Street
New York, New York 10013
April 7, 1999
Dear Shareholder:
I am writing to ask you for your vote on some important questions that
affect your investment in the Smith Barney Special Equities Fund ("Special
Equities Fund"). A special meeting of Special Equities Fund shareholders is
scheduled for May 14, 1999 to consider changes to the Fund. Shareholder
meetings are held by mutual fund companies periodically as important issues
arise requiring shareholder approval.
While we want you to attend your Fund's meeting, we understand that many
shareholders prefer to cast their vote by filling out and signing the enclosed
proxy. A proxy card is a ballot and when you vote your proxy, you tell us how
to vote on your behalf on important issues relating to your fund.
On January 7, 1999 the Board of Directors of Special Equities Fund approved
a proposed merger whereby Special Equities Fund shareholders would exchange
their shares for an equivalent dollar amount of shares in the Salomon Brothers
Small Cap Growth Fund ("Small Cap Growth Fund"). This proposed merger would
enable Special Equities Fund shareholders to continue to own an investment
made up of primarily smaller capitalized companies.
As part of a strategy to improve the performance of the Special Equities
Fund, Pam Milunovich took over management responsibilities on November 6,
1998. In addition to now managing the Special Equities Fund, Ms. Milunovich
has been and continues to be the manager of the Small Cap Growth Fund.
The Board of Directors of the Special Equities Fund has determined that it
is advantageous to combine the Special Equities Fund with the Small Cap Growth
Fund. Among the factors considered by the Board are the generally similar
investment objectives and policies of the two Funds. Moreover, the Board
considered management's belief that certain efficiencies can be obtained by
managing the portfolios as a single fund and that the combination will have a
beneficial impact on the shareholders of the Special Equities Fund.
We ask that you take a few moments to review the accompanying
prospectus/proxy statement carefully. If you do not plan to attend the
meeting, we ask that you complete the proxy card and return it as soon as
possible in the enclosed postage-paid envelope.
Your vote is important. Thank you for your time and consideration. If you
have any questions regarding this proposed merger, please contact your Salomon
Smith Barney Financial Consultant or dealer representative.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
<PAGE>
SMITH BARNEY SPECIAL EQUITIES FUND
388 Greenwich Street New York, New York 10013
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To be held on May 14, 1999
----------------
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of Smith Barney Special Equities Fund (the "Special Equities
Fund"), will be held at 388 Greenwich Street, New York, New York on May 14,
1999, at 2:00 p.m. for the following purposes:
1. To consider and act upon the Agreement and Plan of Reorganization (the
"Plan") dated as of February 3, 1999 providing for: (i) the acquisition of
substantially all of the assets of the Special Equities Fund by the Salomon
Brothers Small Cap Growth Fund, a portfolio of the Salomon Brothers Series
Funds Inc (the "Small Cap Growth Fund") in exchange for shares of the Small
Cap Growth Fund and the assumption by the Small Cap Growth Fund of
substantially all of the liabilities of the Special Equities Fund; (ii) the
distribution of such shares of the Small Cap Growth Fund to shareholders of
the Special Equities Fund in liquidation of the Special Equities Fund; and
(iii) the subsequent termination of the Special Equities Fund.
2. To transact any other business which may properly come before the
Meeting or any adjournment thereof.
The Directors of the Special Equities Fund have approved the transaction and
have fixed the close of business on March 15, 1999, as the record date for
determining shareholders of the Special Equities Fund entitled to notice of
and to vote at this Meeting or any adjournment thereof.
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND IN PERSON ARE URGED TO SIGN AND RETURN WITHOUT DELAY THE
ENCLOSED PROXY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE, SO THAT
THEIR SHARES MAY BE REPRESENTED AT THE MEETING. INSTRUCTIONS FOR THE PROPER
EXECUTION OF PROXIES ARE SET FORTH ON THE FOLLOWING PAGE. PROXIES MAY BE
REVOKED AT ANY TIME BEFORE THEY ARE EXERCISED BY THE SUBSEQUENT EXECUTION AND
SUBMISSION OF A REVISED PROXY, BY GIVING WRITTEN NOTICE OF REVOCATION TO THE
SPECIAL EQUITIES FUND AT ANY TIME BEFORE THE PROXY IS EXERCISED OR BY VOTING
IN PERSON AT THE MEETING.
By order of the Directors
Christina T. Sydor
Secretary
April 7, 1999
----------------
YOUR PROMPT ATTENTION TO THE ENCLOSED PROXY WILL HELP TO AVOID THE EXPENSE OF
FURTHER SOLICITATION.
<PAGE>
PROSPECTUS/PROXY STATEMENT
Dated April 7, 1999
Acquisition Of The Assets Of
SMITH BARNEY INVESTMENT FUNDS INC. --
SPECIAL EQUITIES FUND
388 Greenwich Street
New York, New York 10013
(800) 451-2010
By And In Exchange For Shares Of
SALOMON BROTHERS SERIES FUNDS INC --
SMALL CAP GROWTH FUND
7 World Trade Center
New York, New York 10048
(800) SALOMON
This Prospectus/Proxy Statement is being furnished to shareholders of Smith
Barney Special Equities Fund (the "Special Equities Fund"), a separate series
of Smith Barney Investment Funds Inc. (the "Investment Funds"), in connection
with a proposed Agreement and Plan of Reorganization (the "Plan"), to be
submitted to shareholders for consideration at a Special Meeting of
Shareholders to be held on May 14, 1999 at 2:00 p.m., New York City time, at
the offices of Salomon Smith Barney Inc., located at 388 Greenwich Street,
23rd Floor, New York, New York, and any adjournments thereof (collectively,
the "Meeting"). The Plan provides for all of the assets of the Special
Equities Fund to be acquired by the Salomon Brothers Small Cap Growth Fund
(the "Small Cap Growth Fund"), a separate series of Salomon Brothers Series
Funds Inc (the "Series Funds"), in exchange for shares of the Small Cap Growth
Fund and the assumption by the Small Cap Growth Fund of substantially all
liabilities of the Special Equities Fund (hereinafter referred to as the
"Reorganization"). (The Special Equities Fund and the Small Cap Growth Fund
are herein referred to individually as a "Fund" and collectively as the
"Funds"). Following the Reorganization, shares of the Small Cap Growth Fund
will be distributed to shareholders of the Special Equities Fund in
liquidation of the Special Equities Fund and the Special Equities Fund will be
dissolved. As a result of the proposed Reorganization, each shareholder of the
Special Equities Fund will receive that number of shares of the Small Cap
Growth Fund having an aggregate net asset value equal to the aggregate net
asset value of such shareholder's shares of the Special Equities Fund. Holders
of Class A shares in the Special Equities Fund will receive Class A shares of
the Small Cap Growth Fund, and no sales charge will be imposed on the Class A
shares of the Small Cap Growth Fund received by the Special Equities Fund
Class A shareholders. Holders of Class B and Class L shares in the Special
Equities Fund will receive Class B and Class 2 shares, respectively, of the
Small Cap Growth Fund; any contingent deferred sales charge ("CDSC") which is
applicable to a shareholder's investment will continue to apply, and, in
calculating the applicable CDSC payable upon the subsequent redemption of
Class B, Class 2 or certain Class A shares of the Small Cap Growth Fund, the
period during which a Special Equities Fund shareholder held the shares of the
Special Equities Fund exchanged for such Small Cap Growth Fund shares redeemed
will be counted. This transaction is being structured as a tax-free
reorganization.
The Small Cap Growth Fund is an open-end diversified management investment
company whose investment objective is to seek long-term growth of capital by
investing primarily in securities of companies with market capitalizations at
the time of purchase similar to that of companies included in the Russell 2000
Index. The Russell 2000 Index includes companies with market capitalizations
below the top 1,000 stocks of the equity market. As of December 31, 1998, the
market capitalizations of companies included in the Russell 2000 Index ranged
from $4.4 million to $3.1 billion. The Special Equities Fund is an open-end
diversified management investment company whose investment objective is to
seek long-term capital appreciation. Each Fund invests primarily, but not
exclusively, in equity securities (common and preferred stock). Salomon
Brothers Asset Management Inc ("SBAM") serves as investment manager to the
Small Cap Growth Fund and SSBC Fund
1
<PAGE>
Management Inc. ("SSBC") serves as the investment manager of the Special
Equities Fund. SBAM and SSBC are both subsidiaries of Salomon Smith Barney
Holdings Inc. ("Holdings").
The investment policies of the Small Cap Growth Fund are generally similar
to those of the Special Equities Fund. However, certain differences in the
Funds' investment policies are described under "Comparison of Investment
Objectives and Policies" in this Prospectus/Proxy Statement.
This Prospectus/Proxy Statement, which should be retained for future
reference, sets forth concisely information about the Small Cap Growth Fund
that a prospective investor should know before investing. Certain relevant
documents listed below, which have been filed with the Securities and Exchange
Commission ("SEC"), are incorporated by reference. A Statement of Additional
Information dated April 7, 1999 relating to this Prospectus/Proxy Statement
and the Reorganization, has been filed with the SEC and is incorporated by
reference into this Prospectus/Proxy Statement. A copy of such Statement of
Additional Information and the Special Equities Fund Prospectus referred to
below are available upon request and without charge by writing to the Special
Equities Fund at the address listed on the cover page of this Prospectus/Proxy
Statement or by calling (800) 451-2010.
1. The Prospectus dated May 1, 1998, as supplemented on February 1, 1999
and February 25, 1999 of the Small Cap Growth Fund is incorporated in its
entirety by reference and a copy is included herewith.
2. The Prospectus dated April 30, 1998, as supplemented on June 12, 1998,
October 5, 1998, November 24, 1998 and January 11, 1999 of the Special
Equities Fund is incorporated in its entirety by reference.
Also accompanying this Prospectus/Proxy Statement as Exhibit A is a copy of
the Plan.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Additional Materials...................................................... 4
Fee Tables................................................................ 4
Summary................................................................... 6
Risk Factors.............................................................. 10
Reasons for the Reorganization............................................ 10
Information about the Reorganization...................................... 11
Information about the Small Cap Growth Fund............................... 15
Information about the Special Equities Fund............................... 16
Market Update............................................................. 17
Small Cap Market Outlook.................................................. 17
Comparison of Investment Objectives and Policies.......................... 19
Comparative Information on Shareholders' Rights........................... 23
Additional Information About the Small Cap Growth Fund and the Special
Equities Fund............................................................ 24
Other Business............................................................ 24
Voting Information........................................................ 25
Financial Statements...................................................... 26
Legal Matters............................................................. 26
Exhibit A: Agreement and Plan of Reorganization........................... A-1
</TABLE>
3
<PAGE>
Additional Materials
The following additional materials, which have been incorporated by
reference into the Statement of Additional Information dated April 7, 1999
relating to this Prospectus/Proxy Statement and the Reorganization, will be
sent to all shareholders requesting a copy of such Statement of Additional
Information.
1.Statement of Additional Information of Series Funds dated May 1, 1998.
2. Statement of Additional Information of the Investment Funds dated April 30,
1998
3. Annual Report of Salomon Brothers Investment Series, which includes the
financial statements of Small Cap Growth Fund dated December 31, 1998.
4.Annual Report of Special Equities Fund dated December 31, 1998.
5.Pro forma financial statements.
Fee Tables
Following are tables showing current costs and expenses of the Class A,
Class B and Class L or Class 2 shares of the Special Equities Fund and the
Small Cap Growth Fund and the pro forma costs and expenses expected to be
incurred by each such Class of the Small Cap Growth Fund after giving effect
to the Reorganization, each based on the maximum sales charge or maximum CDSC
that may be incurred at the time of purchase or redemption. Unless otherwise
indicated, these figures are based on each Fund's operating expenses for the
fiscal year ended December 31, 1998.
Class A Shares
<TABLE>
<CAPTION>
Special Small Cap
Equities Growth Pro Forma****
-------- --------- -------------
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 5.00% 5.75% 5.75%
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever is
lower) None* None* None*
- -----------------------------------------------------------------------------
Annual Operating Expenses
(as a percentage of average net assets)
Management and Administration fees .75% .85%** .75%***
12b-1 fees .25 .25 .25
Other expenses .24 1.25 .24
---- ---- ----
Total Operating Expenses** 1.24% 2.35% 1.24%
</TABLE>
- --------
* Purchases of Class A shares of the Special Equities Fund and the Small
Cap Growth Fund, which, when combined with current holdings of Class A
shares offered with a sales charge equal or exceed $500,000 and
$1,000,000, respectively, in the aggregate, will be made at net asset
value with no sales charge, but will be subject to a CDSC of 1.00% on
redemptions made within 12 months.
**As of December 31, 1998, SBAM waived its management fee. After taking into
account such waiver total operating expenses were 1.50%.
*** Reflects the reduction in the management fee of the Small Cap Growth Fund
upon completion of the Reorganization.
**** The pro forma financial figures are intended to provide shareholders with
information about the continuing impact of the Reorganization as if the
Reorganization had taken place as of December 31, 1998.
Class B Shares
<TABLE>
<CAPTION>
Special Small Cap
Equities Growth Pro Forma*****
-------- --------- --------------
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) None None None
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever is
lower) 5.00%* 5.00%* 5.00%*
- ------------------------------------------------------------------------------
Annual Operating Expenses
(as a percentage of average net assets)
Management fees .75% .85%** .75%****
12b-1 fees*** 1.00 1.00 1.00
Other expenses .24 1.25 .24
---- ---- ----
Total Operating Expenses** 1.99% 3.10% 1.99%
</TABLE>
4
<PAGE>
- --------
*The CDSC applicable to Class B shares of the Special Equities Fund
declines by 1% each year after purchase to zero. The CDSC applicable to
Class B shares of the Small Cap Growth Fund and on a Pro Forma basis
decline by 1% per year in each of the second, third, fifth, sixth and
seventh years after purchase to zero.
**As of December 31, 1998, SBAM waived its management fee. After taking
into account such waiver total operating expenses were 2.25%.
*** Upon conversion of Class B shares to Class A shares, such shares will no
longer be subject to a distribution fee, but will be subject to a 0.25%
service fee.
**** Reflects the reduction in the management fee of the Small Cap Growth
Fund upon completion of the Reorganization.
***** The pro forma financial figures are intended to provide shareholders
with information about the continuing impact of the Reorganization as if
the Reorganization had taken place as of December 31, 1998.
Class L and 2 Shares
<TABLE>
<CAPTION>
Special Small Cap
Equities Growth Pro Forma****
-------- --------- -------------
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum sales charge imposed on purchases
(as a percentage of offering price) 1.00% 1.00% 1.00%
Maximum CDSC (as a percentage of original
cost or redemption proceeds, whichever is
lower) 1.00%* 1.00%* 1.00%*
- ------------------------------------------------------------------------------
Annual Operating Expenses
(as a percentage of average net assets)
Management and Administration fees .75% .85%*** .75%****
12b-1 fees** 1.00 1.00 1.00
Other expenses .24 1.20 .24
---- ---- ----
Total Operating Expenses*** 1.99% 3.05% 1.99%
</TABLE>
- --------
*The CDSC applicable to Class 2 and Class L shares is not imposed on
redemptions made after the first 12 months after purchase.
** Class L and Class 2 shares do not have a conversion feature and,
therefore, are subject to an ongoing distribution fee. As a result,
long-term shareholders of Class L or Class 2 shares may pay more than
the economic equivalent of the maximum front-end sales charge permitted
by the National Association of Securities Dealers, Inc.
*** As of December 31, 1998, SBAM waived its management fee. After taking
into account such waiver total operating expenses were 2.25%.
**** Reflects the reduction in the management fee of the Small Cap Growth
Fund upon completion of the Reorganization.
***** The pro forma financial figures are intended to provide shareholders
with information about the continuing impact of the Reorganization as if
the Reorganization had taken place as of December 31, 1998.
Examples
The following examples are intended to assist an investor in understanding
the various costs an investor in the Funds will bear directly or indirectly.
The examples assume payment by the Funds of operating expenses at the levels
set forth in the tables above.
An investor would pay the following expenses on a $1,000 investment,
assuming (1) 5.00% annual return and (2) redemption at the end of each time
period:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
------ ------- ------- ---------
<S> <C> <C> <C> <C>
Class A
Special Equities Fund.......................... $62 $ 87 $115 $192
Small Cap Growth Fund.......................... 79 125 173 306
Pro Forma...................................... 69 95 122 199
Class B
Special Equities Fund.......................... 70 92 117 212
Small Cap Growth Fund.......................... 81 124 180 303
Pro Forma...................................... 70 92 117 212
Class L or Class 2
Special Equities Fund.......................... 40 72 116 239
Small Cap Growth Fund.......................... 50 103 169 343
Pro Forma...................................... 40 72 116 239
</TABLE>
- --------
* Ten-year figures assume conversion of Class B shares of Special Equities
Fund, Small Cap Growth Fund and Pro Forma to Class A shares at the end of
the eighth year, seventh year and seventh year respectively, following the
date of purchase.
5
<PAGE>
An investor would pay the following expenses on the same investment,
assuming the same annual return and no redemption:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years*
------ ------- ------- ---------
<S> <C> <C> <C> <C>
Class A
Special Equities Fund.......................... $62 $ 87 $115 $192
Small Cap Growth Fund.......................... 79 125 173 306
Pro Forma...................................... 69 95 122 199
Class B
Special Equities Fund.......................... 20 62 107 212
Small Cap Growth Fund.......................... 31 94 160 303
Pro Forma...................................... 20 62 107 212
Class L or Class 2
Special Equities Fund.......................... 30 72 116 239
Small Cap Growth Fund.......................... 40 103 169 343
Pro Forma...................................... 30 72 116 239
</TABLE>
- --------
* Ten-year figures assume conversion of Class B shares of Special Equities
Fund and Small Cap Growth Fund and Pro Forma to Class A shares at the end of
the eighth year, seventh year and seventh year, respectively, following the
date of purchase.
The examples also provide a means for the investor to compare expense levels
of funds with different fee structures over varying investment periods. To
facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. These examples should not be considered a
representation of past or future expenses and actual expenses may be greater
or less than those shown.
Summary
This summary is qualified in its entirety by reference to the additional
information contained elsewhere in this Prospectus/Proxy Statement, the
Prospectus of the Small Cap Growth Fund dated May 1, 1998, as supplemented on
February 1, 1999 and February 25, 1999, the Statement of Additional
Information of the Series Funds, dated May 1, 1998, the Prospectus of the
Special Equities Fund dated April 30, 1998, as supplemented on June 12, 1998,
October 5, 1998, November 24, 1998 and January 11, 1999, the Statement of
Additional Information of the Investment Funds dated April 30, 1998 and the
Plan, a copy of which is attached to this Prospectus/Proxy Statement as
Exhibit A.
Proposed Reorganization. The Plan provides for the transfer of all or
substantially all of the assets of the Special Equities Fund in exchange for
shares of the Small Cap Growth Fund and the assumption by the Small Cap Growth
Fund of substantially all liabilities of the Special Equities Fund. The Plan
also calls for the distribution of shares of the Small Cap Growth Fund to the
Special Equities Fund shareholders in liquidation of the Special Equities
Fund. As a result of the Reorganization, each shareholder of the Special
Equities Fund will become the owner of that number of full and fractional
shares of the Small Cap Growth Fund having an aggregate net asset value equal
to the aggregate net asset value of their shares of the Special Equities Fund,
as of the close of business on the date that the Special Equities Fund's
assets are exchanged for shares of the Small Cap Growth Fund. (Shareholders of
Class A, Class B and Class L shares of the Special Equities Fund will receive
Class A, Class B and Class 2 shares, respectively, of the Small Cap Growth
Fund.) See "Information About the Reorganization." The Small Cap Growth Fund
also offers Class O shares which are available only to existing Class O
shareholders of a fund in the Salomon Brothers Investment Series.
For the reasons set forth below under "Reasons for the Reorganization," the
Board of Directors of the Investment Funds, on behalf of the Special Equities
Fund, including all of the "non-interested" Directors, as that term is defined
in the Investment Company Act of 1940, as amended (the "1940 Act"), has
unanimously concluded that the Reorganization would be in the best interests
of the shareholders of the Special Equities Fund and that the interests of the
Special Equities Fund's existing shareholders will not be diluted as a result
of the transaction contemplated by the Reorganization, and therefore has
submitted the Plan for approval by the Fund's shareholders. The Board of
Directors of the Series Funds has reached similar conclusions and also
recommends approval of the Plan effecting the Reorganization.
6
<PAGE>
Approval of the Reorganization will require the affirmative vote of a
majority, as defined in the 1940 Act, of the outstanding shares of the Special
Equities Fund, which is the lesser of (i) 67% of the voting securities of the
Special Equities Fund present at the Meeting, if the holders of more than 50%
of the outstanding voting securities of the Special Equities Fund are present
or represented by proxy, or (ii) more than 50% of the outstanding shares of
the Special Equities Fund. For purposes of voting with respect to the
Reorganization, the Class A, Class B and Class L shares of the Special
Equities Fund will vote together as a single class. No vote of the
shareholders of the Small Cap Growth Fund is required. See "Voting
Information."
In addition, completion of the Reorganization is conditioned upon receipt of
an order from the SEC exempting the Reorganization from certain provisions of
the 1940 Act. See "Information about the Reorganization--Plan of
Reorganization."
Tax Consequences. Prior to completion of the Reorganization, the Special
Equities Fund will have received an opinion from counsel that, upon the
Reorganization and the transfer of the assets of the Special Equities Fund, no
gain or loss will be recognized by the Special Equities Fund or its
shareholders for Federal income tax purposes. The holding period and tax basis
of shares of the Small Cap Growth Fund that are received by each Special
Equities Fund shareholder will be the same as the holding period and tax basis
of the shares of the Special Equities Fund previously held by such
shareholder. In addition, the holding period and tax basis of the assets of
the Special Equities Fund in the hands of the Small Cap Growth Fund as a
result of the Reorganization will be the same as in the hands of the Special
Equities Fund immediately prior to the Reorganization.
Investment Objectives, Policies and Restrictions. The Special Equities Fund
and the Small Cap Growth Fund have generally similar investment policies and
restrictions. The Small Cap Growth Fund seeks long-term growth of capital and
the Special Equities Fund seeks long-term capital appreciation. Both Funds
invest primarily in equity securities and are both classified as diversified
investment companies.
Although the respective investment policies of the Small Cap Growth Fund and
the Special Equities Fund are generally similar, shareholders of the Special
Equities Fund should consider certain differences in such objectives and
policies. See "Information About the Small Cap Growth Fund," "Information
About the Special Equities Fund" and "Comparison of Investment Objectives and
Policies."
Fees and Expenses. The Small Cap Growth Fund pays SBAM a monthly investment
advisory fee calculated at the annual rate of 0.80% of the Fund's average
daily net assets, while the Special Equities Fund pays SSBC a monthly
investment advisory fee calculated at the rate of 0.55% of the Fund's average
daily net assets. In addition to the investment advisory fees, both Funds pay
an administration fee payable monthly at the annual rate of 0.05% and 0.20% of
the Small Cap Growth Fund's and the Special Equities Fund's respective average
daily net assets. SBAM has delegated its responsibilities for administration
of the Small Cap Growth Fund to SSBC and pays SSBC this administration fee.
However, SBAM has agreed to reduce its advisory fee to 0.70% of the Small Cap
Growth Fund's average daily net assets upon completion of the Reorganization
so that the overall management and administration fee payable by former
Special Equities Fund shareholders will continue to be 0.75% subsequent to the
Reorganization.
The expense ratio of the Small Cap Growth Fund subsequent to the
Reorganization is expected to be equal to that of the Special Equities Fund.
See "Reasons for the Reorganization." Total Small Cap Growth Fund operating
expenses stated as a percentage of average net assets for the fiscal year
ended December 31, 1998 for Class A, Class B and Class 2 shares were 1.50%,
2.25% and 2.25%, respectively. These figures reflect a voluntary expense cap
imposed by SBAM. See "Fee Tables" above. Total Special Equities Fund operating
expenses stated as a percentage of average net assets as of the year ended
December 31, 1998 for Class A, Class B and Class L shares were 1.24%, 1.99%
and 1.99%, respectively. Total Small Cap Growth Fund annual operating expenses
stated as a percentage of average net assets subsequent to the Reorganization
(based upon pro forma financial information as of December 31, 1998) are
expected to be 1.24%, 1.99% and 1.99%, for Class A, Class B and Class 2
shares, respectively. SBAM has agreed to waive its management fee and/or
reimburse
7
<PAGE>
the Small Cap Growth Fund to ensure that the expense ratios of the Small Cap
Growth Fund for one year subsequent to the Reorganization do not exceed the
expense ratios of the Special Equities Fund prior to the Reorganization.
Each class of shares (except Class O shares of the Small Cap Growth Fund) of
both Funds is sold subject to distribution plans adopted pursuant to Rule 12b-
1 under the 1940 Act. Under the plans applicable to each Fund, Salomon Smith
Barney Inc. ("Salomon Smith Barney") is paid a service fee calculated at the
annual rate of 0.25% of the value of each Fund's average daily net assets
attributable to the Fund's Class A, Class B and Class L or Class 2 shares, as
the case may be. In addition, each Fund's Class B and, where applicable, Class
L and Class 2 shares pay a distribution fee primarily intended to compensate
Salomon Smith Barney for its initial expense of paying selected dealers and
financial consultants a commission upon sales of the respective shares,
preparation of sales literature, advertising and printing and distributing
prospectuses, statements of additional information and other materials. The
distribution fees for both Funds' Class B shares and Class L or Class 2 shares
are calculated at the annual rate of 0.75% of the value of the respective
Fund's average net assets attributable to the shares of the respective class.
Purchase and Redemption Procedures. Purchase of shares of the Special
Equities Fund must be made: (i) through a Salomon Smith Barney Financial
Consultant; (ii) through an investment dealer in the selling group or a broker
that clears securities transactions through Salomon Smith Barney (a "dealer
representative") or (iii) from the Fund, but only if investing through certain
qualified plans or certain dealer representatives. Shares of the Small Cap
Growth Fund may be purchased through First Data Investors Services Group, Inc.
("First Data"), the Fund's transfer agent or from Salomon Smith Barney or
other selected dealers. Effective March 8, 1999, the Special Equities Fund
ceased accepting new investments. Class A shares of the Small Cap Growth Fund
and the Special Equities Fund are sold subject to a maximum initial sales
charge of 5.75% and 5.00%, respectively, of the public offering price. Class B
shares of both Funds are sold without an initial sales charge. Class L and
Class 2 shares are sold subject to a 1.00% initial sales charge. Class B and
Class L or Class 2 shares of both Funds are subject to certain higher ongoing
expenses than Class A shares and a CDSC payable upon certain redemptions.
Purchases of Class A shares of the Special Equities Fund and the Small Cap
Growth Fund which, when combined with current holdings of Class A shares
offered with a sales charge equal or exceed $500,000 and $1,000,000,
respectively, may be purchased at net asset value, but are subject to a 1%
CDSC if redeemed within the first year of purchase. Otherwise, Class A shares
of both Funds may be redeemed at their next determined net asset value per
share without charge. Class B shares of both Funds may be redeemed at their
next determined net asset value per share, subject to a maximum CDSC of 5.00%
of the lower of original cost of the shares or redemption proceeds. The CDSC
applicable on redemptions of Class B shares of the Small Cap Growth Fund are
at the rates set forth in the following table:
<TABLE>
<CAPTION>
Years since purchased CDSC
- --------------------- ----
<S> <C>
First.................................................................... 5%
Second................................................................... 4%
Third.................................................................... 3%
Fourth................................................................... 3%
Fifth.................................................................... 2%
Sixth.................................................................... 1%
Seventh*................................................................. 0%
</TABLE>
- --------
* Class B shares of the Small Cap Growth Fund received in exchange for Class B
shares of the Special Equities Fund as a result of the Reorganization, will
continue to be subject to the CDSC schedule in effect for the Special
Equities Fund at the time of purchase.
8
<PAGE>
The CDSC applicable on redemptions of Class B shares of the Special Equities
Fund are at the rates set forth in the following table:
<TABLE>
<CAPTION>
Years since purchased CDSC
- --------------------- ----
<S> <C>
First.................................................................... 5%
Second................................................................... 4%
Third.................................................................... 3%
Fourth................................................................... 2%
Fifth.................................................................... 1%
Sixth and thereafter..................................................... 0%
</TABLE>
Class B shares of either Fund will convert automatically to Class A shares
of such Fund, based on relative net asset value, seven years and eight years
after the date of the original purchase of such shares of the Small Cap Growth
Fund and the Special Equities Fund, respectively. Upon conversion, these
shares will no longer be subject to an annual distribution fee. Class B shares
of the Small Cap Growth Fund that are received in exchange for Class B shares
of the Special Equities Fund as a result of the Reorganization, will convert
to Class A shares seven years after the date of the original purchase of such
shares. In addition, a certain portion of Class B shares that have been
acquired through the reinvestment of dividends and distributions will be
converted to Class A shares of the respective Fund at that time.
Class L shares and Class 2 shares are subject to a CDSC of 1% if redeemed
within the first year after purchase.
Shares of the Small Cap Growth Fund may be redeemed through selected dealers
or by submitting a written request to First Data. Shares of the Special
Equities Fund may be redeemed through a Salomon Smith Barney Financial
Consultant, through a dealer representative or by submitting a written request
to First Data. Shareholders of both Funds who hold shares directly with the
Fund may make redemption requests by telephone. See "Redemption of Shares" in
the accompanying Prospectus of the Small Cap Growth Fund for a more detailed
discussion of redemption procedures applicable to the Small Cap Growth Fund.
Exchange Privileges. Shareholders of the Small Cap Growth Fund may exchange
all or part of their shares for shares of the same class of any other fund
comprising the Salomon Brothers Investment Series and offered in the Small Cap
Growth Fund prospectus. Shareholders of the Special Equities Fund may exchange
all or part of their shares for shares of the same class of the funds in the
Smith Barney mutual funds identified under "Exchange Privilege" in the Special
Equities Fund prospectus. Upon completion of the Reorganization, shareholders
of the Special Equities Fund who receive shares of the Small Cap Fund in
exchange for their Special Equities Fund shares will no longer be able to
exchange those shares with other funds in the Smith Barney family of funds. In
each case, exchanges are made at the applicable net asset value per share
without the imposition of any sales charge or CDSC. Any exchange will be a
taxable event for which a shareholder may have to recognize a gain or a loss
under Federal income tax provisions. With respect to Class A, Class B and
Class L or Class 2 shares of the Funds, the shares acquired in the exchange
will be deemed to have been purchased on the same date as the original shares
that were exchanged.
Dividends. The policies regarding dividends and distributions are generally
the same for both Funds. Each Fund's policy is to declare and pay dividends of
investment income annually and to make distributions of any realized capital
gains at least annually. Unless a shareholder otherwise instructs, 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
CDSC. The distribution option currently in effect for a shareholder of the
Special Equities Fund will remain in effect after the Reorganization. After
the Reorganization, however, the former Special Equities Fund shareholders may
change their distribution option at any time by contacting a selected dealer
or First Data in writing. See "Dividends and Distributions" in the
accompanying prospectus of the Small Cap Growth Fund.
9
<PAGE>
Shareholder Voting Rights. The Small Cap Growth Fund and the Special
Equities Fund are both series of open-end investment companies. The Small Cap
Growth Fund is a separate series of the Series Funds, a Maryland corporation.
The Special Equities Fund is a separate series of the Investment Funds, also a
Maryland corporation. As permitted by Maryland law, normally no meeting of
shareholders will be held 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 in each Fund then in
office will call a shareholders' meeting for the election of directors.
Shareholders may, at any meeting called for such purpose, remove a director by
the affirmative vote of the holders of record of a majority of the votes
entitled to be cast for the election of directors. For purposes of voting on
the Reorganization, the Class A, Class B and Class L shares of the Special
Equities Fund shall vote together as a single class. See "Comparative
Information on Shareholder's Rights--Voting Rights."
Risk Factors
The Special Equities Fund invests primarily in securities of growth
companies, generally not within the S&P 500, as determined by SSBC. These
companies may still be in the developmental stage and may not have reached a
fully mature stage of earnings growth. The Small Cap Growth Fund invests
primarily in the equity securities of companies with market capitalizations.
At the time of purchase similar to that of companies included in the Russell
2000 index. Investing in smaller, newer issuers generally involves greater
risk than investing in larger, more established issuers.
Both the Small Cap Growth Fund and the Special Equities Fund invest
primarily in common stocks. In addition, the Small Cap Growth Fund has the
ability to invest a portion of its assets in securities of foreign issuers and
both Funds may enter into futures transactions and options. The risks
typically associated with investing in these securities are discussed under
the caption "Comparison of Investment Objectives and Policies."
Reasons for the Reorganization
The Board of Directors of the Investment Funds has determined that it is
advantageous to combine the Special Equities Fund with the Small Cap Growth
Fund. In reaching this conclusion, the Board took into account a number of
factors. The Board considered the generally similar investment objectives and
policies of the two Funds and the fact that a single portfolio manager, Pamela
Milunovich, employed by both SSBC and SBAM, manages both Funds and that
management has a strong preference for her to manage a single fund. The Board
also took note of how the portfolio assets of the Special Equities Fund had
been restructured since the portfolio manager assumed responsibility. In
addition, the Board considered SBAM's and SSBC's belief that certain
efficiencies can be obtained by managing the portfolios as a single fund and
that the combination will have a beneficial impact on the shareholders of the
Special Equities Fund. The Board considered the advantages to each portfolio
as well as to SBAM, SSBC and their affiliates, of eliminating the unnecessary
competition and duplication of effort inherent in marketing funds having
similar investment objectives and the same portfolio manager. It is expected
that the Reorganization will lead to a more focused marketing and distribution
effort, reducing potential investor confusion and promoting asset growth.
Moreover, Salomon Smith Barney prefers that, as a result of marketing,
investment and other considerations, the combined fund be managed within the
Salomon family of funds. In particular, the Board took into account Salomon
Smith Barney's belief that in light of the portfolios' respective objectives
and investment profiles, marketing the combined fund within the Salomon
Brothers family of funds provides greater potential for long-term asset growth
and efficiencies. Finally, the Board was advised that the combination, as
proposed, would be effected as a tax-free reorganization. SSBC explained to
the Board that, after the Reorganization, the shareholders would no longer be
shareholders of a fund within the Smith Barney family of funds, but would
instead be part of the Salomon Brothers family of funds which have different
rights of exchange and accumulation, and would incur, in some cases, different
sales charges on future investments, all as explained herein. After
considering these differences and the expected benefits and portfolio
management efficiencies, as well as the recommendations of SSBC, the Board of
Directors, on behalf of the Special Equities Fund, including the non-
interested Directors, has decided that it is in the best interests of the
Special Equities Fund and its shareholders to combine with the Small Cap
Growth Fund. The Board of Directors has also determined that a combination of
the Special Equities Fund and the Small Cap Growth Fund would not result in a
dilution of the Special Equities Fund's shareholders' interests.
10
<PAGE>
The Board of Directors of the Series Funds considered the following factors,
among others, in approving the Reorganization and determining that it is
advantageous to acquire the assets of the Special Equities Fund: (i) the terms
and conditions of the Reorganization; (ii) the fact that the Reorganization
will be effected as a tax-free reorganization; (iii) the fact that the
acquisition of significant assets would allow the Small Cap Growth Fund to be
more efficiently managed and would allow the portfolio manager to increase the
Fund's positions in certain stocks and more broadly diversify the portfolio;
(iv) the decrease in expenses for the Small Cap Growth Fund's shareholders
expected to result from the Reorganization; and (v) management's strong
preference to maintain a single fund. Accordingly, the Board of Directors of
the Series Funds, including a majority of the non-interested Directors, has
determined that the Reorganization is in the best interests of the Small Cap
Growth Fund's shareholders and that the interests of the Small Cap Growth
Fund's shareholders will not be diluted as a result of the Reorganization.
Information About The Reorganization
Plan of Reorganization. The following summary of the Plan is qualified in
its entirety by reference to the Plan (Exhibit A hereto). The Plan provides
that the Small Cap Growth Fund will acquire substantially all of the assets of
the Special Equities Fund in exchange for shares of the Small Cap Growth Fund
and the assumption by the Small Cap Growth Fund of substantially all
liabilities of the Special Equities Fund on June 4, 1999, or such later date
as may be agreed upon by the parties (the "Closing Date"). Prior to the
Closing Date, the Special Equities Fund will endeavor to discharge all of its
known liabilities and obligations. The Small Cap Growth Fund will not assume
any liabilities or obligations of the Special Equities Fund other than those
reflected in an unaudited statement of assets and liabilities of the Special
Equities Fund prepared as of the close of regular trading on the New York
Stock Exchange, Inc. (the "NYSE") on the Closing Date. The number of full and
fractional Class A, Class B and Class 2 shares of the Small Cap Growth Fund to
be issued to the Special Equities Fund shareholders will be determined on the
basis of the Small Cap Growth Fund's and the Special Equities Fund's relative
net asset values for each class of shares, computed as of the close of regular
trading on the NYSE on the Closing Date. The net asset value per share of each
Class will be determined by dividing assets, minus liabilities, by the total
number of outstanding shares.
Both the Special Equities Fund and the Small Cap Growth Fund will utilize
the procedures set forth in the then current prospectus for each Fund to
determine the value of their respective portfolio securities. The method of
valuation employed will be consistent with Rule 22c-1 under the 1940 Act, and
with the interpretation of such rule by the SEC's Division of Investment
Management.
At or prior to the Closing Date, the Special Equities Fund will, and the
Small Cap Growth Fund may, declare a dividend or dividends which, together
with all previous such dividends, shall have the effect of distributing to
their respective shareholders all taxable income for the taxable year ending
on or prior to the Closing Date (computed without regard to any deduction for
dividends paid) and all of its net capital gains realized in the taxable year
ending on or prior to the Closing Date (after reductions for any capital loss
carryforward).
As soon after the Closing Date as conveniently practicable, the Special
Equities Fund will liquidate and distribute pro rata to shareholders of record
as of the close of business on the Closing Date, the full and fractional
shares of the Small Cap Growth Fund received by the Special Equities Fund.
Such liquidation and distribution will be accomplished by the establishment of
accounts in the names of the Special Equities Fund's shareholders on the share
records of the Small Cap Growth Fund's transfer agent. Each account will
represent the respective pro rata number of full and fractional shares of the
Small Cap Growth Fund due to each of the Special Equities Fund's shareholders.
The consummation of the Reorganization is subject to the conditions set
forth in the Plan. Notwithstanding approval of the Special Equities Fund's
shareholders, the Plan may be amended or terminated at any time at or prior to
the Closing Date by the Board of Directors.
11
<PAGE>
As of December 31, 1998, Salomon Brothers Holding Company Inc. ("SBHC"), the
parent company of SBAM, owned approximately 36.7% in value of the aggregate
outstanding shares of the Small Cap Growth Fund. The 1940 Act generally
prohibits an "affiliated person" from selling a security or other property to
a fund or from purchasing a security from a fund, and when funds have common
affiliated persons, transfers of securities between the funds are generally
prohibited. These provisions could be deemed to prohibit the transfers
contemplated by the Plan in view of SBHC's ownership of a significant number
of shares of the Small Cap Growth Fund.
The 1940 Act also provides that the SEC shall issue an order granting an
exemption from these prohibitions if, among other requirements, evidence
establishes that (1) the terms of the proposed transaction, including the
consideration paid or received, are reasonable and fair and do not involve
overreaching on the part of any person concerned, (2) the proposed transaction
is consistent with the investment policies of each fund and (3) the proposed
transaction is consistent with the general purposes of the 1940 Act. The
Funds, SBAM, SSBC and SBHC have filed an application with the SEC for such an
order and the Funds believe that the applicants meet the applicable standards
for the receipt of the order, although there can be no assurance that the SEC
will issue the order. The Funds do not intend to effect the Reorganization
without receiving the order from the SEC.
Approval of the Plan will require the affirmative vote of a majority, as
defined in the 1940 Act, of the outstanding shares of the Special Equities
Fund, which is the lesser of: (i) 67% of the voting securities of the Special
Equities Fund present at the Meeting, if the holders of more than 50% of the
outstanding voting securities of the Special Equities Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of the
Special Equities Fund. If the Reorganization is not approved by shareholders
of the Special Equities Fund, the Board of Directors will consider other
possible courses of action.
Description of the Small Cap Growth Fund's Shares. Full and fractional
shares of the respective classes of shares of common stock of the Small Cap
Growth Fund will be issued to the Special Equities Fund in accordance with the
procedures detailed in the Plan and as described in the Small Cap Growth
Fund's Prospectus. Generally, the Small Cap Growth Fund does not issue share
certificates to shareholders unless a specific request is submitted to First
Data. The shares of the Small Cap Growth Fund to be issued to the Special
Equities Fund shareholders and registered on the shareholder records of First
Data will have no preemptive rights.
Federal Income Tax Consequences. For Federal income tax purposes, the
exchange of assets for shares of the Small Cap Growth Fund is intended to
qualify as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended (the "Code"). As a condition to the closing
of the Reorganization, the Special Equities Fund will receive an opinion from
Willkie Farr & Gallagher, counsel to the Special Equities Fund, to the effect
that, on the basis of the existing provisions of the Code, U.S. Treasury
regulations issued thereunder, current administrative rules, pronouncements
and court decisions, for Federal income tax purposes, upon consummation of the
Reorganization, the following will apply:
(1) the Reorganization will constitute a reorganization within the
meaning of Section 368(a)(1)(D) of the Code, and the Small Cap Growth Fund
and the Special Equities Fund are each a "party to a reorganization" within
the meaning of Section 368(b) of the Code;
(2) no gain or loss will be recognized by either the Small Cap Growth
Fund or the Special Equities Fund upon the transfer of the Special Equities
Fund's assets to, and the assumption of the Special Equities Fund's
liabilities by, the Small Cap Growth Fund in exchange for the Small Cap
Growth Fund's shares, or upon the distribution of the Small Cap Growth
Fund's shares to the Special Equities Fund's shareholders in exchange for
their shares in the Special Equities Fund;
(3) no gain or loss will be recognized by shareholders of the Special
Equities Fund upon the exchange of their shares for the Small Cap Growth
Fund shares;
(4) the basis of the Small Cap Growth Fund shares received by each
Special Equities Fund shareholder pursuant to the Reorganization will be
the same as the basis of the Special Equities Fund shares surrendered in
exchange therefor;
12
<PAGE>
(5) the holding period of the Small Cap Growth Fund shares to be received
by each Special Equities Fund shareholder will include the holding period
of the shares of the common stock of the Special Equities Fund which are
surrendered in exchange therefor (provided the Special Equities Fund shares
were held as capital assets on the date of the Reorganization);
(6) the basis of the Special Equities Fund's assets acquired by the Small
Cap Growth Fund will be the same as the basis of such assets to the Special
Equities Fund immediately prior to the Reorganization; and
(7) the holding period of the assets of the Special Equities Fund
acquired by the Small Cap Growth Fund will include the period for which
such assets were held by the Special Equities Fund.
Shareholders of the Special Equities Fund should consult their tax advisors
regarding the effect, if any, of the proposed Reorganization in light of their
individual circumstances. Since the foregoing discussion only relates to the
Federal income tax consequences of the Reorganization, shareholders of the
Special Equities Fund should also consult their tax advisors as to state and
local tax consequences, if any, of the Reorganization.
Capitalization. The following table, which is unaudited, shows the
capitalization of the Small Cap Growth Fund and the Special Equities Fund as
of February 28, 1999 and on a pro forma basis as of that date, giving effect
to the proposed acquisition of assets at net asset value:
<TABLE>
<CAPTION>
Pro Forma
Special Small Cap after
Equities Growth Reorganization
-------- --------- --------------
(In thousands,
except per share values)
(Unaudited)
<S> <C> <C> <C>
Class A
Net Assets.................................... $128,133 $3,175 $131,308
Net asset value per share..................... $ 29.09 $11.23 $ 11.23
Shares outstanding............................ 4,405 283 11,693
Class B
Net Assets.................................... $130,075 $3,802 $133,877
Net asset value per share..................... $ 27.77 $11.18 $ 11.18
Shares outstanding............................ 4,684 340 11,975
Class L or Class 2
Net Assets.................................... $ 8,619 $1,947 $ 10,566
Net asset value per share..................... $ 27.77 $11.19 $ 11.19
Shares outstanding............................ 310 174 944
</TABLE>
As of the Record Date, March 15, 1999, there were 3,814,156 outstanding
Class A shares, 4,443,750 outstanding Class B shares and 294,867 outstanding
Class L shares of the Special Equities Fund and 289,550 outstanding Class A
shares, 352,275 outstanding Class B shares, 178,649 outstanding Class 2 shares
and 4,471 outstanding Class O shares of the Small Cap Growth Fund. As of the
Record Date, the officers and Directors of the Investment Funds as a group
beneficially owned less than 1% of the outstanding shares of the Special
Equities Fund. To the best knowledge of the Directors, as of the Record Date,
no shareholder or "group" (as that term is used in Section 13(d) of the
Securities Exchange Act of 1934 (the "Exchange Act")) owned beneficially or of
record 5% or more of a class of the Special Equities Fund. Except for Ross
Margolies who owned 27.2% of the Class O shares outstanding jointly with
Patricia A. Margolies, and for Pamela Milunovich who owned 1.9% of the Class A
shares outstanding as of the Record Date, the officers and directors of the
Series Funds as a group beneficially owned less than 1% of the outstanding
shares of the Small Cap Growth Fund. Except as set forth in the table below,
to the best knowledge of the Directors of the Series Funds, as of the Record
Date, no shareholder or "group" (as that term is used in Section 13(d) of the
Exchange Act, owned beneficially or of record more than 5% of a class of
shares of the Small Cap Growth Fund.
13
<PAGE>
<TABLE>
<CAPTION>
Percentage of Class Owned of Record
or Beneficially
------------------------------------
Upon
Consummation
Name and Fund As of the of the
Address and Class Record Date Reorganization
- -------- --------- ----------- --------------
Small Cap
Growth
<S> <C> <C> <C>
Salomon Brothers Holding Co., Inc. A 25.6% 1.8%
Attn.: Marc Peckman, 38th Floor
7 World Trade Center
New York, NY 10048
Salomon Smith Barney, Inc. A 18.5% 1.3%
333 West 34th St.--3rd Floor
New York, New York 10001
Salomon Brothers Holding Co., Inc. B 55.7% 4.1%
Attn.: Marc Peckman, 38th Floor
7 World Trade Center
New York, NY 10048
Alberta Infantolino B 6.8% 0.5%
916 Cole Drive
Brielle, NJ 08730-1602
Wexford Clearing Services Corp., FBO 2 5.5% 2.1%
Mrs. Sally D. Carrier
57 Walbridge Road
West Hartford, CT 06119-1344
Salomon Smith Barney, Inc. 2 5.0% 1.9%
333 West 34th St.--3rd Floor
New York, New York 10001
Salomon Brothers Holding Co., Inc. O 55.9% 55.9%
Attn.: Marc Peckman, 38th Floor
7 World Trade Center
New York, NY 10048
Ross S. Margolies & O 27.2% 27.2%
Patricia A. Margolies JTWROS
8 Stoneleigh Park
Westfield, NJ 07090
Hratch Minassian O 11.0% 11.0%
321 4th Street
Palisades Park, NJ 07650
Salomon Smith Barney, Inc. O 5.8% 5.8%
333 West 34th St.--3rd Floor
New York, New York 10001
</TABLE>
14
<PAGE>
Information About The Small Cap Growth Fund
Management's discussion and analysis of Market Condition and Portfolio
Review (through December 31, 1998).
Market Review
1998 was a volatile year as the stock market declined and rebounded in
response to investors' fears of a U.S. recession, and Asian recession, a
global credit squeeze and an impeachment of our President. The swift moves by
the Federal Reserve Board ("Fed") to cut interest rates in October helped the
stock market recover. From October 8th lows, the Russell 2000 Index advanced
36.2%, while the S&P 500 rebounded 28.5%. We believe small capitalization
stocks should continue to do well.
Portfolio Highlights
The economy's expansion was fueled by strong consumer spending and
improvements in productivity due to technological advances. The Fund's
overweighting in the consumer area and timely additions to the technology
sectors enabled it to benefit from these trends. The Fund's minimal commitment
to underperforming sectors such as energy and basic materials helped drive the
favorable return.
The Small Cap Growth Fund uses a bottom-up approach to select small
capitalization companies that are growing their earnings faster than the
overall market. Ideally, the companies should be on the verge of a sustainable
growth spurt from new products, technology or consolidation within an
industry. The Fund invests in several companies which meet this criteria found
primarily in four sectors: technology, healthcare, consumer and financial
services.
Market Outlook
Management continues to see a generally positive economic environment with
moderate inflation. The Fund is focusing upon companies with powerful
franchises and market position which can continue to increase earnings in a
slower growth U.S. economy.
Management believes small capitalization stocks are poised to outperform the
broader U.S. market over the next year. Three factors which should drive the
outperformance are strong earnings, deeply discounted valuations and portfolio
migration. Small caps are posting strong earnings results in comparison with
larger stocks. Second, the price/earnings spread between large and small cap
stocks is as wide as it has been since 1974 which preceded an eleven year run
of outperformance by small caps. Lastly, according to Morningstar, large
capitalization growth portfolios only had 1.8% of their portfolios invested in
small companies with market capitalizations of $1 billion or less as of July
1998 compared with 12.4% in such assets in July 1997. If large cap managers
increase their small cap holdings, small cap stocks should rally.
15
<PAGE>
The following graph depicts the performance of the Small Cap Growth Fund
versus the Russell 2000 Index. It is important to note that the Small Cap
Growth Fund is a professionally managed mutual fund while the index is not
available for investment and is unmanaged. The comparison is shown for
illustrative purposes only.
[SMALL CAP GROWTH CHART]
SMALL CAP GROWTH -- CLASS A, B, 2 and O SHARES
Comparison of $10,000 Investment in the Fund with Russell 2000 Index
[THE FOLLOWING CHART WAS REPRESENTED IN THE PRINTED MATERIAL BY A LINE GRAPH]
<TABLE>
<CAPTION>
Class A Class B Class 2 Class O Russell 2000 Index
------- ------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C>
7/1/98 $ 9,425 $10,000 $ 9,900 $10,000 $10,000
7/98 9,293 9,850 9,761 9,860 9,190
8/98 7,361 7,800 7,732 7,810 7,405
9/98 8,275 8,760 8,692 8,780 7,985
10/98 8,426 8,920 8,840 8,940 8,311
11/98 9,557 10,110 10,019 10,140 8,746
12/98 10,924 11,050 11,344 11,600 9,288
</TABLE>
Past Performance is not predictive of future performance. Performance above
reflects returns after deduction of applicable maximum sales charge.
Note: Fund commenced operations 7/1/98.
Cumulative Total Returns for the Period Through December 31, 1998
<TABLE>
<S> <C> <C>
Class A Net Asset Value* Public Offering Price**
...............................................................................
Since Inception (7/1/98) 15.90% 9.24%
...............................................................................
Class B Return If Not Redeemed* Return If Redeemed**
...............................................................................
Since Inception (7/1/98) 15.50% 10.50%
...............................................................................
Class 2++ Return If Not Redeemed* Return If Redeemed**
...............................................................................
Since Inception (7/1/98) 15.60% 13.44%
...............................................................................
Class O Return If Not Redeemed* Return If Redeemed**
...............................................................................
Since Inception (7/1/98) 16.00% 16.00%
- -------------------------------------------------------------------------------
</TABLE>
* Return does not reflect the deduction of a sales charge.
** Class A shares reflect the deduction of the maximum 5.75% sales charge.
Class B and 2 shares reflect the maximum CDSC of 5% and 1%, respectively.
Class O shares have no initial or contingent deferred sales charges.
Information About The Special Equities Fund
Management's discussion and analysis of Market Condition and Portfolio
Review (through December 31, 1998).
The Special Equities Fund uses a bottom-up approach to select small-
capitalization companies that are growing their earnings faster than the
overall market. Ideally, the companies should be on the verge of a sustainable
growth spurt from new products, technology or consolidation within an
industry. The Special Equities Fund invests in several companies that meet
this criteria found primarily in four sectors: technology, health-care,
consumer and financial services.
16
<PAGE>
In the technology and health-care sector, the Special Equities Fund is
invested in companies that have proprietary products, brands or services which
are somewhat more insulated from competition and have more sustainable
pricing. Management believes smaller firms will thrive by targeting emerging
technologies such as fiber optics (Uniphase) and Internet access (Earthlink).
Management believes that the Special Equities Fund should benefit from the
potential explosive growth in data and voice communications with its
investments in Level One, Metromedia Fiber Network and Winstar Communications.
A change in the Special Equities Fund's investment strategy is that it will
no longer employ the quantitative investment approach that was designed to
mitigate price volatility. Management believes the Special Equities Fund
should perform better by solely utilizing fundamental analysis to identify
stocks with the ability to grow faster than the market and which have superior
appreciation potential. This will result in the Special Equities Fund owning a
fewer number of stocks than when this quantitative strategy was used. For
example, the Special Equities Fund owned approximately 61 stocks as of
December 1998 down from 199 owned on June 1998. Management believes the
Special Equities Fund has already performed better because of its emphasis on
active portfolio management.
The Special Equities Fund's overweight position in the consumer and
technology sectors benefited from the economy's expansion fueled by strong
consumer spending and improvements in productivity due to technological
improvements. The Special Equities Fund's minimal commitment to
underperforming sectors such as energy, basic materials and financials also
helped drive its favorable return.
Market Update
The year 1998 was a volatile one as the stock market declined in response to
investors' fears of a U.S. recession, an Asian recession, a global credit
squeeze and the impeachment of our President. The stock market then rebounded
due to the swift moves by the Fed to cut interest rates. From October 8, 1998
lows, the Russell 2000 Index advanced 36.2% while the S&P 500 Index rebounded
28.5%. Management believes small-capitalization stocks should continue to do
well as they have historically in times when the Fed is easing interest rates.
Management continues to see a generally positive economic environment with
moderate inflation. The economy's expansion was fueled by strong consumer
spending and improvements in productivity due to technological improvements.
The Special Equities Fund is focusing upon companies with powerful franchises
and market positions that can continue to increase earnings in a slower growth
U.S. economy.
Small Cap Market Outlook
Small-capitalization stocks are poised to outperform the broader U.S. market
over the next year. Three factors which should drive the outperformance are
strong earnings, deeply discounted valuations and portfolio migration. Small
caps are posting strong earnings results in comparison with larger stocks.
Second, the price/earnings spread between large- and small-cap stocks is as
wide as it has been since 1974 which preceded an eleven-year run of
outperformance by small caps. Lastly, according to Morningstar, large-
capitalization growth portfolios only had 1.8% of their portfolios invested in
small companies with market capitalizations of $1 billion or less as of July
1998 compared with 12.4% in such assets in July 1997. If large-cap managers
increase their small cap holdings, small-cap stocks should rally.
17
<PAGE>
[GROWTH OF $10,000 INVESTED CHART]
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Class B Shares of the Smith Barney
Special Equities Fund vs. the Standard & Poor's 500 Index and the Russell 2000
Index+
- --------------------------------------------------------------------------------
[THE CHART BELOW WAS REPRESENTED IN THE PRINTED MATERIAL BY A LINE GRAPH]
<TABLE>
<CAPTION>
SB Special Equities Standard & Poor's 500 Index Russell 2000
------------------- --------------------------- ------------
<S> <C> <C> <C>
12/88 $10,000 $10,000 $10,000
12/89 11,361 13,163 11,627
12/90 8,604 12,755 9,362
12/91 12,627 16,633 13,673
12/92 14,003 17,899 16,189
12/93 18,606 19,698 19,245
12/94 17,439 19,957 18,895
12/95 28,302 27,448 24,272
12/96 26,478 33,747 28,276
12/97 24,789 45,004 34,600
12/98 27,177 57,938 33,721
</TABLE>
+ Hypothetical illustration of $10,000 invested in Class B shares on December
31, 1988, assuming reinvestment of dividends and capital gains, if any, at
net asset value through December 31, 1998. The Standard & Poor's 500 Index
is composed of 500 widely held common stocks listed on the New York Stock
Exchange, American Stock Exchange and over-the-counter market. Figures for
the index include reinvestment of dividends. The Russell 2000 Index is
composed of the 2,000 smallest companies in the Russell 3000 Index. The
Russell 3000 Index is composed of 3,000 of the largest U.S. companies by
market capitalization. The indexes are unmanaged and are not subject to the
same management and trading expenses as a mutual fund. The performance of
the Fund's other classes may be greater or less than the Class B shares'
performance indicated on this chart, depending on whether greater or lesser
sales charges and fees were incurred by shareholders investing in the other
classes.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholders tax liability on dividends or capital gains.
Average Annual Total Returns through
December 31, 1998
<TABLE>
<CAPTION>
Without Sales Charges(1)
--------------------------
Class A Class B Class L(2)
------- ------- ----------
<S> <C> <C> <C>
One-Year............................................. 10.44% 9.63% 9.63%
Five-Year............................................ 8.66 7.87 7.87
Ten-Year............................................. N/A 10.51 N/A
Since Inception+..................................... 13.73 9.36 5.45
<CAPTION>
With Sales Charges(3)
--------------------------
Class A Class B Class L(2)
------- ------- ----------
<S> <C> <C> <C>
One-Year............................................. 4.91% 4.63% 7.53%
Five-Year............................................ 7.56 7.72 7.66
Ten-Year............................................. N/A 10.51 N/A
Since Inception+..................................... 12.79 9.36 5.24
</TABLE>
18
<PAGE>
- --------
(1) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value and does not reflect the deduction of the
applicable sales charges with respect to Class A and L shares or the
applicable contingent deferred sales charges ("CDSC") with respect to
Class B and L shares.
(2) On June 12, 1998, Class C shares were renamed Class L shares.
(3) Assumes reinvestment of all dividends and capital gain distributions, if
any, at net asset value. In addition, Class A and L shares reflect the
deduction of the maximum sales charge of 5.00% and 1.00% respectively; and
Class B shares reflect the deduction of a 5.00% CDSC, which applies if
shares are redeemed within one year from purchase. Thereafter, this CDSC
declines by 1.00% per year until no CDSC is incurred. Class L shares also
reflect the deduction of a 1.00% CDSC, which applies if shares are
redeemed within the first year of purchase.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
+ Inception dates for Class A, B and L shares are November 6, 1992, December
13, 1982 and October 18, 1993, respectively.
Comparison Of Investment Objectives And Policies
The following discussion which compares investment objectives, policies and
restrictions of the Small Cap Growth Fund to the Special Equities Fund is
based upon and qualified in its entirety by the investment objectives,
policies and restrictions sections of the Prospectuses of the Small Cap Growth
Fund and the Special Equities
Fund. For a full discussion of the investment objectives, policies and
restrictions of the Small Cap Growth Fund, refer to the Small Cap Growth
Fund's Prospectus, which accompanies this Prospectus/Proxy Statement, under
the captions, "Investment Objectives and Policies" and for a discussion of
these issues as they apply to the Special Equities Fund, refer to the Special
Equities Fund's Prospectus under the caption, "Investment Objectives and
Management Policies."
Investment Objective. The investment objective of the Small Cap Growth Fund
is long-term growth of capital. The investment objective of the Special
Equities Fund is long-term capital appreciation. Both the Small Cap Growth
Fund's and the Special Equities Fund's investment objective is fundamental
and, as such, may be changed only by the "vote of a majority of the
outstanding voting securities," as defined in the 1940 Act. The investment
policies of the Small Cap Growth Fund and the Special Equities Fund are non-
fundamental and, as such, may be changed by the Board of Directors without
shareholder approval, provided such change is not prohibited by the investment
restrictions (which are set forth in the applicable Statement of Additional
Information) or applicable law, and any such change will first be disclosed in
the then current prospectus.
Primary Investments. Both the Small Cap Growth Fund and the Special Equities
Fund invest primarily in equity securities (common stock, preferred stock,
convertible bonds). The Small Cap Growth Fund invests primarily in equity
securities of companies with market capitalizations at the time of purchase
similar to that of companies included in the Russell 2000 Index, which SBAM
believes have favorable growth prospects and potential for significant capital
appreciation. SBAM will seek to identify companies that either occupy a
dominant position in an emerging industry or a growing market share in larger
fragmented industries. The Special Equities Fund seeks to achieve its
investment objective by investing primarily in equity securities of growth
companies, generally not within the S&P 500, as identified by SSBC. These
companies may not have reached a fully mature stage of earnings growth, since
they may still be in the developmental stage, or may be older companies which
appear to be entering a new stage of more rapid earnings progress due to
factors such as management change or development of new technology, products
or markets. Since the Funds generally have similar investment policies and are
managed by the same portfolio manager, the types of securities purchased by
the Funds are similar.
Both Funds invest primarily in common stock, but each may also invest in
other types of securities, including convertible bonds, convertible preferred
stocks, warrants, preferred stocks and debt securities. Both
19
<PAGE>
Funds may also invest in illiquid securities (up to 15% of total assets in the
case of the Small Cap Growth Fund and 10% of total assets in the case of the
Special Equities Fund).
Additional Investments and Risk Factors. Each Fund has the ability to engage
in a number of specialized investment strategies and techniques designed to
enable the Fund to achieve its investment objectives, certain of which are
discussed below.
Small Cap Companies. Both Funds invest a significant portion of their assets
in securities of small capitalized companies. Investments in these companies
may involve greater risks and volatility than investments in larger companies.
Small cap companies may be at an earlier stage of development, may be subject
to greater business risks, may have limited product lines, reduced market
liquidity for, and more abrupt or erratic price movements in, the trading of
their shares. In addition, small cap companies may have difficulty
withstanding competition from larger more established companies.
Repurchase Agreements. Each Fund may engage in repurchase agreement
transactions (typically the acquisition of an underlying debt obligation for a
relatively short period (usually not more than one week) subject to an
obligation of the seller to repurchase, and the buyer to resell, the
obligation at an agreed-upon price and time) with certain member banks of the
Federal Reserve System and with certain dealers on the Federal Reserve Bank of
New York's list of reporting dealers. The value of the underlying securities
will be at least equal at all times to the total amount of the repurchase
obligation, including interest. SBAM or SSBC, as the case may be, acting under
the supervision of the Board of Directors, reviews on an ongoing basis the
value of the collateral and creditworthiness of those banks and dealers with
which the Funds enter into repurchase agreements to evaluate potential risks.
In the event of default by the seller under the repurchase agreement, a Fund
could experience losses and delays in connection with the disposition of the
underlying security.
Foreign Securities and American Depository Receipts. The Small Cap Growth
Fund may invest up to 20% of its assets in equity securities of foreign
issuers. Both Funds may invest in American Depository Receipts ("ADRs") which
are U.S. dollar-denominated receipts issued generally by domestic banks,
representing the deposit with the bank of a security of a foreign issuer. ADRs
are publicly traded on exchanges or over-the-counter in the United States.
Investments in securities of foreign issuers may involve risks arising from
differences between U.S. and foreign securities markets, including less volume
and greater volatility, different trading and settlement practices and less
governmental supervision and regulation, from changes in currency exchange
rates and from economic, social and political conditions.
Lending Portfolio Securities. Each Fund is authorized to lend its portfolio
securities to brokers, dealers and other financial institutions. The Funds'
loans of securities will be collateralized by cash, U.S. government securities
or other eligible liquid assets which are maintained in a segregated account
in an amount at least equal to the current market value of the loaned
securities. The risk associated with lending portfolio securities, as with
other extensions of credit, consists of possible loss of rights in the
collateral should the borrower fail financially.
Short Sales Against the Box. Each Fund may sell securities short if at all
times when a position is open, the Fund owns the stock or owns securities
convertible or exchangeable for securities of the same issue as the securities
sold short. Short sales of this kind are referred to as "against the box."
Futures and Options Activities. The Small Cap Growth Fund may, for hedging
purposes, purchase and sell interest rate, currency or stock or bond index
futures contracts and enter into currency forward contracts and currency
swaps; purchase and sell exchange listed and over-the-counter put and call
options on securities, currencies, futures contracts, indices and other
financial instruments. Although the Small Cap Growth Fund is authorized to use
the foregoing techniques, it is not presently anticipated that any of these
strategies will be used to a significant degree. The Special Equities Fund may
enter into transactions in futures contracts and options on futures contracts
for hedging purposes or for non-hedging purposes only if the aggregate initial
margin and premiums on such positions do not exceed 5% of the liquidation
value of the Fund's assets.
20
<PAGE>
Investment Restrictions. Each Fund has adopted certain investment
restrictions for the protection of shareholders. The following restrictions
applicable to the Small Cap Growth Fund are fundamental and may not be changed
without the approval of the holders of a majority, as defined in the 1940 Act,
of the voting securities of the Fund. The Small Cap Growth Fund may not:
1. purchase securities of any issuer if the purchase would cause more than
5% of the value of the Fund's total assets to be invested in the
securities of any one issuer (excluding securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities and bank
obligations) or cause more than 10% of the voting securities of the
issuer to be held by the Fund, except that up to 25% of the value of the
Fund's total assets may be invested without regard to this restriction
and provided that the Fund may invest all or substantially all of its
assets in another registered investment company having substantially the
same investment objective(s) and policies and substantially the same
investment restrictions as those with respect to the Fund;
2. borrow money (including entering into reverse repurchase agreements),
except for temporary or emergency purposes and then not in excess of 10%
of the value of the total assets of the Fund at the time the borrowing
is made, except that for the purpose of this restriction, short-term
credits necessary for settlement of securities transactions are not
considered borrowings (the Fund will not purchase additional securities
at any time its borrowings exceed 5% of total assets, provided, however,
that the Fund may increase its interest in another registered investment
company having substantially the same investment objective(s) and
policies and substantially the same investment restrictions as those
with respect to the Fund while such borrowings are outstanding); or
3. invest more than 25% of the total assets of the Fund in the securities
of issuers having their principal activities in any particular industry,
except for obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities or by any state, territory or any
possession of the United States or any of their authorities, agencies,
instrumentalities or political subdivisions, or with respect to
repurchase agreements collateralized by any of such obligations (for
purposes of this restriction, supranational issuers will be considered
to comprise an industry as will each foreign government that issues
securities purchased by the Fund), provided, however, that the Fund may
invest all or substantially all of its assets in another registered
investment company having substantially the same investment objective(s)
and policies and substantially the same investment restrictions as those
with respect to the Fund.
For purposes of investment limitations (1) and (3) above, both the
borrower under a loan and the lender selling a loan participation will
be considered an "issuer."
4. underwrite securities of other issuers, except to the extent that the
purchase of investments directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such securities
in accordance with a Fund's investment program may be deemed to be an
underwriting;
5. purchase or sell real estate, although the Fund may purchase and sell
securities of companies which deal in real estate, may purchase and sell
marketable securities which are secured by interests in real estate and
may invest in mortgages and mortgage-backed securities;
6. purchase or sell commodities or commodity contracts except that the Fund
may engage in hedging and derivative transactions to the extent
permitted by its investment policies as stated in the Fund's prospectus
and statement of additional information;
7. make loans, except that (a) the Fund may purchase and hold debt
securities in accordance with its investment objectives and policies,
(b) the Fund may enter into repurchase agreements with respect to
portfolio securities, subject to applicable limitations of its
investment policies, (c) the Fund may lend portfolio securities with a
value not in excess of one-third of the value of its total assets,
provided that collateral arrangements with respect to options, forward
currency and futures transactions will not be deemed to involve loans of
securities and (d) delays in the settlement of securities transactions
will not be considered loans;
8. purchase the securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger,
consolidation, acquisition or reorganization.
21
<PAGE>
The following restrictions are applicable to the Special Equities Fund.
Restrictions 1-7 set forth below are fundamental and may not be changed
without the approval of the holders of a majority, as defined in the 1940 Act,
of the voting securities of the Fund. The Special Equities Fund may not:
1. invest in a manner that would cause it to fail to be a "diversified
company" under the 1940 Act and the rules, regulations and orders
thereunder;
2. 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;
3. 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;
4. invest more than 25% of its total assets in securities, the issuers of
which conduct their principal business activities in the same industry.
For purposes of this limitation, securities of the U.S. government
(including its agencies and instrumentalities) and securities of state
or municipal governments and their political subdivisions are not
considered to be issued by members of any industry;
5. 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;
6. 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 33 1/3% 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;
7. act as an underwriter of securities, except that the Fund may invest up
to 10% of its total assets in securities which it may not be free to
resell without registration under the Securities Act of 1933, as
amended, in which registration the Fund may technically be deemed an
underwriter for purposes of the 1933 Act;
8. invest in oil, gas or other mineral exploration or development programs;
9. make investments in securities for the purpose of exercising control
over the management of the issuer;
10. purchase any securities on margin (except for such short-term credits
as are necessary for the clearance of purchases and sales of portfolio
securities) or sell any securities short (except "against the box").
For purposes of this restriction, the deposit or payment by the Fund of
underlying securities and other assets in escrow and collateral
agreements with respect to initial or maintenance margin in connection
with futures contracts and related options and options on securities,
indexes or similar items is not considered to be the purchase of a
security on margin;
11. invest in securities of an issuer which, together with any predecessor,
has been in operation for less than three years if, as a result, more
than 5% of the total assets of the Fund would then be invested in such
securities (for purposes of this restriction, issuers include
predecessors, sponsors, controlling persons, general guarantors and
originators of underlying assets);
12. purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are
illiquid;
13. write, purchase or sell puts, calls, straddles, spreads or any
combinations thereof.
22
<PAGE>
Comparative Information On Shareholders' Rights
General. The Special Equities Fund and the Small Cap Growth Fund are open-
end, management investment companies registered under the 1940 Act, which
continuously offer to sell shares at their current net asset value. The
Special Equities Fund is a series of the Investment Funds, which is a Maryland
corporation, incorporated on September 29, 1981 and is governed by its
Articles of Incorporation, By-laws and Board of Directors. The Small Cap
Growth Fund is a series of the Series Funds, also a Maryland corporation,
incorporated on April 17, 1990 and is governed by its Articles of
Incorporation, By-laws and Board of Directors. Each Fund is also governed by
applicable state and Federal law. The Investment Funds has an authorized
capital of 10,000,000,000 shares of common stock with a par value of $.001 per
share and an aggregate par value of $10,000,000. The Board of Directors has
authorized the issuance of nine series, each representing shares in one of
nine separate portfolios and may authorize the issuance of additional series
of shares in the future. The Board of Directors of the Series Funds has
authorized the issuance of ten series of shares, each representing shares in
one of ten separate portfolios, and may authorize the issuance of additional
series of shares in the future. The assets of each portfolio are segregated
and separately managed and a shareholder's interest is in the assets of the
portfolio in which he or she holds shares. In both the Special Equities Fund
and the Small Cap Growth Fund, Class A, Class B and Class L or Class 2 shares,
as the case may be, represent interests in the assets of the Fund and have
identical voting, dividend, liquidation, and other rights on the same terms
and conditions except that expenses related to the distribution of each class
of shares are borne solely by the respective class and each class of shares
has exclusive voting rights with respect to provisions of the respective
Fund's Rule 12b-1 distribution plan which pertains to a particular class.
Directors. The By-laws of both the Series Funds and the Investment Funds
provide that the term of office of each director shall be from the time of his
or her election until his or her successor is elected and qualifies or until
his or her earlier resignation or removal. Directors of both the Series Funds
and the Investment Funds may be removed with or without cause at any meeting
of stockholders by the affirmative vote of a majority of the votes entitled to
be cast for the election of directors. Vacancies on the Boards of either the
Investment Funds or the Series Funds may be filled by the Directors remaining
in office. A meeting of shareholders will be required for the purpose of
electing additional Directors whenever fewer than a majority of the Directors
then in office were elected by shareholders.
Voting Rights. Neither the Series Funds nor Investment Funds holds a meeting
of shareholders annually, and there normally is no meeting of shareholders
held 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. Special meetings of shareholders of the Series Funds for any
purpose may be called by a majority of shareholders or by the Board of
Directors. A meeting of shareholders of the Investment Funds, for any purpose,
must be called upon the written request of shareholders holding at least 25%
of the outstanding shares entitled to vote at such meeting. On each matter
submitted to a vote of the shareholders of either the Series Funds or the
Investment Funds, each shareholder is entitled to one vote for each whole
share owned and a proportionate, fractional vote for each fractional share
outstanding in the shareholder's name on the respective Fund's books. With
respect to each of the Series Funds and the Investment Funds, the affirmative
vote of the majority of votes validly cast in person or by proxy at a
shareholder meeting at which a quorum is present, shall decide any questions
except when a different vote is required or permitted by any provision of the
1940 Act or other applicable law or as may otherwise be set forth in the
applicable organizational documents, or in cases where the vote is submitted
to the holders of one or more but not all portfolios or classes, a majority of
the votes cast of the particular portfolio or class affected by the matter
shall decide such matter.
Liquidation or Dissolution. In the event of the liquidation or dissolution
of the Small Cap Growth Fund or the Special Equities Fund, the shareholders of
the Funds are entitled to receive, when, and as declared by the Directors, the
excess of the assets belonging to the Funds over the liabilities belonging to
the Funds. In either case, the assets so distributed to shareholders of the
Funds will be distributed among the shareholders in proportion to the number
of shares of the Funds held by them and recorded on the books of the Funds.
23
<PAGE>
Indemnification of Directors and Officers. The By-laws of the Series Funds
provides that each individual who is a present or former Director or officer
of the Series Funds who, by reason of his or her position was, is, or is
threatened to be made a party to any threatened, pending or completed action
shall be indemnified to the fullest extent permitted under the laws of the
State of Maryland, the 1940 Act and any other applicable law; provided,
however, that such indemnity shall not protect any person from any liability
arising out of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office. The By-
laws of the Investment Funds provide that each Director and officer shall be
indemnified against liabilities and expenses incurred in connection with
litigation in which they may be involved because of their positions with the
Investment Funds, to the fullest extent permitted by Maryland General
Corporation Law, except for such person's willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct
of his or her office or under any contract or agreement with the Series Funds.
Rights of Inspection. Maryland law permits any shareholder of the Series
Funds or the Investment Funds, or any agent of such shareholder to inspect and
copy during the Fund's usual business hours the Fund's By-laws, minutes of
shareholder proceedings, annual statements of the Fund's affairs and voting
trust agreements on file at its principal office.
Shareholder Liability. Under Maryland law, Series Funds' and Investment
Funds' shareholders do not have personal liability for the corporate acts and
obligations of the Small Cap Growth Fund or the Special Equities Fund,
respectively. Shares of the Small Cap Growth Fund issued to the shareholders
of the Special Equities Fund in the Reorganization will be fully paid and
nonassessable when issued, transferable without restrictions and will have no
preemptive rights.
The foregoing is only a summary of certain information with respect to the
Small Cap Growth Fund and the Special Equities Fund. The foregoing is not a
complete description of the documents cited. Shareholders should refer to the
provisions of the corporate documents and state laws governing each Fund for a
more thorough description.
Additional Information About The Small Cap Growth Fund And The Special
Equities Fund
The Small Cap Growth Fund. Information about the Small Cap Growth Fund is
incorporated herein by reference to the Prospectus, a copy of which
accompanies this Prospectus/Proxy Statement, dated May 1, 1998, as
supplemented on February 1, 1999 and February 25, 1999 and the Statement of
Additional Information dated May 1, 1998 which have been filed with the SEC. A
copy of the Statement of Additional Information is available upon request and
without charge by writing the Small Cap Growth Fund at 7 World Trade Center,
New York, New York 10048 or by calling (800) 446-1013.
The Special Equities Fund. Information concerning the operation and
management of the Special Equities Fund is incorporated herein by reference to
the Prospectus dated April 30, 1998 as supplemented on June 12, 1999, October
5, 1998, November 28, 1998 and January 11, 1999 and the Statement of
Additional Information dated April 30, 1998, each of which have been filed
with the SEC. A copy of the Prospectus and the Statement of Additional
Information is available upon request and without charge by writing the
Special Equities Fund at 388 Greenwich Street, New York, New York 10013 or by
calling (800) 451-2010.
Both the Small Cap Growth Fund and the Special Equities Fund are subject to
the informational requirements of the Exchange Act and in accordance therewith
file reports and other information including proxy material, reports and
charter documents with the SEC. The SEC maintains a Web site at
http:/www.sec.gov that contains these reports and other information regarding
the Funds.
Other Business
The Directors of the Investment Funds do not intend to present any other
business at the Meeting. If, however, any other matters are properly brought
before the Meeting, the persons named in the accompanying form of proxy will
vote thereon in accordance with their judgment.
24
<PAGE>
Voting Information
This Prospectus/Proxy Statement is furnished in connection with a
solicitation of proxies by the Board of Directors of the Investment Funds to
be used at the Special Meeting of Shareholders to be held at 2:00 p.m. on May
14, 1999, at 388 Greenwich Street, New York, New York 10013 and at any
adjournments thereof. This Prospectus/Proxy Statement, along with a Notice of
the Meeting and a proxy card, is first being mailed to shareholders of the
Special Equities Fund on or about April 12, 1999. Only shareholders of record
as of the close of business on the Record Date will be entitled to notice of,
and to vote at, the Meeting or any adjournment thereof. The holders of a
majority of the shares of the Special Equities Fund outstanding at the close
of business on the Record Date present in person or represented by proxy will
constitute a quorum for the Meeting. For purposes of determining a quorum for
transacting business at the Meeting, abstentions and broker "non-votes" (that
is, proxies from brokers or nominees indicating that such persons have not
received instructions from the beneficial owner or other persons entitled to
vote shares on a particular matter with respect to which the brokers or
nominees do not have discretionary power) will be treated as shares that are
present but which have not been voted. For this reason, abstentions and broker
non-votes will have the effect of a "no" vote for purposes of obtaining the
requisite approval of the Plan. If the enclosed form of proxy is properly
executed and returned in time to be voted at the Meeting, the proxies named
therein will vote the shares represented by the proxy in accordance with the
instructions marked thereon. Unmarked proxies will be voted FOR the proposed
Reorganization and FOR any other matters deemed appropriate. A proxy may be
revoked at any time on or before the Meeting by written notice to the Special
Equities Fund, 388 Greenwich Street, New York, New York 10013, 22nd Floor, c/o
the Corporate Secretary. Unless revoked, all valid proxies will be voted in
accordance with the specifications thereon or, in the absence of such
specifications, FOR approval of the Plan and the Reorganization contemplated
thereby.
Approval of the Plan will require the affirmative vote of a majority, as
defined in the 1940 Act, of the outstanding shares of the Special Equities
Fund, which is the lesser of (i) 67% of the voting securities of the Special
Equities Fund present at the Meeting, if the holders of more than 50% of the
outstanding voting securities of the Special Equities Fund are present or
represented by proxy, or (ii) more than 50% of the outstanding shares of the
Special Equities Fund. Shareholders of Class A, Class B and Class L shares of
the Special Equities Fund shall vote together as a single class. Shareholders
of the Special Equities Fund are entitled to one vote for each share held by
them.
Proxy solicitations will be made primarily by mail, but proxy solicitations
also may be made by telephone, telegraph or personal interviews conducted by
officers and employees of Salomon Smith Barney and its affiliates and/or by
First Data. If the Fund record votes by telephone, it will use procedures
designed to authenticate shareholders' identities, to allow shareholders to
authorize the voting of their shares in accordance with their instructions,
and to confirm that their instructions have been properly recorded. Proxies
voted by telephone may be revoked at any time before they are voted in the
same manner that proxies voted by mail may be revoked. Expenses of the
Reorganization, including the costs of the proxy solicitation and the
preparation of enclosures to the Prospectus/Proxy Statement, reimbursement of
expenses of forwarding solicitation material to shareholders of the Special
Equities Fund and expenses incurred in connection with the preparation of this
Prospectus/Proxy Statement will be borne equally by SSBC and SBAM.
If sufficient votes to approve the Reorganization are not received by May
14, 1999, the persons named as proxies may propose one or more adjournments of
the Meeting to permit further solicitation of proxies. In determining whether
to adjourn the Meeting, the following factors may be considered: the
percentage of votes actually cast, the percentage of negative votes actually
cast, the nature of any further solicitation and the information to be
provided to shareholders with respect to the reasons for the solicitation. Any
such adjournment will require an affirmative vote by the holders of a majority
of the shares present in person or by proxy and entitled to vote at the
Meeting. The persons named as proxies will vote upon such adjournment after
consideration of the best interests of all shareholders.
The votes of the shareholders of the Small Cap Growth Fund are not being
solicited by this Prospectus/Proxy Statement.
25
<PAGE>
Financial Statements
The audited statements of assets and liabilities of the Special Equities
Fund as of December 31, 1998, related statements of operations for the year
then ended and changes in net assets for the two years then ended, and the
Financial Highlights for each of the years in the three year period then
ended, have been incorporated by reference into the Statement of Additional
Information relating to this Prospectus/Proxy Statement in reliance on the
reports of KPMG LLP, independent auditors for the Special Equities Fund. The
Annual Report of Salomon Brothers Investment Series, which contains the
audited statements of assets and liabilities of the Small Cap Growth Fund as
of December 31, 1998, and the related statements of operations, changes in net
assets and Financial highlights for the period July 1, 1998 (commencement of
operations) through December 31, 1998, have been incorporated by reference
into the Statement of Additional Information relating to this Prospectus/Proxy
Statement in reliance on the report of PricewaterhouseCoopers LLP, independent
auditors for the Small Cap Growth Fund.
Legal Matters
Certain legal matters concerning the issuance of shares of the Small Cap
Growth Fund will be passed upon by Piper & Marbury L.L.P., Charles Center
South, 36 South Charles Street, Baltimore, Maryland 21201.
THE BOARD OF DIRECTORS OF THE INVESTMENT FUNDS ON BEHALF OF THE SPECIAL
EQUITIES FUND, INCLUDING THE "NON-INTERESTED" DIRECTORS, UNANIMOUSLY RECOMMEND
APPROVAL OF THE PLAN, AND ANY UNMARKED PROXIES WITHOUT INSTRUCTIONS TO THE
CONTRARY WILL BE VOTED IN FAVOR OF APPROVAL OF THE PLAN.
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APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
this 3rd day of February, 1999, by and between Salomon Brothers Series Funds
Inc ("Series Funds"), a Maryland corporation with its principal place of
business at 7 World Trade Center, New York, New York 10048, on behalf of the
Small Cap Growth Fund (the "Small Cap Growth Fund"), an investment portfolio
of Series Funds and Smith Barney Investment Funds ("Investment Funds"), a
Maryland corporation with its principal place of business at 388 Greenwich
Street, New York, New York 10013, on behalf of the Special Equities Fund (the
"Special Equities Fund"), an investment portfolio of Investment Funds.
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Section 368(a)(1)(D) of the United
States Internal Revenue Code of 1986, as amended (the "Code"). The
reorganization (the "Reorganization") will consist of the transfer of all or
substantially all of the assets of the Special Equities Fund in exchange for
shares of common stock of the Small Cap Growth Fund (collectively, the "Small
Cap Growth Fund Shares" and each, a "Small Cap Growth Fund Share") and the
assumption by the Small Cap Growth Fund of certain scheduled liabilities of
the Special Equities Fund and the distribution, after the Closing Date herein
referred to, of Small Cap Growth Fund Shares to the shareholders of the
Special Equities Fund in liquidation of the Special Equities Fund and the
termination of the Special Equities Fund, all upon the terms and conditions
hereinafter set forth in this Agreement.
Whereas, Series Funds and Investment Funds are registered investment
companies of the management type and the Special Equities Fund owns securities
that generally are assets of the character in which the Small Cap Growth Fund
is permitted to invest;
Whereas, Series Funds and Investment Funds are authorized to issue shares of
common stock;
Whereas, the Directors of Investment Funds have determined that the exchange
of all or substantially all of the assets and certain of the liabilities of
the Special Equities Fund for Small Cap Growth Fund Shares and the assumption
of such liabilities by Series Funds on behalf of the Small Cap Growth Fund is
in the best interests of the Special Equities Fund's shareholders and that the
interests of the existing shareholders of the Special Equities Fund would not
be diluted as a result of this transaction;
Whereas, the Board of Directors of Series Funds has determined that the
exchange of all or substantially all of the assets of the Special Equities
Fund for Small Cap Growth Fund Shares is in the best interests of the Small
Cap Growth Fund's shareholders and that the interests of the existing
shareholders of the Small Cap Growth Fund would not be diluted as a result of
this transaction;
Now, Therefore, in consideration of the premises and of the covenants and
agreements hereinafter set forth, the parties hereto covenant and agree as
follows:
1. TRANSFER OF ASSETS OF THE SPECIAL EQUITIES FUND IN EXCHANGE FOR THE SMALL
CAP GROWTH FUND SHARES AND ASSUMPTION OF THE SPECIAL EQUITIES FUND'S SCHEDULED
LIABILITIES AND LIQUIDATION AND TERMINATION OF THE SPECIAL EQUITIES FUND
1.1. Subject to the terms and conditions herein set forth and on the
basis of the representations and warranties contained herein, Investment
Funds, on behalf of the Special Equities Fund agrees to transfer the
Special Equities Fund's assets as set forth in paragraph 1.2 to Series
Funds on behalf of the Small Cap Growth Fund, and Series Funds on behalf of
the Small Cap Growth Fund agrees in exchange therefor: (i) to deliver to
the Special Equities Fund the number of Class A Small Cap Growth Fund
Shares, including fractional Class A Small Cap Growth Fund Shares,
determined by dividing the value of the Special Equities Fund's net assets
attributable to its Class A shares, computed in the manner and as of the
time and date set
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forth in paragraph 2.1, by the net asset value of one Class A Special
Equities Fund Share, computed in the manner and as of the time and date set
forth in paragraph 2.2; (ii) to deliver to the Special Equities Fund the
number of Class B Small Cap Growth Fund Shares, including fractional Class
B Small Cap Growth Fund Shares, determined by dividing the value of the
Special Equities Fund's net assets attributable to its Class B shares,
computed in the manner and as of the time and date set forth in paragraph
2.1, by the net asset value of one Class B Small Cap Growth Fund Share,
computed in the manner and as of the time and date set forth in paragraph
2.2; (iii) to deliver to the Special Equities Fund the number of Class 2
Small Cap Growth Fund Shares, including fractional Class 2 Special Equities
Fund Shares, determined by dividing the value of the Special Equities
Fund's net assets attributable to its Class L shares, computed in the
manner and as of the time and date set forth in paragraph 2.1, by the net
asset value of one Class 2 Small Cap Growth Fund Share, computed in the
manner and as of the time and date set forth in paragraph 2.2; and (iv) to
assume certain scheduled liabilities of the Special Equities Fund, as set
forth in paragraph 1.3. Such transactions shall take place at the closing
provided for in paragraph 3.1 (the "Closing").
1.2. (a) The assets of the Special Equities Fund to be acquired by Series
Funds on behalf of the Small Cap Growth Fund shall consist of all or
substantially all of its property, including, without limitation, all cash,
securities and dividends or interest receivables which are owned by the
Special Equities Fund and any deferred or prepaid expenses shown as an
asset on the books of the Special Equities Fund on the closing date
provided in paragraph 3.1 (the "Closing Date").
(b) The Special Equities Fund has provided the Small Cap Growth Fund with
a list of all of the Special Equities Fund's assets as of the date of
execution of this Agreement. The Special Equities Fund reserves the right
to sell any of the securities but will not, without the prior approval of
the Small Cap Growth Fund, acquire any additional securities other than
securities of the type in which the Small Cap Growth Fund is permitted to
invest. The Small Cap Growth Fund will, within a reasonable time prior to
the Closing Date, furnish the Special Equities Fund with a statement of the
Small Cap Growth Fund's investment objectives, policies and restrictions
and a list of the securities, if any, on the Special Equities Fund's list
referred to in the first sentence of this paragraph which do not conform to
the Small Cap Growth Fund's investment objectives, policies and
restrictions. In the event that the Special Equities Fund holds any
investments which the Small Cap Growth Fund may not hold, the Special
Equities Fund will dispose of such securities prior to the Closing Date. In
addition, if it is determined that the portfolios of the Special Equities
Fund and the Small Cap Growth Fund, when aggregated, would contain
investments exceeding certain percentage limitations imposed upon the Small
Cap Growth Fund with respect to such investments, the Special Equities
Fund, if requested by the Small Cap Growth Fund, will dispose of and/or
reinvest a sufficient amount of such investments as may be necessary to
avoid violating such limitations as of the Closing Date.
1.3. Investment Funds, on behalf of the Special Equities Fund will
endeavor to discharge all the Special Equities Fund's known liabilities and
obligations prior to the Closing Date. Series Funds on behalf of the Small
Cap Growth Fund shall assume all liabilities, expenses, costs, charges and
reserves reflected on an unaudited Statement of Assets and Liabilities of
the Special Equities Fund prepared as of the Valuation Date (as defined in
paragraph 2.1), in accordance with generally accepted accounting principles
consistently applied from the prior audited period. Series Funds on behalf
of the Small Cap Growth Fund shall assume only those liabilities of the
Special Equities Fund reflected in that unaudited Statement of Assets and
Liabilities and shall not assume any other liabilities, whether absolute or
contingent, not reflected therein.
1.4. As provided in paragraph 3.4, as soon after the Closing Date as is
conveniently practicable (the "Liquidation Date"), the Special Equities
Fund will liquidate and distribute pro rata to the Special Equities Fund's
shareholders of record determined as of the close of business on the
Closing Date (the "Special Equities Fund Shareholders"), the Small Cap
Growth Fund Shares it receives pursuant to paragraph 1.1. Shareholders of
Class A, Class B and Class L shares of the Special Equities Fund shall
receive Class A, Class B and Class 2 shares, respectively, of the Small Cap
Growth Fund. Such liquidation and distribution will be accomplished by the
transfer of the Small Cap Growth Fund Shares then credited to the account
of the Special Equities Fund on the books of the Special Equities Fund to
open accounts on the share records
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of the Small Cap Growth Fund in the name of the Special Equities Fund's
shareholders and representing the respective pro rata number of the Small
Cap Growth Fund Shares due such shareholders. All issued and outstanding
shares of the Special Equities Fund will simultaneously be canceled on the
books of the Special Equities Fund, although share certificates
representing interests in the Special Equities Fund will represent a number
of Small Cap Growth Fund Shares after the Closing Date as determined in
accordance with paragraph 1.1. The Small Cap Growth Fund shall not issue
certificates representing the Small Cap Growth Fund Shares in connection
with such exchange.
1.5. Ownership of Small Cap Growth Fund Shares will be shown on the books
of the Small Cap Growth Fund's transfer agent. Small Cap Growth Fund Shares
will be issued in the manner described in the Small Cap Growth Fund's
current prospectus and statement of additional information.
1.6. Any transfer taxes payable upon issuance of the Small Cap Growth
Fund Shares in a name other than the registered holder of the Small Cap
Growth Fund Shares on the books of Small Cap Growth Fund as of that time
shall, as a condition of such issuance and transfer, be paid by the person
to whom such Small Cap Growth Fund Shares are to be issued and transferred.
1.7. Any reporting responsibility of the Special Equities Fund is and
shall remain the responsibility of the Special Equities Fund up to and
including the Closing Date and such later dates on which the Special
Equities Fund is terminated and deregistered.
2. VALUATION
2.1. The value of the Special Equities Fund's assets to be acquired by
the Small Cap Growth Fund hereunder shall be the value of such assets
computed as of the close of regular trading on the New York Stock Exchange,
Inc. (the "NYSE") on the Closing Date (such time and date being hereinafter
called the "Valuation Date"), using the valuation procedures set forth in
the Special Equities Fund's then current prospectus or statement of
additional information.
2.2. The net asset value of Small Cap Growth Fund Shares shall be the net
asset value per share computed as of the close of regular trading on the
NYSE on the Valuation Date, using the valuation procedures set forth in the
Small Cap Growth Fund's then current prospectus or statement of additional
information.
2.3. All computations of value shall be made by Mutual Management Corp.
in accordance with its regular practice as pricing agent for the Special
Equities Fund and the Small Cap Growth Fund.
3. CLOSING AND CLOSING DATE
3.1. The Closing Date shall be June 4, 1999, or such later date as the
parties may agree to in writing. All acts taking place at the Closing shall
be deemed to take place simultaneously as of the close of business on the
Closing Date unless otherwise provided. The Closing shall be held as of
5:00 p.m. at the offices of Salomon Smith Barney Inc., 388 Greenwich
Street, New York, New York 10013, or at such other time and/or place as the
parties may agree.
3.2. In the event that on the Valuation Date (a) the NYSE or another
primary trading market for portfolio securities of the Special Equities
Fund or the Small Cap Growth Fund shall be closed to trading or trading
thereon shall be restricted or (b) trading or the reporting of trading on
the NYSE or elsewhere shall be disrupted so that accurate appraisal of the
value of the net assets of the Special Equities Fund or the Small Cap
Growth Fund is impracticable, the Closing Date shall be postponed until the
first business day after the day when trading shall have been fully resumed
and reporting shall have been restored.
3.3. The Special Equities Fund shall deliver at the Closing a list of the
names and addresses of the Special Equities Fund's shareholders and the
number and percentage ownership of outstanding shares owned by each such
shareholder immediately prior to the Closing, certified on behalf of the
Special Equities Fund by its President. The Small Cap Growth Fund shall
issue and deliver a confirmation evidencing the Small Cap Growth Fund
Shares to be credited to the Special Equities Fund's account on the Closing
Date to the Secretary of the Special Equities Fund, or provide evidence
satisfactory to the Special Equities Fund
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that such Small Cap Growth Fund Shares have been credited to the Special
Equities Fund's account on the books of the Small Cap Growth Fund. At the
Closing, each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, if any, receipts or other documents as
such other party or its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1. Investment Funds and the Special Equities Fund represent and warrant
to Series Funds and the Small Cap Growth Fund as follows:
(a) Investment Funds is a corporation, duly organized, validly
existing and in good standing under the laws of the State of Maryland;
(b) Investment Funds is a registered investment company classified as
a management company of the open-end type, and its registration with
the Securities and Exchange Commission (the "Commission") as an
investment company under the Investment Company Act of 1940, as amended
(the "1940 Act") is in full force and effect;
(c) Investment Funds is not, and the execution, delivery and
performance of this Agreement will not result, in a material violation
of its Articles of Incorporation or By-laws or of any agreement,
indenture, instrument, contract, lease or other undertaking to which
the Special Equities Fund is a party or by which it is bound;
(d) Investment Funds has no material contracts or other commitments
(other than this Agreement) which will be terminated with liability to
the Special Equities Fund prior to the Closing Date;
(e) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Investment Funds or the
Special Equities Fund or any of the Special Equities Fund's properties
or assets, except as previously disclosed to the Small Cap Growth Fund.
The Special Equities Fund knows of no facts which might form the basis
for the institution of such proceedings and is not party to or subject
to the provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects its business
or its ability to consummate the transactions herein contemplated;
(f) The Statements of Assets and Liabilities of the Special Equities
Fund as of December 31, 1998 have been audited by KPMG LLP, independent
certified public accountants, and are in accordance with generally
accepted accounting principles consistently applied, and such
statements (copies of which have been furnished to the Small Cap Growth
Fund) fairly reflect the financial condition of the Special Equities
Fund as of such date, and there are no known contingent liabilities of
the Special Equities Fund as of such date not disclosed therein;
(g) The Special Equities Fund will file its final federal and other
tax returns for the period ending on the Closing Date in accordance
with the Code. At the Closing Date, all federal and other tax returns
and reports of the Special Equities Fund required by law then to have
been filed prior to the Closing Date shall have been filed, and all
federal and other taxes shown as due on such returns shall have been
paid so far as due, or provision shall have been made for the payment
thereof and, to the best of the Special Equities Fund's knowledge, no
such return is currently under audit and no assessment has been
asserted with respect to such returns;
(h) For the most recent fiscal year of its operation, the Special
Equities Fund has met the requirements of Subchapter M of the Code for
qualification and treatment as a regulated investment company;
(i) All issued and outstanding shares of the Special Equities Fund
are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and non-assessable. All of the issued and
outstanding shares of the Special Equities Fund will, at the time of
Closing, be held by the persons and in the amounts set forth in the
records of the transfer agent as provided in paragraph 3.4. The Special
Equities Fund does not have outstanding any options, warrants or other
rights to subscribe for or
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purchase any shares of the Special Equities Fund, nor is there
outstanding any security convertible into any shares of the Special
Equities Fund;
(j) At the Closing Date, the Special Equities Fund will have good and
marketable title to its assets to be transferred to the Small Cap
Growth Fund pursuant to paragraph 1.2 and full right, power and
authority to sell, assign, transfer and deliver such assets hereunder
and, upon delivery and payment for such assets, the Small Cap Growth
Fund will acquire good and marketable title thereto, subject to no
restrictions on the full transfer thereof, including such restrictions
as might arise under the Securities Act of 1933, as amended (the "1933
Act"), other than as disclosed to the Small Cap Growth Fund;
(k) The execution, delivery and performance of this Agreement has
been duly authorized by all necessary action on the part of Investment
Funds' Board of Directors, and subject to the approval of the Special
Equities Fund's shareholders, this Agreement, assuming due
authorization, execution and delivery by the Small Cap Growth Fund,
will constitute a valid and binding obligation of the Special Equities
Fund, enforceable in accordance with its terms, subject as to
enforcement, to bankruptcy, insolvency, reorganization, moratorium and
other laws relating to or affecting creditors' rights and to general
equity principles;
(l) The information to be furnished by the Special Equities Fund for
use in no-action letters, applications for exemptive orders,
registration statements, proxy materials and other documents which may
be necessary in connection with the transactions contemplated hereby
shall be accurate and complete in all material respects and shall
comply in all material respects with federal securities and other laws
and regulations thereunder applicable thereto; and
(m) The proxy statement of the Special Equities Fund (the "Proxy
Statement") to be included in the Registration Statement referred to in
paragraph 5.7 (other than information therein that relates to the Small
Cap Growth Fund) will, on the effective date of the Registration
Statement and on the Closing Date, not contain any untrue statement of
a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which such statements were made, not materially
misleading.
4.2. Series Funds and the Small Cap Growth Fund represent and warrant to
Investment Funds and the Special Equities Fund as follows:
(a) The Small Cap Growth Fund is a portfolio of Series Funds, which
is a corporation, duly organized, validly existing and in good standing
under the laws of the State of Maryland;
(b) Series Funds is a registered investment company classified as a
management company of the open-end type and its registration with the
Commission as an investment company under the 1940 Act is in full force
and effect;
(c) The current prospectus of the Small Cap Growth Fund and the
statement of additional information of Series Funds conform in all
material respects to the applicable requirements of the 1933 Act and
the 1940 Act and the rules and regulations of the Commission thereunder
and do not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not materially misleading;
(d) At the Closing Date, Series Funds will have good and marketable
title to the Small Cap Growth Fund's assets;
(e) Series Funds is not, and the execution, delivery and performance
of this Agreement on behalf of the Small Cap Growth Fund will not
result, in a material violation of its Articles of Incorporation or By-
laws or of any agreement, indenture, instrument, contract, lease or
other undertaking with respect to the Small Cap Growth Fund to which
Series Funds is a party or by which it is bound;
(f) No material litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or threatened against Series Funds with respect to the Small
Cap Growth Fund or any of the Small Cap Growth Fund's properties or
assets, except as previously
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disclosed in writing to the Special Equities Fund. Series Funds and the
Small Cap Growth Fund know of no facts which might form the basis for
the institution of such proceedings and neither Series Funds nor the
Small Cap Growth Fund is a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which
materially and adversely affects the Small Cap Growth Fund's business
or Series Funds' ability on behalf of the Small Cap Growth Fund to
consummate the transactions contemplated herein;
(g) At the Closing Date, all federal and other tax returns and
reports of Small Cap Growth Fund required by law then to have been
filed by such dates shall have been filed, and all federal and other
taxes shown as due on said returns and reports shall have been paid so
far as due, or provision shall have been made for the payment thereof
and, to the best of the Small Cap Growth Fund's knowledge, no such
return is currently under audit and no assessment has been asserted
with respect to such returns;
(h) For the most recent fiscal year of its operation, the Small Cap
Growth Fund has met the requirements of Subchapter M of the Code for
qualification and treatment as a regulated investment company and the
Small Cap Growth Fund intends to do so in the future;
(i) At the date hereof, all issued and outstanding shares of the
Small Cap Growth Fund are, and at the Closing Date will be, duly and
validly issued and outstanding, fully paid and non-assessable, with no
personal liability attaching to the ownership thereof. The Small Cap
Growth Fund does not have outstanding any options, warrants or other
rights to subscribe for or purchase any shares of the Small Cap Growth
Fund, nor is there outstanding any security convertible into shares of
the Small Cap Growth Fund;
(j) The execution, delivery and performance of this Agreement has
been duly authorized by all necessary action, if any, on the part of
Series Funds' Board of Directors and assuming due authorization,
execution and delivery by Investment Funds, this Agreement constitutes
a valid and binding obligation of Series Funds on behalf of the Small
Cap Growth Fund, enforceable in accordance with its terms, subject as
to enforcement, to bankruptcy, insolvency, reorganization, moratorium
and other laws relating to or affecting creditors' rights and to
general equity principles;
(k) The Small Cap Growth Fund Shares to be issued and delivered to
the Special Equities Fund, for the account of the Special Equities Fund
Shareholders, pursuant to the terms of this Agreement, will at the
Closing Date have been duly authorized and, when so issued and
delivered, will be duly and validly issued Small Cap Growth Fund
Shares, and will be fully paid and non-assessable with no personal
liability attaching to the ownership thereof;
(l) The information to be furnished by the Small Cap Growth Fund for
use in no-action letters, applications for exemptive orders,
registration statements, proxy materials and other documents which may
be necessary in connection with the transactions contemplated hereby
shall be accurate and complete in all material respects and shall
comply in all material respects with federal securities and other laws
and regulations applicable thereto;
(m) The Proxy Statement to be included in the Registration Statement
(only insofar as it relates to the Small Cap Growth Fund and Series
Funds) will, on the effective date of the Registration Statement and on
the Closing Date, not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which such statements were made, not materially misleading; and
(n) Series Funds, on behalf of the Small Cap Growth Fund, agrees to
use all reasonable efforts to obtain the approvals and authorizations
required by the 1933 Act, the 1940 Act and such of the state Blue Sky
or securities laws as it may deem appropriate in order to continue the
Small Cap Growth Fund's operations after the Closing Date.
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5. COVENANTS OF INVESTMENT FUNDS, THE SPECIAL EQUITIES FUND, THE SMALL CAP
GROWTH FUND AND SERIES FUNDS
5.1. Series Funds on behalf of the Small Cap Growth Fund and Investment
Funds on behalf of the Special Equities Fund each will operate its business
in the ordinary course between the date hereof and the Closing Date. It is
understood that such ordinary course of business will include the
declaration and payment of customary dividends and distributions and any
other dividends and distributions deemed advisable, in each case payable
either in cash or in additional shares.
5.2. Investment Funds on behalf of the Special Equities Fund will call a
meeting of its shareholders to consider and act upon this Agreement and to
take all other action necessary to obtain approval of the transactions
contemplated herein.
5.3. Investment Funds on behalf of the Special Equities Fund covenants
that the Small Cap Growth Fund Shares to be issued hereunder are not being
acquired for the purpose of making any distribution thereof other than in
accordance with the terms of this Agreement.
5.4. The Special Equities Fund will assist the Small Cap Growth Fund in
obtaining such information as the Small Cap Growth Fund reasonably requests
concerning the beneficial ownership of the Special Equities Fund's shares.
5.5. Subject to the provisions of this Agreement, Investment Funds on
behalf of the Special Equities Fund and Series Funds on behalf of the Small
Cap Growth Fund, each will take, or cause to be taken, all action, and do
or cause to be done, all things reasonably necessary, proper or advisable
to consummate and make effective the transactions contemplated by this
Agreement.
5.6. As promptly as practicable, but in any case within sixty days after
the Closing Date, the Special Equities Fund shall furnish the Small Cap
Growth Fund, in such form as is reasonably satisfactory to the Small Cap
Growth Fund, a statement of the earnings and profits of the Special
Equities Fund for federal income tax purposes which will be carried over to
the Small Cap Growth Fund as a result of Section 381 of the Code, and which
will be certified by the President and Treasurer of the Special Equities
Fund.
5.7. The Special Equities Fund will provide the Small Cap Growth Fund
with information reasonably necessary for the preparation of a prospectus
(the "Prospectus") which will include the Proxy Statement, referred to in
paragraph 4.1(m), all to be included in a Registration Statement on Form N-
14 of Series Funds (the "Registration Statement"), in compliance with the
1933 Act, the Securities Exchange Act of 1934 (the "1934 Act") and the 1940
Act in connection with the meeting of the Special Equities Fund's
shareholders to consider approval of this Agreement and the transactions
contemplated herein.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF INVESTMENT FUNDS IN RESPECT OF THE
SPECIAL EQUITIES FUND
The obligations of Investment Funds and the Special Equities Fund to
consummate the transactions provided for herein shall be subject, at its
election, to the performance by Series Funds and the Small Cap Growth Fund of
all of the obligations to be performed by them hereunder on or before the
Closing Date and, in addition thereto, the following further conditions:
6.1. All representations and warranties of Series Funds and the Small Cap
Growth Fund contained in this Agreement shall be true and correct in all
material respects as of the date hereof and, except as they may be affected
by the transactions contemplated by this Agreement, as of the Closing Date
with the same force and effect as if made on and as of the Closing Date;
6.2. Series Funds on behalf of the Small Cap Growth Fund shall have
delivered to Investment Funds a certificate executed in its name by its
President or Vice President and its Treasurer or Assistant Treasurer, in a
form reasonably satisfactory to Investment Funds and dated as of the
Closing Date, to the effect that the representations and warranties of
Series Funds and the Small Cap Growth Fund made in this Agreement are true
and correct at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement; and
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6.3. Investment Funds shall have received on the Closing Date a favorable
opinion from Simpson Thatcher & Bartlett, counsel to the Small Cap Growth
Fund, dated as of the Closing Date, in a form reasonably satisfactory to
Christina T. Sydor, Esq., Secretary of Investment Funds, covering the
following points:
That (a) Series Funds has been duly organized and is validly existing
as a corporation under the laws of the State of Maryland; (b) Series
Funds is an open-end investment company of the management type
registered under the 1940 Act; (c) the Small Cap Growth Fund is a
series of the Series Funds; (d) this Agreement, the reorganization
provided for hereunder and the execution of this Agreement have been
duly authorized, and executed and delivered by the Series Funds, and
this Agreement is a legal, valid, binding and enforceable obligation of
the Series Funds with respect to the Small Cap Growth Fund, subject to
the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or
affecting creditors rights generally, general equitable principals
(whether considered in a proceeding in equity or at law), and an
implied covenant of good faith and fair dealing executed and delivered
by Series Funds and is a valid and binding obligation of Series Funds
with respect to the Small Cap Growth Fund enforceable in accordance
with its terms against the assets of the Small Cap Growth Fund; and (e)
the Small Cap Growth Fund Shares to be issued to the Special Equities
Fund for distribution to its shareholders pursuant to this Agreement
have been, to the extent of the number of Small Cap Growth Fund Shares
of the pertinent class authorized to be issued by the Small Cap Growth
Fund in the Articles of Incorporation of Series Funds and then
unissued, duly authorized and, subject to the receipt by Series Funds
of consideration equal to the net asset value thereof (but in no event
less than the par value thereof), such Small Cap Growth Fund Shares,
when issued in accordance with this Agreement, will be validly issued
and fully paid and non-assessable. Such opinion may state that it is
solely for the benefit of Investment Funds and the Special Equities
Fund, its Directors and its officers. Such counsel may rely, as to
matters governed by the laws of the State of Maryland, on an opinion of
Maryland counsel.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SERIES FUNDS IN RESPECT OF THE
SMALL CAP GROWTH FUND
The obligations of Series Funds on behalf of the Small Cap Growth Fund to
complete the transactions provided for herein shall be subject, at its
election, to the performance by Investment Funds and the Special Equities Fund
of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, the following conditions:
7.1. All representations and warranties of Investment Funds and the
Special Equities Fund contained in this Agreement shall be true and correct
in all material respects as of the date hereof and, except as they may be
affected by the transactions contemplated by this Agreement, as of the
Closing Date with the same force and effect as if made on and as of the
Closing Date;
7.2. The Special Equities Fund shall have delivered to the Small Cap
Growth Fund a statement of the Special Equities Fund's assets and
liabilities, together with a list of the Special Equities Fund's portfolio
securities showing the tax costs of such securities by lot and the holding
periods of such securities, as of the Closing Date, certified by the
Treasurer or Assistant Treasurer of the Special Equities Fund;
7.3. Investment Funds shall have delivered to the Small Cap Growth Fund
on the Closing Date a certificate executed in its name by its President or
Vice President and its Treasurer or Assistant Treasurer, in form and
substance satisfactory to the Small Cap Growth Fund and dated as of the
Closing Date, to the effect that the representations and warranties of
Investment Funds and the Special Equities Fund made in this Agreement are
true and correct at and as of the Closing Date, except as they may be
affected by the transactions contemplated by this Agreement; and
7.4. The Small Cap Growth Fund shall have received on the Closing Date a
favorable opinion of Willkie Farr & Gallagher, counsel to the Special
Equities Fund, in a form satisfactory to Christina T. Sydor, Esq.,
Secretary of the Small Cap Growth Fund, covering the following points:
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That (a) Investment Funds is duly organized and validly existing
under the laws of the State of Maryland; (b) Investment Funds is an
open-end management investment company registered under the 1940 Act;
(c) the Special Equities Fund is a series of the Investment Funds; and
(d) this Agreement, the reorganization provided for hereunder and the
execution of this Agreement have been duly authorized and approved by
all requisite action of Investment Funds, and this Agreement has been
duly executed and delivered by Investment Funds and is a valid and
binding obligation of Investment Funds and the Special Equities Fund
enforceable in accordance with its terms against the assets of the
Special Equities Fund. Such opinion may state that it is solely for the
benefit of Series Funds, its Directors and its officers. Such counsel
may rely, as to matters governed by the laws of the State of Maryland,
on an opinion of Maryland counsel.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF INVESTMENT FUNDS, THE
SPECIAL EQUITIES FUND, THE SMALL CAP GROWTH FUND AND SERIES FUNDS
If any of the conditions set forth below do not exist on or before the
Closing Date with respect to Series Funds on behalf of the Small Cap Growth
Fund, or Investment Funds on behalf of the Special Equities Fund, the other
party to this Agreement shall, at its option, not be required to consummate
the transactions contemplated by this Agreement:
8.1. This Agreement and the transactions contemplated herein shall have
been approved by the requisite vote of the holders of the outstanding
shares of the Special Equities Fund in accordance with the provisions of
Investment Funds's Articles of Incorporation and By-laws and certified
copies of the votes evidencing such approval shall have been delivered to
the Small Cap Growth Fund. Notwithstanding anything herein to the contrary,
neither Series Funds on behalf of the Small Cap Growth Fund nor Investment
Funds on behalf of the Special Equities Fund may waive the conditions set
forth in this paragraph 8.1;
8.2. On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with,
this Agreement or the transactions contemplated herein;
8.3. All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities (including those
of the Commission and of state Blue Sky and securities authorities,
including "no-action" positions of and exemptive orders from such federal
and state authorities) deemed necessary by the Special Equities Fund or the
Small Cap Growth Fund to permit consummation, in all material respects, of
the transactions contemplated hereby shall have been obtained, except where
failure to obtain any such consent, order or permit would not involve a
risk of a material adverse effect on the assets or properties of the
Special Equities Fund or the Small Cap Growth Fund, provided that either
party hereto may for itself waive any of such conditions;
8.4. The Registration Statement shall have become effective under the
1933 Act and no stop orders suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no
investigation or proceeding for that purpose shall have been instituted or
be pending, threatened or contemplated under the 1933 Act;
8.5. The Special Equities Fund shall have declared and paid a dividend or
dividends on the outstanding shares of the Special Equities Fund, which,
together with all previous such dividends, shall have the effect of
distributing to the shareholders of the Special Equities Fund all of the
investment company taxable income and exempt-interest income of the Special
Equities Fund for all taxable years ending on or prior to the Closing Date.
The dividend declared and paid by the Special Equities Fund shall also
include all of such fund's net capital gain realized in all taxable years
ending on or prior to the Closing Date (after reduction for any capital
loss carryforward);
8.6. The parties shall have received a favorable opinion of Willkie Farr
& Gallagher, addressed to Series Funds in respect of the Small Cap Growth
Fund and Investment Funds in respect of the Special
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Equities Fund and satisfactory to Christina T. Sydor, Esq., as Secretary of
the Special Equities Fund and the Small Cap Growth Fund, substantially to
the effect that for federal income tax purposes:
(a) the transfer of all or substantially all of the Special Equities
Fund's assets in exchange for the Small Cap Growth Fund Shares and the
assumption by the Small Cap Growth Fund of certain scheduled
liabilities of the Special Equities Fund will constitute a
"reorganization" within the meaning of Section 368(a)(1)(D) of the
Code, and the Special Equities Fund and the Small Cap Growth Fund are
each a "party to a reorganization" within the meaning of Section 368(b)
of the Code; (b) no gain or loss will be recognized by the Small Cap
Growth Fund upon the receipt of the assets of the Special Equities Fund
in exchange for the Small Cap Growth Fund Shares and the assumption by
the Small Cap Growth Fund of certain scheduled liabilities of the
Special Equities Fund; (c) no gain or loss will be recognized by the
Special Equities Fund upon the transfer of the Special Equities Fund's
assets to the Small Cap Growth Fund in exchange for the Small Cap
Growth Fund Shares and the assumption by the Small Cap Growth Fund of
certain scheduled liabilities of the Special Equities Fund or upon the
distribution (whether actual or constructive) of the Small Cap Growth
Fund Shares to the Special Equities Fund's shareholders; (d) no gain or
loss will be recognized by shareholders of the Special Equities Fund
upon the exchange of their Special Equities Fund shares for the Small
Cap Growth Fund Shares and the assumption by the Small Cap Growth Fund
of certain scheduled liabilities of the Special Equities Fund; (e) the
aggregate tax basis for the Small Cap Growth Fund Shares received by
each of the Special Equities Fund's shareholders pursuant to the
Reorganization will be the same as the aggregate tax basis of the
Special Equities Fund Shares held by such shareholder immediately prior
to the Reorganization, and the holding period of the Small Cap Growth
Fund Shares to be received by each Special Equities Fund shareholder
will include the period during which the Special Equities Fund Shares
exchanged therefor were held by such shareholder (provided that the
Special Equities Fund Shares were held as capital assets on the date of
the Reorganization); and (f) the tax basis of the Special Equities
Fund's assets acquired by Small Cap Growth Fund will be the same as the
tax basis of such assets to the Special Equities Fund immediately prior
to the Reorganization, and the holding period of the assets of the
Special Equities Fund in the hands of the Small Cap Growth Fund will
include the period during which those assets were held by the Special
Equities Fund.
Notwithstanding anything herein to the contrary, neither Series Funds on
behalf of the Small Cap Growth Fund nor Investment Funds on behalf of the
Special Equities Fund may waive the conditions set forth in this paragraph
8.6.
9. BROKERAGE FEES AND EXPENSES
Series Funds on behalf of the Small Cap Growth Fund represents and warrants
to Investment Funds and the Special Equities Fund, and Investment Funds on
behalf of the Special Equities Fund hereby represents and warrants to Series
Funds on behalf of the Small Cap Growth Fund, that there are no brokers or
finders entitled to receive any payments in connection with the transactions
provided for herein.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1. The parties hereto agree that no party has made any representation,
warranty or covenant not set forth herein and that this Agreement
constitutes the entire agreement between the parties.
10.2. The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection
herewith shall survive the consummation of the transactions contemplated
hereunder.
11. TERMINATION
11.1. This Agreement may be terminated at any time prior to the Closing
Date by: (1) the mutual agreement of Investment Funds on behalf of the
Special Equities Fund and Series Funds on behalf of the Small Cap Growth
Fund; (2) Investment Funds in respect of the Special Equities Fund in the
event that Series Funds in respect of the Small Cap Growth Fund shall, or
Series Funds in respect of the Small Cap
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Growth Fund in the event that Investment Funds or the Special Equities Fund
shall, materially breach any representation, warranty or agreement
contained herein to be performed at or prior to the Closing Date; or (3) a
condition herein expressed to be precedent to the obligations of the
terminating party has not been met and it reasonably appears that it will
not or cannot be met.
11.2. In the event of any such termination, there shall be no liability
for damages on the part of either Investment Funds on behalf of the Special
Equities Fund or Series Funds on behalf of the Small Cap Growth Fund or
their respective Directors or officers to the other party.
12. AMENDMENTS; WAIVERS
12.1. This Agreement may be amended, modified or supplemented in such
manner as may be mutually agreed upon in writing by the authorized officers
of Investment Funds and Series Funds; provided, however, that following the
meeting of the Special Equities Fund shareholders called by the Special
Equities Fund pursuant to paragraph 5.2 of this Agreement, no such
amendment may have the effect of changing the provisions for determining
the number of the Small Cap Growth Fund Shares to be issued to the Special
Equities Fund's shareholders under this Agreement to the detriment of such
shareholders without their further approval.
12.2. At any time prior to the Closing Date either party hereto may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy or certified mail addressed to Investment Funds, 388
Greenwich Street, 22nd Floor, New York, New York 10013, Attention: Heath B.
McLendon; or to Series Funds, 388 Greenwich Street, 22nd Floor, New York, New
York 10013, Attention: Heath B. McLendon.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
14.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by
any party without the written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or
give any person, firm, corporation or other entity, other than the parties
hereto and their respective successors and assigns, any rights or remedies
under or by reason of this Agreement.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its Chairman of the Board, President or Vice President and
attested by its Secretary or Assistant Secretary.
SALOMON BROTHERS SERIES FUNDS INC
on behalf of the SMALL CAP GROWTH FUND
Attest: By: /s/ Heath B. McLendon /s/ Christina T. Sydor
-------------------- --------------------
Name: Heath B. Name: Christina T. Sydor
McLendon Title: Secretary
Title: President
SMITH BARNEY INVESTMENT FUNDS INC.
on behalf of the SPECIAL EQUITIES FUND
Attest: By: /s/ Heath B. McLendon /s/ Christina T. Sydor
-------------------- --------------------
Name: Heath B. McLendon Name: Christina T. Sydor
Title: President Title: Secretary
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