Statement of Additional Information
April 30, 1998
SMITH BARNEY
CONCERT ALLOCATION SERIES INC.
SELECT HIGH GROWTH PORTFOLIO
SELECT GROWTH PORTFOLIO
SELECT BALANCED PORTFOLIO
SELECT CONSERVATIVE PORTFOLIO
SELECT INCOME PORTFOLIO
388 Greenwich Street, New York, New York 10013 (800) 451-2010
Smith Barney Concert Allocation Series Inc. (the "Concert Series")
currently offers eleven investment portfolios, five of which are
offered by this Statement of Additional Information (individually, a
"Portfolio" and collectively, the "Select Portfolios"). This
Statement of Additional Information expands upon and supplements the
information contained in the current Prospectus of Smith Barney
Concert Allocation Series Inc. (the "Concert Series") dated April 30,
1998 for the Select Portfolios, as amended or supplemented from time
to time (the "Prospectus"), and should be read in conjunction
therewith. Each of the Select Portfolios seeks to achieve its
objective by investing in a number of open-end management investment
companies or series thereof ("Underlying Smith Barney Funds") for
which Smith Barney Inc. ("Smith Barney") now or in the future acts as
principal underwriter or for which Mutual Management Corp. ("MMC")
(formerly Smith Barney, Smith Barney Mutual Funds Management Inc.),
or Smith Barney Strategy Advisers Inc. ("SBSA") now or in the future
acts as investment adviser. A Prospectus may be obtained from
designated insurance companies offering separate accounts ("Separate
Accounts") which fund certain variable annuity and variable life
insurance contracts (each a "Contract") or by writing or calling the
Concert Series at the address or telephone number listed above. This
Statement of Additional Information, although not in itself a
prospectus, is incorporated by reference into the Prospectus in its
entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are used in the
Prospectus for the Select Portfolios and this Statement of Additional
Information, except as shown below:
Caption Page
Management of the Concert Series 2
Investment Objectives and Management Policies 4
Purchase of Shares 20
Redemption of Shares 20
Valuation of Shares 21
Performance 21
Taxes (See in the Prospectus "Dividends, Distributions and Taxes") 22
Voting (See in the Prospectus "Additional Information") 24
Additional Information 25
Financial Statements 25
Appendix - Ratings of Debt Obligations A-1
MANAGEMENT OF THE CONCERT SERIES
The executive officers of the Concert Series are employees of certain
of the organizations that provide services to the Concert Series.
These organizations are the following:
Travelers Investment Adviser, Inc. ("TIA") Investment
Manager
PNC Bank, National Association ("PNC Bank") Custodian
First Data Investor Services Group, Inc. ("First Data") Transfer
Agent
These organizations and the functions they perform for the Concert
Series are discussed in the Prospectus and in this Statement of
Additional Information.
Directors and Executive Officers of the Concert Series
The names of the directors and executive officers of the Concert
Series, together with information as to their principal business
occupations during the past five years, are shown below. Each
director who is an "interested person" of the Concert Series, as
defined in the Investment Company Act of 1940, as amended (the "1940
Act"), is indicated by an asterisk.
Walter E. Auch, Director (Age 77). Consultant to companies in
the financial services industry; Director of Pimco Advisers L.P.;
Brinson Partners; Nicholas-Applegate (each a registered investment
adviser); Legend Properties, a real estate management company; Banyan
Realty Trust; Banyan Land Fund II; Geotek Communications Inc., an
international wireless communications company. His address is 6001 N.
62nd Place, Paradise Valley, Arizona 85253.
Martin Brody, Director (Age 76). Private Investor; His address
is c/o HMK Associates, 30 Columbia Turnpike, Florham Park, N.J.
07932.
H. John Ellis, Jr., Director (Age 71). Retired. His address is
858 East Crystal Downs Drive, Frankfort, Michigan 49635.
Stephen E. Kaufman, Director (Age 66). Attorney. His address
is 277 Park Avenue, New York, New York 10172.
Armon E. Kamesar, Director (Age 70). Chairman of the Board of
TEC, an international organization of Chief Executive Officers;
Trustee, U.S. Bankruptcy Court. His address is 7328 Country Club
Drive, La Jolla, CA 92037.
*Heath B. McLendon, Chairman of the Board (Age 64). Managing
Director of Smith Barney and Chairman of the Board of Smith Barney
Strategy Advisers Inc. and Director and President of MMC and TIA;
prior to July 1993, Senior Executive Vice President of Shearson
Lehman Brothers Inc.; Vice Chairman of Shearson Asset Management,;
and a Director of PanAgora Asset Management, Inc. and PanAgora Asset
Management Limited. Mr. McLendon serves on the Board of 42 Smith
Barney Mutual Funds. His address is 388 Greenwich Street, New York,
New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 40).
Managing Director of Smith Barney; Director and Senior Vice President
of MMC and TIA. Mr. Daidone also serves as Senior Vice President and
Treasurer of 42 Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
R. Jay Gerken, Vice President and Investment Officer (Age 47).
Managing Director of Smith Barney and portfolio manager of one
other investment company of Smith Barney Mutual Funds; prior to July
1993, Managing Director of Shearson Lehman Advisors. His address is
388 Greenwich Street, New York, New York 10013.
Thomas Stiles, Vice President and Investment Officer (Age *).
Christina T. Sydor, Secretary (Age 47). Managing Director of
Smith Barney; General Counsel and Secretary of MMC and TIA. Ms.
Sydor also serves as Secretary of 42 Smith Barney Mutual Funds. Her
address is 388 Greenwich Street, New York, New York 10013.
Each Director also serves as a director, trustee, consultant and/or
general partner of certain other mutual funds for which Smith Barney
serves as distributor. As of April 3, 1998, the Directors and
officers of the Fund, as a group, owned less than 1.00% of the
outstanding common stock of the Fund.
No officer, director or employee of MMC, or any of its affiliates
will receive any compensation from the Concert Series for serving as
an officer or director of the Concert Series. The Concert Series
pays each director who is not an officer, director or employee of MMC
or any of its affiliates a fee of $5,000 per annum plus $100 per
Portfolio per meeting attended and reimburses travel and out-of-
pocket expenses.
Upon attainment of age 80 Directors are required to change to
emeritus status. Directors Emeritus are entitled to serve in
emeritus status for a maximum of 10 years during which time they
receive 50% of the annual retainer fee and meeting fees otherwise
applicable to the Concert Series Directors. All Directors are
reimbursed for travel and out-of-pocket expenses incurred in
attending such meetings.
The following table shows the compensation paid by Concert Series to
each incumbent Director during its first fiscal year:
Compensation Table
Total
Pension or Total Number
Retirement Benefits Compensation of Funds
Aggregate Accrued as Expense From Served in
Name Compensation of Concert Series Fund Complex Complex
Heath B. McLendon* None None None 42
Walter Auch $14,950 None $ 43,400 2
Martin Brody 12,950 None 119,814 19
H. John Ellis 14,950 None 41,200 1
Armon E. Kamesar 14,950 None 43,300 2
Stephen E. Kaufman 14,950 None 91,964 13
* Designates "interested director".
Investment Manager - TIA
TIA acts as investment manager to each Select Portfolio pursuant to
separate asset allocation and administration agreements (the "Asset
Allocation and Administration Agreements"). TIA is an indirect
wholly owned subsidiary of Travelers Group Inc. ("Travelers"). The
Asset Allocation and Administration Agreements with respect to each
Select Portfolio were approved by the Board of Directors, including a
majority of the directors who are not "interested persons" of the
Concert Series or TIA (the "Independent Directors"), on September 5,
1996. Pursuant to the Asset Allocation and Administration
Agreements, TIA will determine how each Select Portfolio's assets
will be invested in the Underlying Smith Barney Funds and in
repurchase agreements pursuant to the investment objectives and
policies of each Portfolio set forth in the Prospectus and make
recommendations to the Board of Directors concerning changes to (a)
the Underlying Smith Barney Funds in which the Select Portfolios may
invest, (b) the percentage range of assets that may be invested by
each Portfolio in any one Underlying Smith Barney Fund and (c) the
percentage range of assets of any Portfolio that may be invested in
equity funds and fixed income funds (including money market funds).
In addition to such services, TIA pays the salaries of all officers
and employees who are employed by both it and the Concert Series,
maintains office facilities for the Concert Series, furnishes the
Concert Series with statistical and research data, clerical help and
accounting, data processing, bookkeeping, internal auditing and legal
services and certain other services required by the Concert Series
and each Select Portfolio, prepares reports to each Portfolio's
shareholders and prepares tax returns, reports to and filings with
the Securities and Exchange Commission (the "SEC") and state Blue Sky
authorities. MMC provides investment advisory and management
services to investment companies affiliated with Smith Barney.
The management fee for each Select Portfolio is calculated at the
annual rate of 0.35% of that Portfolio's average daily net assets.
Under the Asset Allocation and Administration Agreements, TIA has
agreed to bear all expenses incurred in the operation of each Select
Portfolio other than the management fee and extraordinary expenses.
Such expenses include taxes, interest, brokerage fees and
commissions, if any; fees of directors who are not officers,
directors, shareholders or employees of Smith Barney or TIA; SEC fees
and state Blue Sky qualification fees; charges of custodians;
transfer and dividend disbursing agent's fees; certain insurance
premiums; outside auditing and legal expenses; costs of maintenance
of corporate existence; investor services (including allocated
telephone and personnel expenses); and costs of preparation and
printing of the prospectus for regulatory purposes and for
distribution to existing shareholders; cost of shareholders' reports
and shareholder meetings and meetings of the officers or Board of
Directors of the Concert Series.
For the fiscal period ended January 31, 1998, the management fees for
each Select Portfolio were as follows:
Select Portfolio
High Growth $37,387
Growth 58,327
Balanced 62,481
Conservative 13,941
Income 5,866
Counsel and Auditors
Willkie Farr & Gallagher serves as legal counsel to the Concert
Series. The Independent Directors of the Concert Series have
selected Stroock & Stroock & Lavan LLP as their legal counsel
KPMG Peat Marwick LLP, independent accountants, 345 Park Avenue, New
York, New York 10154, have been selected as auditors for the Concert
Series for its fiscal year ending January 31, 1999 to examine and
report on the Concert Series' financial statements and highlights.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectus discusses the investment objectives of the Select
Portfolios and each of the Underlying Smith Barney Funds in which the
Select Portfolios may invest, as well as the policies employed to
achieve those objectives. This section contains supplemental
information concerning the types of securities and other instruments
in which the Underlying Smith Barney Funds may invest (and repurchase
agreements in which the Select Portfolios and/or the Underlying Smith
Barney Funds may invest), the investment policies and portfolio
strategies the Underlying Smith Barney Funds may utilize and certain
risks attendant to such investments, policies and strategies. There
can be no assurance that the respective investment objectives of the
Select Portfolios or the Underlying Smith Barney Funds will be
achieved.
The Articles of Incorporation of the Concert Series permit the Board
of Directors to establish additional portfolios of the Concert Series
from time to time. The investment objectives, policies and
restrictions applicable to additional portfolios would be established
by the Board of Directors at the time such portfolios were
established and may differ from those set forth in the Prospectus and
this Statement of Additional Information.
MONEY MARKET INSTRUMENTS. Each of the Underlying Smith Barney Funds
may invest in certain types of money market instruments which may
include: U.S. government securities; certificates of deposit ("CDs"),
time deposits ("TDs") and bankers' acceptances issued by domestic
banks (including their branches located outside the United States and
subsidiaries located in Canada), domestic branches of foreign banks,
savings and loan associations and similar institutions; high grade
commercial paper; and repurchase agreements with respect to the
foregoing types of instruments. The following is a more detailed
description of such money market instruments.
U.S. GOVERNMENT SECURITIES. U.S. government securities include debt
obligations of varying maturities issued or guaranteed by the U.S.
government or its agencies or instrumentalities. U.S. government
securities include not only direct obligations of the U.S. Treasury,
but also securities issued or guaranteed by the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of
the United States, Small Business Administration, Government National
Mortgage Association ("GNMA"), General Services Administration,
Central Bank for Cooperatives, Federal Intermediate Credit Banks,
Federal Land Banks, Federal National Mortgage Association ("FNMA"),
Maritime Administration, Tennessee Valley Authority, District of
Columbia Armory Board, Student Loan Marketing Association,
International Bank for Reconstruction and Development and Resolution
Trust Corporation. Certain U.S. government securities, such as those
issued or guaranteed by GNMA, FNMA and Federal Home Loan Mortgage
Corporation ("FHLMC"), are mortgage-related securities. Because the
U.S. Government is not obligated by law to provide support to an
instrumentality that it sponsors, a Portfolio or an Underlying Smith
Barney Fund will invest in obligations issued by such an
instrumentality only if its investment adviser determines that the
credit risk with respect to the instrumentality does not make its
securities unsuitable for investment by the Portfolio or the Fund, as
the case may be.
BANK OBLIGATIONS. Domestic commercial banks organized under Federal
law are supervised and examined by the Comptroller of the Currency
and are required to be members of the Federal Reserve System and to
be insured by the Federal Deposit Insurance Corporation (the "FDIC").
Domestic banks organized under state law are supervised and examined
by state banking authorities but are members of the Federal Reserve
System only if they elect to join. Most state banks are insured by
the FDIC (although such insurance may not be of material benefit to
an Underlying Smith Barney Fund, depending upon the principal amount
of certificates of deposit ("CDs") of each held by the Fund) and are
subject to Federal examination and to a substantial body of Federal
law and regulation. As a result of Federal and state laws and
regulations, domestic branches of domestic banks are, among other
things, generally required to maintain specified levels of reserves,
and are subject to other supervision and regulation designed to
promote financial soundness.
Obligations of foreign branches of U.S. banks, such as CDs and TDs,
may be general obligations of the parent bank in addition to the
issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Obligations of foreign
branches of U.S. banks and foreign banks are subject to different
risks than are those of U.S. banks or U.S. branches of foreign banks.
These risks include foreign economic and political developments,
foreign governmental restrictions that may adversely affect payment
of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income.
Foreign branches of U.S. banks are not necessarily subject to the
same or similar regulatory requirements that apply to U.S. banks,
such as mandatory reserve requirements, loan limitations and
accounting, auditing and financial recordkeeping requirements. In
addition, less information may be publicly available about a foreign
branch of a U.S. bank than about a U.S. bank. CDs issued by wholly
owned Canadian subsidiaries of U.S. banks are guaranteed as to
repayment of principal and interest, but not as to sovereign risk, by
the U.S. parent bank.
Obligations of U.S. branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or
may be limited by the terms of a specific obligation and by Federal
and state regulation as well as governmental action in the country in
which the foreign bank has its head office. A U.S. branch of a
foreign bank with assets in excess of $1 billion may or may not be
subject to reserve requirements imposed by the Federal Reserve System
or by the state in which the branch is located if the branch is
licensed in that state. In addition, branches licensed by the
Comptroller of the Currency and branches licensed by certain states
("State Branches") may or may not be required to: (a) pledge to the
regulator by depositing assets with a designated bank within the
state, an amount of its assets equal to 5% of its total liabilities;
and (b) maintain assets within the state in an amount equal to a
specified percentage of the aggregate amount of liabilities of the
foreign bank payable at or through all of its agencies or branches
within the state. The deposits of State Branches may not necessarily
be insured by the FDIC. In addition, there may be less publicly
available information about a U.S. branch of a foreign bank than
about a U.S. bank.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually
from 1 to 270 days) unsecured promissory notes issued by corporations
in order to finance their current operations. A variable amount
master demand note (which is a type of commercial paper) represents a
direct borrowing arrangement involving periodically fluctuating rates
of interest under a letter agreement between a commercial paper
issuer and an institutional lender, such as one of the Underlying
Smith Barney Funds, pursuant to which the lender may determine to
invest varying amounts. Transfer of such notes is usually restricted
by the issuer, and there is no secondary trading market for such
notes.
REPURCHASE AGREEMENTS. The Select Portfolios and the Underlying
Smith Barney Funds may purchase securities and concurrently enter
into repurchase agreements with certain member banks which are the
issuers of instruments acceptable for purchase by the Portfolio or
the Fund, as the case may be, and with certain dealers on the Federal
Reserve Bank of New York's list of reporting dealers. Repurchase
agreements are contracts under which the buyer of a security
simultaneously commits to resell the security to the seller at an
agreed-upon price and date. Under each repurchase agreement, the
selling institution will be required to maintain the value of the
securities subject to the repurchase agreement at not less than their
repurchase price. Repurchase agreements could involve certain risks
in the event of default or insolvency of the other party, including
possible delays or restrictions upon a Portfolio's or a Fund's
ability to dispose of the underlying securities, the risk of a
possible decline in the value of the underlying securities during the
period in which the Portfolio or Fund seeks to assert its rights to
them, the risk of incurring expenses associated with asserting those
rights and the risk of losing all or part of the income from the
repurchase agreement.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. To secure
an advantageous price or yield, certain of the Underlying Smith
Barney Funds may purchase certain securities on a when-issued basis
or purchase or sell securities for delayed delivery. Delivery of the
securities in such cases occurs beyond the normal settlement periods,
but no payment or delivery is made by a Fund prior to the reciprocal
delivery or payment by the other party to the transaction. In
entering into a when-issued or delayed-delivery transaction, an
Underlying Smith Barney Fund will rely on the other party to
consummate the transaction and may be disadvantaged if the other
party fails to do so.
U.S. government securities normally are subject to changes in value
based upon changes, real or anticipated, in the level of interest
rates and the public's perception of the creditworthiness of the
issuers. In general, U.S. government securities tend to appreciate
when interest rates decline and depreciate when interest rates rise.
Purchasing these securities on a when-issued or delayed-delivery
basis, therefore, can involve the risk that the yields available in
the market when the delivery takes place may actually be higher than
those obtained in the transaction itself. Similarly, the sale of
U.S. government securities for delayed delivery can involve the risk
that the prices available in the market when the delivery is made may
actually be higher than those obtained in the transaction itself.
In the case of the purchase by an Underlying Smith Barney Fund of
securities on a when-issued or delayed-delivery basis, a segregated
account in the name of the Fund consisting of cash or liquid debt
securities equal to the amount of the when-issued or delayed-delivery
commitments will be established at the Fund's custodian. For the
purpose of determining the adequacy of the securities in the
accounts, the deposited securities will be valued at market or fair
value. If the market or fair value of the securities declines,
additional cash or securities will be placed in the account daily so
that the value of the account will equal the amount of such
commitments by the Fund involved. On the settlement date, a Fund
will meet its obligations from then-available cash flow, the sale of
securities held in the segregated account, the sale of other
securities or, although it would not normally expect to do so, from
the sale of the securities purchased on a when-issued or delayed-
delivery basis (which may have a value greater or less than the
Fund's payment obligations).
LENDING OF PORTFOLIO SECURITIES. Certain of the Underlying Smith
Barney Funds have the ability to lend portfolio securities to
brokers, dealers and other financial organizations. A Fund will not
lend portfolio securities to Smith Barney unless it has applied for
and received specific authority to do so from the SEC. Loans of
portfolio securities will be collateralized by cash, letters of
credit or U.S. government securities which are maintained at all
times in an amount at least equal to the current market value of the
loaned securities. From time to time, an Underlying Smith Barney
Fund may pay a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a
third party which is unaffiliated with the Fund and is acting as a
"finder."
By lending its securities, an Underlying Smith Barney Fund can
increase its income by continuing to receive interest on the loaned
securities as well as by either investing the cash collateral in
short-term instruments or obtaining yield in the form of interest
paid by the borrower when U.S. government securities are used as
collateral. A Fund will comply with the following conditions
whenever its portfolio securities are loaned: (a) the Fund must
receive at least 100% cash collateral or equivalent securities from
the borrower; (b) the borrower must increase such collateral whenever
the market value of the securities loaned rises above the level of
such collateral; (c) the Fund must be able to terminate the loan at
any time; (d) the Fund must receive reasonable interest on the loan,
as well as any dividends, interest or other distributions on the
loaned securities, and any increase in market value; (e) the Fund may
pay only reasonable custodian fees in connection with the loan; and
(f) voting rights on the loaned securities may pass to the borrower;
provided, however, that if a material event adversely affecting the
investment in the loaned securities occurs, the Fund's trustees or
directors, as the case may be, must terminate the loan and regain the
right to vote the securities. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of a
possible delay in receiving additional collateral or in the recovery
of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will be made to firms deemed by
each Underlying Smith Barney Fund's investment adviser to be of good
standing and will not be made unless, in the judgment of the adviser,
the consideration to be earned from such loans would justify the
risk.
OPTIONS ON SECURITIES. Certain of the Underlying Smith Barney Funds
may engage in transactions in options on securities, which, depending
on the Fund, may include the writing of covered put options and
covered call options, the purchase of put and call options and the
entry into closing transactions.
The principal reason for writing covered call options on securities
is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. Certain
Underlying Smith Barney Funds, however, may engage in option
transactions only to hedge against adverse price movements in the
securities that it holds or may wish to purchase and the currencies
in which certain portfolio securities may be denominated. In return
for a premium, the writer of a covered call option forfeits the right
to any appreciation in the value of the underlying security above the
strike price for the life of the option (or until a closing purchase
transaction can be effected). Nevertheless, the call writer retains
the risk of a decline in the price of the underlying security.
Similarly, the principal reason for writing covered put options is to
realize income in the form of premiums. The writer of a covered put
option accepts the risk of a decline in the price of the underlying
security. The size of the premiums that a Fund may receive may be
adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing
activities.
Options written by an Underlying Smith Barney Fund normally will have
expiration dates between one and nine months from the date written.
The exercise price of the options may be below, equal to or above the
market values of the underlying securities at the times the options
are written. In the case of call options, these exercise prices are
referred to as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. An Underlying Smith Barney Fund with option-writing
authority may write (a) in-the-money call options when its investment
adviser expects that the price of the underlying security will remain
flat or decline moderately during the option period, (b) at-the-money
call options when its adviser expects that the price of the
underlying security will remain flat or advance moderately during the
option period and (c) out-of-the-money call options when its adviser
expects that the price of the underlying security may increase but
not above a price equal to the sum of the exercise price plus the
premiums received from writing the call option. In any of the
preceding situations, if the market price of the underlying security
declines and the security is sold at this lower price, the amount of
any realized loss will be offset wholly or in part by the premium
received. Out-of-the-money, at-the-money and in-the-money put
options (the reverse of call options as to the relation of exercise
price to market price) may be utilized in the same market
environments that such call options are used in equivalent
transactions.
So long as the obligation of an Underlying Smith Barney Fund as the
writer of an option continues, the Fund may be assigned an exercise
notice by the broker-dealer through which the option was sold,
requiring the Fund to deliver, in the case of a call, or take
delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates when the
option expires or the Fund effects a closing purchase transaction. A
Fund can no longer effect a closing purchase transaction with respect
to an option once it has been assigned an exercise notice. To secure
its obligation to deliver the underlying security when it writes a
call option, or to pay for the underlying security when it writes a
put option, an Underlying Smith Barney Fund will be required to
deposit in escrow the underlying security or other assets in
accordance with the rules of the Options Clearing Corporation (the
"Clearing Corporation") or similar foreign clearing corporation and
of the securities exchange on which the option is written.
Certain Underlying Smith Barney Funds may purchase and sell put, call
and other types of option securities that are traded on domestic or
foreign exchanges or the over-the-counter market including, but not
limited to, "spread" options, "knock-out" options, "knock-in" options
and "average rate" or "look-back" options. "Spread" options are
dependent upon the difference between the price of two securities or
futures contracts, "knock-out" options are canceled if the price of
the underlying asset reaches a trigger level prior to expiration,
"knock-in" options only have value if the price of the underlying
asset reaches a trigger level and, "average rate" or "look-back"
options are options where, at expiration, the option's strike price
is set based on either the average, maximum or minimum price of the
asset over the period of the option.
An option position may be closed out only where there exists a
secondary market for an option of the same series on a recognized
securities exchange or in the over-the-counter market. Certain
Underlying Smith Barney Funds with option-writing authority may write
options on U.S. or foreign exchanges and in the over-the-counter
market.
An Underlying Smith Barney Fund may realize a profit or loss upon
entering into a closing transaction. In cases in which a Fund has
written an option, it will realize a profit if the cost of the
closing purchase transaction is less than the premium received upon
writing the original option and will incur a loss if the cost of the
closing purchase transaction exceeds the premium received upon
writing the original option. Similarly, when a Fund has purchased an
option and engages in a closing sale transaction, whether the Fund
realizes a profit or loss will depend upon whether the amount
received in the closing sale transaction is more or less than the
premium that the Fund initially paid for the original option plus the
related transaction costs.
Although an Underlying Smith Barney Fund generally will purchase or
write only those options for which its adviser believes there is an
active secondary market so as to facilitate closing transactions,
there is no assurance that sufficient trading interest to create a
liquid secondary market on a securities exchange will exist for any
particular option or at any particular time, and for some options no
such secondary market may exist. A liquid secondary market in an
option may cease to exist for a variety of reasons. In the past, for
example, higher than anticipated trading activity or order flow, or
other unforeseen events, have at times rendered inadequate certain of
the facilities of the Clearing Corporation and U.S. and foreign
securities exchanges and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types
of orders or trading halts or suspensions in one or more options.
There can be no assurance that similar events, or events that may
otherwise interfere with the timely execution of customers' orders,
will not recur. In such event, it might not be possible to effect
closing transactions in particular options. If as a covered call
option writer a Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the
underlying security until the option expires or it delivers the
underlying security upon exercise.
Securities exchanges generally have established limitations governing
the maximum number of calls and puts of each class which may be held
or written, or exercised within certain time periods, by an investor
or group of investors acting in concert (regardless of whether the
options are written on the same or different securities exchanges or
are held, written or exercised in one or more accounts or through one
or more brokers). It is possible that the Underlying Smith Barney
Funds with authority to engage in options transactions and other
clients of their respective advisers and certain of their affiliates
may be considered to be such a group. A securities exchange may
order the liquidation of positions found to be in violation of these
limits and it may impose certain other sanctions.
In the case of options written by an Underlying Smith Barney Fund
that are deemed covered by virtue of the Fund's holding convertible
or exchangeable preferred stock or debt securities, the time required
to convert or exchange and obtain physical delivery of the underlying
common stocks with respect to which the Fund has written options may
exceed the time within which the Fund must make delivery in
accordance with an exercise notice. In these instances, an
Underlying Smith Barney Fund may purchase or borrow temporarily the
underlying securities for purposes of physical delivery. By so
doing, the Fund will not bear any market risk because the Fund will
have the absolute right to receive from the issuer of the underlying
security an equal number of shares to replace the borrowed stock, but
the Fund may incur additional transaction costs or interest expenses
in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the U.S. government
securities for which an Underlying Smith Barney Fund may write
covered call options. If a Fund writes covered call options on
mortgage-backed securities, the securities that it holds as cover
may, because of scheduled amortization or unscheduled prepayments,
cease to be sufficient cover. The Fund will compensate for the
decline in the value of the cover by purchasing an appropriate
additional amount of those securities.
STOCK INDEX OPTIONS. Certain of the Underlying Smith Barney Funds
may purchase and write put and call options on U.S. stock indexes
listed on U.S. exchanges for the purpose of hedging its portfolio. A
stock index fluctuates with changes in the market values of the
stocks included in the index. Some stock index options are based on
a broad market index such as the New York Stock Exchange Composite
Index or a narrower market index such as the Standard & Poor's 100.
Indexes also are based on an industry or market segment such as the
American Stock Exchange Oil and Gas Index or the Computer and
Business Equipment Index.
Options on stock indexes are similar to options on stock except that
(a) the expiration cycles of stock index options are monthly, while
those of stock options currently are quarterly, and (b) the delivery
requirements are different. Instead of giving the right to take or
make delivery of stock at a specified price, an option on a stock
index gives the holder the right to receive a cash "exercise
settlement amount" equal to (a) the amount, if any, by which the
fixed exercise price of the option exceeds (in the case of a put) or
is less than (in the case of a call) the closing value of the
underlying index on the date of exercise, multiplied by (b) a fixed
"index multiplier." Receipt of this cash amount will depend upon the
closing level of the stock index upon which the option is based being
greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the option. The amount of cash received
will be equal to such difference between the closing price of the
index and the exercise price of the option expressed in dollars times
a specified multiple. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount.
The writer may offset its position in stock index options prior to
expiration by entering into a closing transaction on an exchange or
it may let the options expire unexercised.
The effectiveness of purchasing or writing stock index options as a
hedging technique will depend upon the extent to which price
movements in the portion of a securities portfolio being hedged
correlate with price movements of the stock index selected. Because
the value of an index option depends upon movements in the level of
the index rather than the price of a particular stock, whether a Fund
will realize a gain or loss from the purchase or writing of options
on an index depends upon movements in the level of stock prices in
the stock market generally or, in the case of certain indexes, in an
industry or market segment, rather than movements in the price of a
particular stock. Accordingly, successful use by a Fund of options
on stock indexes will be subject to its adviser's ability to predict
correctly movements in the direction of the stock market generally or
of a particular industry. This requires different skills and
techniques than predicting changes in the prices of individual
stocks.
An Underlying Smith Barney Fund will engage in stock index options
transactions only when determined by its adviser to be consistent
with the Fund's efforts to control risk. There can be no assurance
that such judgment will be accurate or that the use of these
portfolio strategies will be successful. When a Fund writes an
option on a stock index, the Fund will establish a segregated account
with its custodian in an amount equal to the market value of the
option and will maintain the account while the option is open.
MORTGAGE-RELATED SECURITIES. The average maturity of pass-through
pools of mortgage related securities varies with the maturities of
the underlying mortgage instruments. In addition, a pool's stated
maturity may be shortened by unscheduled payments on the underlying
mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the
location of the mortgaged property and age of the mortgage. Because
prepayment rates of individual pools vary widely, it is not possible
to accurately predict the average life of a particular pool. Common
practice is to assume that prepayments will result in an average life
ranging from 2 to 10 years for pools of fixed-rate 30-year mortgages.
Pools of mortgages with other maturities or different characteristics
will have varying average life assumptions.
Mortgage-related securities may be classified as private,
governmental or government-related, depending on the issuer or
guarantor. Private mortgage-related securities represent pass-
through pools consisting principally of conventional residential
mortgage loans created by non-governmental issuers, such as
commercial banks, savings and loan associations and private mortgage
insurance companies. Governmental mortgage-related securities are
backed up by the full faith and credit of the U.S. Government. GNMA,
the principal guarantor of such securities, is a wholly owned U.S.
government corporation within the Department of Housing and Urban
Development. Government-related mortgage-related securities are not
backed by the full faith and credit of the U.S. Government. Issuers
of such securities include FNMA and FHLMC. FNMA is a government-
sponsored corporation owned entirely by private stockholders, which
is subject to general regulation by the Secretary of Housing and
Urban Development. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA.
FHLMC is a corporate instrumentality of the U.S., the stock of which
is owned by Federal Home Loan Banks. Participation certificates
representing interests in mortgages from FHLMC's national portfolio
are guaranteed as to the timely payment of interest and ultimate
collection of principal by FHLMC.
Private U.S. governmental or government-related entities create
mortgage loan pools offering pass-through investments in addition to
those described above. The mortgages underlying these securities may
be alternative mortgage instruments, that is, mortgage instruments
whose principal or interest payments may vary or whose terms to
maturity may be shorter than previously customary. As new types of
mortgage-related securities are developed and offered to investors,
certain of the Underlying Smith Barney Funds, consistent with their
investment objective and policies, may consider making investments in
such new types of securities.
CURRENCY TRANSACTIONS. Certain of the Underlying Smith Barney Funds
may enter into forward currency exchange transactions. A forward
currency contract is an obligation to purchase or sell a currency
against another currency at a future date and price as agreed upon by
the parties. An Underlying Smith Barney Fund that enters into a
forward currency contract may either accept or make delivery of the
currency at the maturity of the forward contract or, prior to
maturity, enter into a closing transaction involving the purchase or
sale of an offsetting contract. A Fund may engage in forward
currency transactions in anticipation of, or to protect itself
against, fluctuations in exchange rates. A Fund might sell a
particular foreign currency forward, for example, when it holds bonds
denominated in that currency but anticipates, and seeks to be
protected against, decline in the currency against the U.S. dollar.
Similarly, a Fund may sell the U.S. dollar forward when it holds
bonds denominated in U.S. dollars but anticipates, and seeks to be
protected against, a decline in the U.S. dollar relative to other
currencies. Further, a Fund may purchase a currency forward to "lock
in" the price of securities denominated in that currency which it
anticipates purchasing.
Transaction hedging is the purchase or sale of forward currency
contracts with respect to a specific receivable or payable of the
Fund generally arising in connection with the purchase or sale of its
securities. Position hedging, generally, is the sale of forward
currency contracts with respect to portfolio security positions
denominated or quoted in the currency. A Fund may not position hedge
with respect to a particular currency to an extent greater than the
aggregate market value at any time of the security or securities held
in its portfolio denominated or quoted in or currently convertible
(such as through exercise of an option or consummation of a forward
currency contract) into that particular currency, except that certain
Underlying Smith Barney Funds may utilize forward currency contracts
denominated in the European Currency Unit to hedge portfolio security
positions when a security or securities are denominated in currencies
of member countries in the European Monetary System. If a Fund
enters into a transaction hedging or position hedging transaction, it
will cover the transaction through one or more of the following
methods: (a) ownership of the underlying currency or an option to
purchase such currency; (b) ownership of an option to enter into an
offsetting forward currency contract; (c) entering into a forward
contract to purchase currency being sold or to sell currency being
purchased, provided that such covering contract is itself covered by
any one of these methods unless the covering contract closes out the
first contract; or (d) depositing into a segregated account with the
custodian or a sub-custodian of the Fund cash or readily marketable
securities in an amount equal to the value of the Fund's total assets
committed to the consummation of the forward currency contract and
not otherwise covered. In the case of transaction hedging, any
securities placed in an account must be liquid debt securities. In
any case, if the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the
account so that the value of the account will equal the above amount.
Hedging transactions may be made from any foreign currency into
dollars or into other appropriate currencies.
At or before the maturity of a forward contract, a Fund either may
sell a portfolio security and make delivery of the currency, or
retain the security and offset its contractual obligation to deliver
the currency by purchasing a second contract pursuant to which the
relevant Fund will obtain, on the same maturity date, the same amount
of the currency which it is obligated to deliver. If a Fund retains
the portfolio security and engages in an offsetting transaction, the
Fund, at the time of execution of the offsetting transaction, will
incur a gain or loss to the extent movement has occurred in forward
contract prices. Should forward prices decline during the period
between a Fund's entering into a forward contract for the sale of a
currency and the date that it enters into an offsetting contract for
the purchase of the currency, the Fund will realize a gain to the
extent that the price of the currency it has agreed to sell exceeds
the price of the currency it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent the price
of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
The cost to a Fund of engaging in currency transactions varies with
factors such as the currency involved, the length of the contract
period and the market conditions then prevailing. Because
transactions in currency exchange are usually conducted on a
principal basis, no fees or commissions are involved. The use of
forward currency contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of
exchange that can be achieved in the future. In addition, although
forward currency contracts limit the risk of loss due to a decline in
the value of the hedged currency, at the same time, they limit any
potential gain that might result should the value of the currency
increase. If a devaluation is generally anticipated a Fund may not
be able to contract to sell the currency at a price above the
devaluation level anticipated.
FOREIGN CURRENCY OPTIONS. Certain Underlying Smith Barney Funds may
purchase or write put and call options on foreign currencies for the
purpose of hedging against changes in future currency exchange rates.
Foreign currency options generally have three, six and nine month
expiration cycles. Put options convey the right to sell the
underlying currency at a price which is anticipated to be higher than
the spot price of the currency at the time the option expires. Call
options convey the right to buy the underlying currency at a price
which is expected to be lower than the spot price of the currency at
the time that the option expires.
An Underlying Smith Barney Fund may use foreign currency options
under the same circumstances that it could use forward currency
exchange transactions. A decline in the dollar value of a foreign
currency in which a Fund's securities are denominated, for example,
will reduce the dollar value of the securities, even if their value
in the foreign currency remains constant. In order to protect
against such diminutions in the value of securities that it holds,
the Fund may purchase put options on the foreign currency. If the
value of the currency does decline, the Fund will have the right to
sell the currency for a fixed amount in dollars and will thereby
offset, in whole or in part, the adverse effect on its securities
that otherwise would have resulted. Conversely, if a rise in the
dollar value of a currency in which securities to be acquired are
denominated is projected, thereby potentially increasing the cost of
the securities, the Fund may purchase call options on the particular
currency. The purchase of these options could offset, at least
partially, the effects of the adverse movements in exchange rates.
The benefit to the Fund derived from purchases of foreign currency
options, like the benefit derived from other types of options, will
be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the
direction or to the extent anticipated, the Fund could sustain losses
on transactions in foreign currency options that would require it to
forego a portion or all of the benefits of advantageous changes in
the rates.
FOREIGN GOVERNMENT SECURITIES. Among the foreign government
securities in which certain Underlying Smith Barney Funds may invest
are those issued by countries with developing economies, which are
countries in the initial stages of their industrialization cycles.
Investing in securities of countries with developing economies
involves exposure to economic structures that are generally less
diverse and less mature, and to political systems that can be
expected to have less stability, than those of developed countries.
The markets of countries with developing economies historically have
been more volatile than markets of the more mature economies of
developed countries, but often have provided higher rates of return
to investors.
RATINGS AS INVESTMENT CRITERIA. In general, the ratings of
nationally recognized statistical rating organization ("NRSROs")
represent the opinions of these agencies as to the quality of
securities that they rate. Such ratings, however, are relative and
subjective, and are not absolute standards of quality and do not
evaluate the market value risk of the securities. These ratings will
be used the by Underlying Smith Barney Funds as initial criteria for
the selection of portfolio securities, but the Funds also will rely
upon the independent advice of their respective advisers to evaluate
potential investments. Among the factors that will be considered are
the long-term ability of the issuer to pay principal and interest and
general economic trends. The Appendix to this Statement of
Additional Information contains further information concerning the
rating categories of NRSROs and their significance.
Subsequent to its purchase by a Fund, an issue of securities may
cease to be rated or its rating may be reduced below the minimum
required for purchase by the Fund. In addition, it is possible that
an NRSRO might not change its rating of a particular issue to reflect
subsequent events. None of these events will require sale of such
securities by a Fund, but the Fund's adviser will consider such
events in its determination of whether the Fund should continue to
hold the securities. In addition, to the extent that the ratings
change as a result of changes in such organizations or their rating
systems, or due to a corporate reorganization, a Fund will attempt to
use comparable ratings as standards for its investments in accordance
with its investment objective and policies.
FUTURES CONTRACTS. The purpose of the acquisition or sale of a
futures contract by a Fund is to mitigate the effects of fluctuations
in interest rates or currency or market values, depending on the type
of contract, on securities or their values without actually buying or
selling the securities. Of course, because the value of portfolio
securities will far exceed the value of the futures contracts sold by
a Fund, an increase in the value of the futures contracts could only
mitigate -- but not totally offset -- the decline in the value of the
Fund.
Certain of the Underlying Smith Barney Funds may enter into futures
contracts or related options on futures contracts that are traded on
a domestic or foreign exchange or in the over-the-counter market.
Generally, these investments may be made solely for the purpose of
hedging against changes in the value of its portfolio investments due
to anticipated changes in interest rates, currency values and/or
market conditions when the transactions are economically appropriate
to the reduction of risks inherent in the management of the Fund and
not for purposes of speculation. However, the International Equity
Portfolio, the International Balanced Portfolio and the Natural
Resources Fund may also enter into futures transactions for non-
hedging purposes, subject to applicable law. The ability of the
Funds to trade in futures contracts may be limited by the
requirements of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable to a regulated investment company.
No consideration is paid or received by a Fund upon entering into a
futures contract. Initially, a Fund will be required to deposit with
its custodian an amount of cash or cash equivalents equal to
approximately 1% to 10% of the contract amount (this amount is
subject to change by the board of trade on which the contract is
traded and members of such board of trade may charge a higher
amount). This amount, known as initial margin, is in the nature of a
performance bond or good faith deposit on the contract and is
returned to a Fund upon termination of the futures contract, assuming
that all contractual obligations have been satisfied. Subsequent
payments, known as variation margin, to and from the broker, will be
made daily as the price of the securities, currency, index or gold
underlying the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process
known as "marking-to-market." At any time prior to expiration of a
futures contract, a Fund may elect to close the position by taking an
opposite position, which will operate to terminate the Fund's
existing position in the contract.
Several risks are associated with the use of futures contracts as a
hedging device. Successful use of futures contracts by a Fund is
subject to the ability of its adviser to predict correctly movements
in interest rates, stock or bond indices, the price of gold or
foreign currency values. These predictions involve skills and
techniques that may be different from those involved in the
management of the portfolio being hedged. In addition, there can be
no assurance that there will be a correlation between movements in
the price of the underlying securities, currency, index or gold and
movements in the price of the investments which are the subject of
the hedge. A decision of whether, when and how to hedge involves the
exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or
unexpected trends in interest rates or currency values.
There is no assurance that an active market will exist for future
contracts at any particular time. Most futures exchanges and boards
of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit
has been reached in a particular contract, no trades may be made that
day at a price beyond that limit. It is possible that futures
contract prices could move to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures traders
to substantial losses. In such event, and in the event of adverse
price movements, a Fund would be required to make daily cash payments
of variation margin, and an increase in the value of the portion of
the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. As described above, however,
there is no guarantee that the price of the securities being hedged
will, in fact, correlate with the price movements in a futures
contract and thus provide an offset to losses on the futures
contract.
If a Fund has hedged against the possibility of a change in interest
rates or currency or market values adversely affecting the value of
investments held in its portfolio and rates or currency or market
values move in a direction opposite to that which the Fund has
anticipated, the Fund will lose part or all of the benefit of the
increased value of investments which it has hedged because it will
have offsetting losses in its futures positions. In addition, in
such situations, if the Fund had insufficient cash, it may have to
sell investments to meet daily variation margin requirements at a
time when it may be disadvantageous to do so. These sales of
investments may, but will not necessarily, be at increased prices
which reflect the change in interest rates or currency or market
values, as the case may be.
OPTIONS ON FUTURES CONTRACTS. An option on an interest rate or gold
futures contract, as contrasted with the direct investment in such a
contract, gives the purchaser the right, in return for the premium
paid, to assume a position in the underlying interest rate futures
contract at a specified exercise price at any time prior to the
expiration date of the option. An option on a foreign currency
futures contract, as contracted with the direct investment in such a
contract, gives the purchaser the right, but not the obligation, to
assume a long or short position in the relevant underlying foreign
currency futures contract at a predetermined exercise price at a time
in the future. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the
option will be accompanied by delivery of the accumulated balance in
the writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the case
of a call, or is less than, in the case of a put, the exercise price
of the option on the futures contract. The potential for loss
related to the purchase of an option on a futures contract is limited
to the premium paid for the option (plus transaction costs). Because
the value of the option is fixed at the point of sale, there are no
daily cash payments to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of a Fund investing
in the options.
Several risks are associated with options on futures contracts. The
ability to establish and close out positions on such options will be
subject to the existence of a liquid market. In addition, the
purchase of put or call options on interest rate, foreign currency
and gold futures will be based upon predictions by a Fund's adviser
as to anticipated trends in interest rates, currency and gold values,
as the case may be, which could be incorrect. Even if the
expectations of an adviser are correct, there may be an imperfect
correlation between the change in the value of the options and of the
portfolio investments being hedged.
FOREIGN INVESTMENTS. Investors should recognize that investing in
foreign companies involves certain considerations which are not
typically associated with investing in U.S. issuers. Since certain
Underlying Smith Barney Funds will be investing in securities
denominated in currencies other than the U.S. dollar, and since
certain Funds may temporarily hold funds in bank deposits or other
money market investments denominated in foreign currencies, the Funds
may be affected favorably or unfavorably by exchange control
regulations or changes in the exchange rate between such currencies
and the dollar. A change in the value of a foreign currency relative
to the U.S. dollar will result in a corresponding change in the
dollar value of a Fund's assets denominated in that foreign currency.
Changes in foreign currency exchange rates may also affect the value
of dividends and interest earned, gains and losses realized on the
sale of securities and net investment income and gain, if any, to be
distributed to shareholders by the Fund.
The rate of exchange between the U.S. dollar and other currencies is
determined by the forces of supply and demand in the foreign exchange
markets. Changes in the exchange rate may result over time from the
interaction of many factors directly or indirectly affecting economic
conditions and political developments in other countries. Of
particular importance are rates of inflation, interest rate levels,
the balance of payments and the extent of government surpluses or
deficits in the U.S. and the particular foreign country, all of which
are in turn sensitive to the monetary, fiscal and trade policies
pursued by the governments of the U.S. and other foreign countries
important to international trade and finance. Governmental
intervention may also play a significant role. National governments
rarely voluntarily allow their currencies to float freely in response
to economic forces. Sovereign governments use a variety of
techniques, such as intervention by a country's central bank or
imposition of regulatory controls or taxes, to affect the exchange
rates of their currencies.
Securities held by an Underlying Smith Barney Fund may not be
registered with, nor the issuers thereof be subject to reporting
requirements of, the SEC. Accordingly, there may be less publicly
available information about the securities and about the foreign
company or government issuing them than is available about a domestic
company or government entity. Foreign issuers are generally not
subject to uniform financial reporting standards, practices and
requirements comparable to those applicable to U.S. issuers. In
addition, with respect to some foreign countries, there is the
possibility of expropriation or confiscatory taxation, limitations on
the removal of funds or other assets of the Fund, political or social
instability, or domestic developments which could affect U.S.
investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy
in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and
balance of payments positions. Certain Underlying Smith Barney Funds
may invest in securities of foreign governments (or agencies or
instrumentalities thereof), and many, if not all, of the foregoing
considerations apply to such investments as well.
Securities of some foreign companies are less liquid and their prices
are more volatile than securities of comparable domestic companies.
Certain foreign countries are known to experience long delays between
the trade and settlement dates of securities purchased or sold.
The interest payable on a Fund's foreign securities may be subject to
foreign withholding taxes, and while investors may be able to claim
some credit or deductions for such taxes with respect to their
allocated shares of such foreign tax payments, the general effect of
these taxes will be to reduce the Fund's income. Additionally, the
operating expenses of a Fund can be expected to be higher than that
of an investment company investing exclusively in the U.S.
securities, since the expenses of the Fund, such as custodial costs,
valuation costs and communication costs, as well as the rate of the
investment advisory fees, though similar to such expenses of some
other international funds, are higher than those costs incurred by
other investment companies.
FOREIGN COMMODITY EXCHANGES. Unlike trading on domestic commodity
exchanges, trading on foreign commodity exchanges is not regulated by
the Commodity Futures Trading Commission and may be subject to
greater risks than trading on domestic exchanges. For example, some
foreign exchanges may be principal markets so that no common clearing
facility exists and a trader may look only to the broker for
performance of the contract. In addition, unless an Underlying Smith
Barney Fund trading on a foreign commodity exchange hedges against
fluctuations in the exchange rate between the U.S. dollar and the
currencies in which trading is done on foreign exchanges, any profits
that the Fund might realize in trading could be eliminated by adverse
changes in the exchange rate, or the Fund could incur losses as a
result of those changes.
SHORT SALES. Certain of the Underlying Smith Barney Funds may from
time to time sell securities short. A short sale is a transaction in
which the Fund sells securities that it does not own (but has
borrowed) in anticipation of a decline in the market price of the
securities.
When a Fund makes a short sale, the proceeds it receives from the
sale are retained by a broker until the Fund replaces the borrowed
securities. To deliver the securities to the buyer, the Fund must
arrange through a broker to borrow the securities and, in so doing,
the Fund becomes obligated to replace the securities borrowed at
their market price at the time of replacement, whatever that price
may be. The Fund may have to pay a premium to borrow the securities
and must pay any dividends or interest payable on the securities
until they are replaced.
A Fund's obligation to replace the securities borrowed in connection
with a short sale will be secured by collateral deposited with the
broker that consists of cash, U.S. government securities, equity
securities or debt securities of any grade so long as such assets are
liquid, unencumbered and marked to market daily. In addition, the
Fund will place in a segregated account with its custodian an amount
of cash or U.S. government securities equal to the difference, if
any, between (a) the market value of the securities sold at the time
they were sold short and (b) any cash or U.S. government securities
deposited as collateral with the broker in connection with the short
sale (not including the proceeds of the short sale). Until it
replaces the borrowed securities, the Fund will maintain the
segregated account daily at a level so that the amount deposited in
the account plus the amount deposited with the broker (not including
the proceeds from the short sale) (a) will equal the current market
value of the securities sold short and (b) will not be less than the
market value of the securities at the time they were sold short.
SHORT SALES AGAINST THE BOX. Certain of the Underlying Smith Barney
Funds may enter into a short sale of common stock such that when the
short position is open the Fund involved owns an equal amount of
preferred stocks or debt securities, convertible or exchangeable,
without payment of further consideration, into an equal number of
shares of the common stock sold short. This kind of short sale,
which is described as "against the box," will be entered into by a
Fund for the purpose of receiving a portion of the interest earned by
the executing broker from the proceeds of the sale. The proceeds of
the sale will be held by the broker until the settlement date when
the Fund delivers the convertible securities to close out its short
position. Although prior to delivery a Fund will have to pay an
amount equal to any dividends paid on the common stock sold short,
the Fund will receive the dividends from the preferred stock or
interest from the debt securities convertible into the stock sold
short, plus a portion of the interest earned from the proceeds of the
short sale. The Fund will deposit, in a segregated account with
their custodian, convertible preferred stock or convertible debt
securities in connection with short sales against the box.
SWAP AGREEMENTS. Among the hedging transactions into which certain
Underlying Smith Barney Funds may enter are interest rate swaps and
the purchase or sale of interest rate caps and floors. Interest rate
swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange
of floating rate payments for fixed rate payments. The purchase of
an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party
selling such interest rate cap. The purchase of an interest rate
floor entitles the purchaser, to the extent that a specified index
falls below a predetermined interest rate, to receive payment of
interest on a notional principal amount from the party selling such
interest rate floor.
Certain Underlying Smith Barney Funds may enter into interest rate
swaps, caps and floors on either an asset-based or liability-based
basis, depending on whether it is hedging its assets or its
liabilities, and will usually enter into interest rate swaps on a net
basis, i.e., the two payment streams are netted, with the Fund
receiving or paying, as the case may be, only the net amount of the
two payments. Inasmuch as these hedging transactions are entered
into for good faith hedging purposes, the investment adviser and the
Fund believe such obligations do not constitute senior securities
and, accordingly will not treat them as being subject to its
borrowing restrictions. The net amount of the excess, if any, of a
Fund's obligations over its entitlement with respect to each interest
rate swap will be accrued on a daily basis and an amount of cash or
liquid securities having an aggregate net asset value at least equal
to the accrued excess will be maintained in a segregated account with
PNC Bank. If there is a default by the other party to such a
transaction, a Fund will have contractual remedies pursuant to the
agreement related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents. As
a result, the swap market has become relatively liquid. Caps and
floors are more recent innovations for which standardized
documentation has not yet been developed and, accordingly, they are
less liquid than swaps.
RESTRICTED SECURITIES. Certain of the Underlying Smith Barney Funds
may invest in securities the disposition of which is subject to legal
or contractual restrictions. The sale of restricted securities often
requires more time and results in higher brokerage charges or dealer
discounts and other selling expenses than does the sale of securities
eligible for trading on a national securities exchange that are not
subject to restrictions on resale. Restricted securities often sell
at a price lower than similar securities that are not subject to
restrictions on resale.
REVERSE REPURCHASE AGREEMENTS. Certain Underlying Smith Barney Funds
may enter into reverse repurchase agreements with banks or broker-
dealers. A reverse repurchase agreement involves the sale of a money
market instrument held by an Underlying Smith Barney Fund coupled
with an agreement by the Fund to repurchase the instrument at a
stated price, date and interest payment. The Fund will use the
proceeds of a reverse repurchase agreement to purchase other money
market instruments which either mature at a date simultaneous with or
prior to the expiration of the reverse repurchase agreement or which
are held under an agreement to resell maturing as of that time.
An Underlying Smith Barney Fund will enter into a reverse repurchase
agreement only when the interest income to be earned from the
investment of the proceeds of the transaction is greater than the
interest expense of the transaction. Under the 1940 Act, reverse
repurchase agreements may be considered to be borrowings by the
seller. Entry into such agreements requires the creation and
maintenance of a segregated account with the Fund's custodian
consisting of U.S. government securities, cash, equity securities or
debt securities of any grade so long as such assets are liquid,
unencumbered and marked to market daily.
LEVERAGING. Certain of the Underlying Smith Barney Funds may from
time to time leverage their investments by purchasing securities with
borrowed money. A Fund is required under the 1940 Act to maintain at
all times an asset coverage of 300% of the amount of its borrowings.
If, as a result of market fluctuations or for any other reason, the
Fund's asset coverage drops below 300%, the Fund must reduce its
outstanding borrowings within three business days so as to restore
its asset coverage to the 300% level.
Any gain in the value of securities purchased with borrowed money
that exceeds the interest paid on the amount borrowed would cause the
net asset value of the Underlying Smith Barney Fund's shares to
increase more rapidly than otherwise would be the case. Conversely,
any decline in the value of securities purchased would cause the net
asset value of the Fund's shares to decrease more rapidly than
otherwise would be the case. Borrowed money thus creates an
opportunity for greater capital gain but at the same time increases
exposure to capital risk. The net cost of any borrowed money would
be an expense that otherwise would not be incurred, and this expense
could restrict or eliminate a Fund's net investment income in any
given period.
AMERICAN, EUROPEAN AND CONTINENTAL DEPOSITORY RECEIPTS. Certain of
the Underlying Smith Barney Funds may invest in the securities of
foreign and domestic issuers in the form of American Depository
Receipts ("ADRs") and European Depository Receipts ("EDRs"). These
securities may not necessarily be denominated in the same currency as
the securities into which they may be converted. ADRs are receipts
typically issued by a U.S. bank or trust company that evidence
ownership of underlying securities issued by a foreign corporation.
EDRs, which sometimes are referred to as Continental Depository
Receipts ("CDRs"), are receipts issued in Europe typically by foreign
banks and trust companies that evidence ownership of either foreign
or domestic securities. Generally, ADRs, in registered form, are
designed for use in U.S. securities markets and EDRs and CDRs are
designed for use in European securities markets.
CONVERTIBLE SECURITIES. Convertible securities are fixed-income
securities that may be converted at either a stated price or stated
rate into underlying shares of common stock. Convertible securities
have general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income
securities generally, the market value of convertible securities
tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of the
conversion feature, the market value of convertible securities tends
to vary with fluctuations in the market value of the underlying
common stocks and, therefore, also will react to variations in the
general market for equity securities. A unique feature of
convertible securities is that as the market price of the underlying
common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the
market price of the underlying common stock increases, the prices of
the convertible securities tend to rise as a reflection of the value
of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail
less risk than investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments
that provide for a stable stream of income with generally higher
yields than common stocks. Of course, like all fixed-income
securities, there can be no assurance of current income because the
issuers of the convertible securities may default on their
obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of
similar quality because of the potential for capital appreciation. A
convertible security, in addition to providing fixed income, offers
the potential for capital appreciation through the conversion
feature, which enables the holder to benefit from increases in the
market price of the underlying common stock. There can be no
assurance of capital appreciation, however, because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar
but non-convertible securities of the same issuer, although
convertible bonds, such as corporate debt obligations, enjoy
seniority in right of payment to all equity securities, and
convertible preferred stock is senior to common stock, of the same
issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar nonconvertible
securities.
WARRANTS. Because a warrant does not carry with it the right to
dividends or voting rights with respect to the securities that the
warrant holder is entitled to purchase, and because it does not
represent any rights to the assets of the issuer, a warrant may be
considered more speculative than certain other types of investments.
In addition, the value of a warrant does not necessarily change with
the value of the underlying securities and a warrant ceases to have
value if it is not exercised prior to its expiration date. Warrants
acquired by an Underlying Smith Barney Fund in units or attached to
securities may be deemed to be without value.
PREFERRED STOCK. Preferred stocks, like debt obligations, are
generally fixed-income securities. Shareholders of preferred stocks
normally have the right to receive dividends at a fixed rate when and
as declared by the issuer's board of directors, but do not
participate in other amounts available for distribution by the
issuing corporation. Dividends on the preferred stock may be
cumulative, and all cumulative dividends usually must be paid prior
to common shareholders receiving any dividends. Preferred stock
dividends must be paid before common stock dividends and, for that
reason, preferred stocks generally entail less risk than common
stocks. Upon liquidation, preferred stocks are entitled to a
specified liquidation preference, which is generally the same as the
par or stated value, and are senior in right of payment to common
stock. Preferred stocks are, however, equity securities in the sense
that they do not represent a liability of the issuer and, therefore,
do not offer as great a degree of protection of capital or assurance
of continued income as investments in corporate debt securities. In
addition, preferred stocks are subordinated in right of payment to
all debt obligations and creditors of the issuer, and convertible
preferred stocks may be subordinated to other preferred stock of the
same issuer.
Investment Restrictions
The Concert Series has adopted the following investment restrictions
for the protection of shareholders. Restrictions 1 through 5 below
have been adopted by the Concert Series with respect to each
Portfolio as fundamental policies. Under the 1940 Act, a fundamental
policy of a Portfolio may not be changed without the vote of a
majority, as defined in the 1940 Act, of the outstanding voting
securities of the Portfolio. Such majority is defined as the lesser
of (a) 67% or more of the shares present at the meeting, if the
holders of more than 50% of the outstanding shares of the Portfolio
are present or represented by proxy, or (b) more than 50% of the
outstanding shares. Investment restrictions 7 through 15 may be
changed by a vote of a majority of the Concert Series' Board of
Directors at any time.
The investment policies adopted by the Concert Series prohibit a
Portfolio from:
1. Borrowing 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,.
2. Making loans except that 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.
3. Engaging in the business if underwriting securities issued by
other persons, except to the extent that the Fund may technically
be deemed to be an underwriter under the Securities Act of 1933,
as amended, in disposing of portfolio securities.
4. Purchasing or selling 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 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
Funds' investment objective and policies); or (d) investing in
real estate investment trust securities.
5. Issuing "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. Purchasing securities on margin.
7. Making short sales of securities or maintaining a short position.
8. Pledging, hypothecating, mortgaging or otherwise encumbering more
than 33-1/3% of the value of a Portfolio's total assets.
9. Investing in oil, gas or other mineral exploration or development
programs.
10. Writing or selling puts, calls, straddles, spreads or combinations
thereof.
11. Purchasing restricted securities, illiquid securities (such as
repurchase agreements with maturities in excess of seven days) or
other securities that are not readily marketable.
12. Purchasing any security if as a result the Portfolio would then
have more than 5% of its total assets invested in securities of
companies (including predecessors) that have been in continuous
operation for fewer than three years (except for Underlying Smith
Barney Funds).
13. Making investments for the purpose of exercising control or
management.
14. Purchasing or retaining securities of any company if, to the
knowledge of the Concert Series, any officer or director of the
Concert Series or TIA individually owns more than 1/2 of 1% of the
outstanding securities of such company and together they own
beneficially more than 5% of such securities.
The Concert Series may make commitments more restrictive than the
restrictions listed above with respect to a Portfolio so as to permit
the sale of shares of the Portfolio in certain states. Should the
Concert Series determine that any such commitment is no longer in the
best interests of the Portfolio and its shareholders, the Concert
Series will revoke the commitment by terminating the sale of shares
of the Portfolio in the relevant state. The percentage limitations
contained in the restrictions listed above (other than with respect
to (1) above) apply at the time of purchases of securities.
Notwithstanding the foregoing investment restrictions, the Underlying
Smith Barney Funds in which the Portfolios invest have adopted
certain investment restrictions which may be more or less restrictive
than those listed above, thereby permitting a Portfolio to engage in
investment strategies indirectly that are prohibited under the
investment restrictions listed above. The investment restrictions of
an Underlying Smith Barney Fund are located in its Statement of
Additional Information.
Under Rule 12d(1)(G) of the 1940 Act, each Select Portfolio may
invest substantially all of its assets in the Underlying Smith Barney
Funds.
Because of their investment objectives and policies, the Select
Portfolios will each concentrate more than 25% of their assets in the
mutual fund industry. In accordance with the Select Portfolios'
investment programs set forth in the Prospectus, each of the
Portfolios may invest more than 25% of its assets in certain
Underlying Smith Barney Funds. However, each of the Underlying Smith
Barney Funds in which each Fund will invest (other than the Smith
Barney Utilities Fund) will not concentrate more than 25% of its
total assets in any one industry. The Smith Barney Utilities Fund
will invest at least 65% of its assets in securities of companies in
the utility industries.
Portfolio Turnover
Each Portfolio's turnover rate is not expected to exceed 25%
annually. A Portfolio may purchase or sell securities to: (a)
accommodate purchases and sales of its shares, (b) change the
percentages of its assets invested in each of the Underlying Smith
Barney Funds in response to market conditions, and (c) maintain or
modify the allocation of its assets between equity and fixed income
funds and among the Underlying Smith Barney Funds within the
percentage limits described in the Prospectus.
The turnover rates of the Underlying Smith Barney Funds have ranged
from 1% to 367% during their most recent fiscal years. There can be
no assurance that the turnover rates of these funds will remain
within this range during subsequent fiscal years. Higher turnover
rates may result in higher expenses being incurred by the Underlying
Smith Barney Funds.
PURCHASE OF SHARES
The Concert Series offers its shares of capital stock on a continuous
basis. Shares can only be acquired by buying a Contract from a life
insurance company designated by Concert Series and directing the
allocation of part or all of the net purchase payment to one or more
of five subaccounts (the "Subaccounts"), each of which invests in a
Select Portfolio as permitted under the Contract prospectus.
Investors should read this Statement of Additional Information and
the Fund's Prospectus for the Select Portfolios dated April 30, 1998
along with the Contract prospectus.
Sales Charges and Surrender Charges
The Concert Series does not assess any sales charge, either when it
sells or when it redeems shares of a Portfolio. Surrender charges
may be assessed under the Contract, as described in the Contract
prospectus. Mortality and expense risk fees and other charges are
also described in that prospectus.
REDEMPTION OF SHARES
The Concert Series will redeem any shares of the Select Portfolios
presented by the Subaccounts, its sole shareholders, for redemption.
The Subaccounts' policy on when or whether to buy or redeem Portfolio
shares is described in the Contract prospectus.
Payment upon redemption of shares of a Portfolio is normally made
within three days of receipt of such request. The right of
redemption of shares of a Portfolio may be suspended or the date of
payment postponed (a) for any periods during which the New York Stock
Exchange, Inc. ("NYSE") is closed (other than for customary weekend
and holiday closings), (b) when trading in the markets the Portfolio
customarily utilizes is restricted, or an emergency, as defined by
the rules and regulations of the SEC, exists, making disposal of the
Portfolio's investments or determination of its net asset value not
reasonably practicable, or (c) for such other periods as the SEC by
order may permit for the protection of the Portfolio's shareholders.
Should the redemption of shares of a Portfolio be suspended or
postponed, the Concert Series' Board of Directors may make a
deduction from the value of the assets of the Portfolio to cover the
cost of future liquidations of the assets so as to distribute fairly
these costs among all owners of the Contract.
VALUATION OF SHARES
The net asset value of each Portfolio's Classes of Shares will be
determined on any day that the NYSE is open. The NYSE is closed on
the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day, and on the preceding Friday
or subsequent Monday when one of these holidays falls on a Saturday
or Sunday, respectively. The following is a description of the
procedures used by each Select Portfolio in valuing its assets.
The value of each Underlying Smith Barney Fund will be its net asset
value at the time of computation. Short-term investments that have a
maturity of more than 60 days are valued at prices based on market
quotations for securities of similar type, yield and maturity.
Short-term investments that have a maturity of 60 days or less are
valued at amortized cost, which constitutes fair value as determined
by the Concert Series' Board of Directors. Amortized cost involves
valuing an instrument at its original cost to the Portfolio and
thereafter assuming a constant amortization to maturity of any
discount or premium regardless of the effect of fluctuating interest
rates on the market value of the instrument.
PERFORMANCE
From time to time, the Concert Series may quote a Portfolio's yield
or total return in advertisements or in reports and other
communications to shareholders. The Concert Series may include
comparative performance information in advertising or marketing the
Portfolio's shares. Such performance information may include data
from the following industry and financial publications: BARRON'S,
BUSINESS WEEK, CDA INVESTMENT TECHNOLOGIES, INC., CHANGING TIMES,
FORBES, FORTUNE, INSTITUTIONAL INVESTOR, INVESTORS BUSINESS DAILY,
MONEY, MORNINGSTAR MUTUAL FUND VALUES, THE NEW YORK TIMES, USA TODAY
and THE WALL STREET JOURNAL.
Yield
A Portfolio's 30-day yield figure described below is calculated
according to a formula prescribed by the SEC. The formula can be
expressed as follows: YIELD = 2[( [(a-b/(c*d))/1] + 1)6 - 1], where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
For the purpose of determining the interest earned (variable "a" in
the formula) on debt obligations purchased by the Portfolio at a
discount or premium, the formula generally calls for amortization of
the discount or premium; the amortization schedule will be adjusted
monthly to reflect changes in the market values of the debt
obligations.
Investors should recognize that in periods of declining interest
rates a Portfolio's yield will tend to be somewhat higher than
prevailing market rates, and in periods of rising interest rates, the
Portfolio's yield will tend to be somewhat lower. In addition, when
interest rates are falling, the inflow of net new money to the
Portfolio from the continuous sale of its shares will likely be
invested in portfolio instruments producing lower yields than the
balance of the Portfolio's investments, thereby reducing the current
yield of the Portfolio. In periods of rising interest rates, the
opposite can be expected to occur.
Average Annual Total Return
"Average annual total return" figures, as described below, are
computed according to a formula prescribed by the SEC. The formula
can be expressed as follows: P(1+T)/n = ERV, where:
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or 10-year
period at the end of the 1-, 5- or 10-year period (or
fractional portion thereof), assuming reinvestment of all
dividends and distributions.
Each Select Portfolio's average annual total return with respect
to its Shares for the one-year period, five-year period, if any, and
for the life of the Portfolio ended January 31, 1998 is as follows:
One Year Five Years Life Inception Date
High Growth N/A N/A 10.60% 2/5/97
Growth N/A N/A 12.80 2/5/97
Balanced N/A N/A 12.80 2/5/97
Conservative N/A N/A 13.80 2/5/97
Income N/A N/A 12.90 2/5/97
TAXES
The following is a summary of certain Federal income tax
considerations that may affect the Concert Series and its
shareholders. The summary is not intended as a substitute for
individual tax advice, and investors are urged to consult their tax
advisors as to the tax consequences of an investment in any Portfolio
of the Concert Series .
Tax Status of the Portfolios
Each Portfolio will be treated as a separate taxable entity for
Federal income tax purposes.
Each Portfolio intends to qualify separately each year as a
"regulated investment company" under the Code. A qualified Portfolio
will not be liable for Federal income taxes to the extent that its
taxable net investment income and net realized capital gains are
distributed to its shareholders, provided that each Portfolio
distributes at least 90% of its net investment income.
Each Portfolio intends to accrue dividend income for Federal income
tax purposes in accordance with the rules applicable to regulated
investment companies. In some cases, these rules may have the effect
of accelerating (in comparison to other recipients of the dividend)
the time at which the dividend is taken into account by a Portfolio
as taxable income.
Distributions of an Underlying Smith Barney Fund's investment company
taxable income are taxable as ordinary income to a Portfolio which
invests in the Fund. Distributions of the excess of an Underlying
Smith Barney Fund's net long-term capital gain over its net short-
term capital loss, which are properly designated as "capital gain
dividends," are taxable as long-term capital gain to a Portfolio
which invests in the Fund, regardless of how long the Portfolio held
the Fund's shares, and are not eligible for the corporate dividends-
received deduction. Upon the sale or other disposition by a
Portfolio of shares of any Underlying Smith Barney Fund, the
Portfolio generally will realize a capital gain or loss which will be
long-term or short-term, generally depending upon the Portfolio's
holding period for the shares.
Tax Treatment of Shareholders
The Concert Series has been informed that certain of the life
insurance companies offering Contracts intend to qualify each of the
Subaccounts as a "segregated asset account" within the meaning of the
Code. For a Subaccount to quality as a segregated asset account, the
Select Portfolio in which such Subaccount holds shares must meet the
diversification requirements of Section 817(h) of the Code and the
regulations promulgated thereunder. To meet those requirements, a
Select Portfolio may not invest more than certain specified
percentages of its assets in the securities of any one, two, three or
four issuers. However, certain increases are made to the percentage
limitations to the extent of investments in United States Treasury
obligations. For these purposes, all obligations of the United
States Treasury and each instrumentality are treated as securities of
separate issuers.
Income on assets of a Subaccount qualified as a segregated asset
account whose underlying investments are adequately diversified will
not be taxable to Contract owners. However, in the event a
Subaccount is not so qualified, all annuities allocating any amount
of premiums to such Subaccount will not qualify as annuities for
federal income tax purposes and the holders of such annuities would
be taxed on any income on the annuities during the period of
disqualification.
The Concert Series has undertaken to meet the diversification
requirements of Section 817(h) of the Code. This undertaking may
limit the ability of a particular Select Portfolio to make certain
otherwise permitted investments.
Taxation of the Underlying Smith Barney Funds
Each Underlying Smith Barney Fund intends to qualify annually and
elect to be treated as a regulated investment company under
Subchapter M of the Code. In any year in which an Underlying Smith
Barney Fund qualifies as a regulated investment company and timely
distributes all of its taxable income, the Underlying Smith Barney
Fund generally will not pay any federal income or excise tax.
If more than 50% in value of an Underlying Smith Barney Fund's assets
at the close of any taxable year consists of stocks or securities of
foreign corporations, that Underlying Smith Barney Fund may elect to
treat certain foreign taxes paid by it as paid by its shareholders.
The shareholders would then be required to include their
proportionate share of the electing Fund's foreign income and related
foreign taxes in income even if the shareholder does not receive the
amount representing foreign taxes. Shareholders itemizing deductions
could then deduct the foreign taxes, or, whether or not deductions
are itemized but subject to certain limitations, claim a direct
dollar for dollar tax credit against their U.S. federal income tax
liability attributable to foreign income. In many cases, a foreign
tax credit will be more advantageous than a deduction for foreign
taxes. Each of the Portfolios may invest in some Underlying Smith
Barney Funds that expect to be eligible to make the above-described
election. While a Portfolio will be able to deduct the foreign taxes
that it will be treated as receiving if the election is made, the
Portfolio will not itself be able to elect to treat its foreign taxes
as paid by its shareholders. Accordingly, the shareholders of the
Portfolio will not have an option of claiming a foreign tax credit
for foreign taxes paid by the Underlying Smith Barney Funds, while
persons who invest directly in such Underlying Smith Barney Funds may
have that option.
General
The foregoing discussion related only to Federal income tax law as
applicable to U.S. citizens. Distributions by the Portfolio also may
be subject to state, local and foreign taxes, and their treatment
under state, local and foreign income tax laws may differ from the
Federal income tax treatment. Shareholders should consult their tax
advisors with respect to particular questions of Federal, state,
local and foreign taxation.
VOTING
Voting Rights
The Concert Series offers shares of the Select High Growth, Select
Growth, Select Balanced, Select Conservative and Select Income
Portfolios only for purchase by insurance company separate accounts.
Thus, the insurance company is technically the shareholder of these
Portfolios, and under the 1940 Act, is deemed to be in control of
these Portfolios. Nevertheless, with respect to any Concert Series
shareholder meeting, an insurance company will solicit and accept
timely voting instruction from its contract owners who own units in a
separate account investment division which corresponds to shares in
the Select Portfolios in accordance with the procedures set forth in
the accompanying prospectus of the applicable contract issued by the
insurance company and to the extent required by law. Shares of the
Concert Series attributable to contract owner interests for which no
voting instructions are received will be voted by an insurance
company in proportion to the shares for which voting instructions are
received.
Each share of a Portfolio represents an equal proportionate interest
in that Portfolio with each other share of the same Portfolio and is
entitled to such dividends and distributions out of the net income of
that Portfolio as are declared in the discretion of the Directors.
Shareowners are entitled to one vote for each share held and will
vote by individual Portfolio except to the extent required by the
1940 Act. The Concert Series is not required to hold annual
shareowner meetings, although special meetings may be called for the
Concert Series as a whole, or a specific Portfolio, for purposes such
as electing or removing Directors, changing fundamental policies or
approving a management contract. Shareowners may cause a meeting of
shareowners to be held upon a vote of 10% of the Fund's outstanding
shares for the purposes of voting on the removal of Directors.
As used in the Prospectus and this Statement of Additional
Information, a "vote of a majority of the outstanding voting
securities" means the affirmative vote of the lesser of (a) more than
50% of the outstanding shares of the Concert Series (or the affected
Portfolio) or (b) 67% or more of such shares present at a meeting if
more than 50% of the outstanding shares of the Concert Series (or the
affected Portfolio are represented at the meeting in person or by
proxy. A Portfolio shall be deemed to be affected by a matter unless
it is clear that the interests of each Portfolio in the matter are
identical or that the matter does not affect any interest of the
Portfolio. The approval of a management agreement, a distribution
agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a Portfolio only if approved
by a "vote of a majority of the outstanding voting securities" of the
Portfolio affected by the matter; however, the ratification of
independent accountants and the election of directors are not subject
to separate voting requirements and may be effectively acted upon by
a vote of the holders of a majority of all Concert Series shares
voting without regard to Portfolio.
ADDITIONAL INFORMATION
The Concert Series was incorporated in Maryland on August 11, 1995.
Portfolio securities and cash owned by the Concert Series are held in
the custody of PNC Bank, National Association, 17th and Chestnut
Streets, Philadelphia, Pennsylvania 19103.
In the event of the liquidation or dissolution of the Concert Series,
shareholders of a Portfolio are entitled to receive the assets
belonging to that Portfolio that are available for distribution and a
proportionate distribution, based upon the relative net assets of the
respective Portfolios, of any general assets not belonging to any
particular Portfolio that are available for distribution.
FINANCIAL STATEMENTS
The Concert Series' Annual Report for the fiscal year ended January
31, 1998 is incorporated herein by reference in its entirety.
APPENDIX - RATINGS OF DEBT OBLIGATIONS
BOND (AND NOTE) RATINGS
Moody's Investors Services, Inc. ("Moody's")
Aaa - Bonds that are rated "Aaa" are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely
to impair the fundamentally strong position of such issues.
Aa - Bonds that are rated "Aa" are judged to be of high quality by
all standards. Together with the "Aaa" group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
"Aaa" securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present that make
the long term risks appear somewhat larger than in "Aaa" securities.
A - Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds which are rated "Ba" are judged to have speculative
elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds
in this class.
B - Bonds which are rated "B" generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long period
of time may be small.
Caa - Bonds which are rated "Caa" are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca - Bonds which are rated "Ca" represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C - Bonds which are rated "C" are the lowest class of bonds and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
Con (..) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects
under construction, (b) earnings of projects unseasoned in operating
experience, (c) rentals which begin when facilities are completed, or
(d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates that the issue ranks in
the lower end of its generic rating category.
Standard & Poor's Ratings Group ("S&P")
AAA - Debt rated "AAA" has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in
small degree.
A - Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB - Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for debt in this category than in
higher rated categories.
BB, B, CCC, CC, C - Debt rated "BB", "B", "CCC", "CC" and "C" is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the
terms of the obligation. 'BB' indicates the lowest degree of
speculation and 'C' the highest degree of speculation. While such
debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures
to adverse conditions.
Plus (+) or Minus (-): The ratings from "AA" to "B" may be modified
by the addition of a plus or minus to show relative standing within
the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion
of the project being financed by the debt being rated and indicates
that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project.
This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of, or
the risk of default upon failure of, such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L - The letter "L" indicates that the rating pertains to the
principal amount of those bonds where the underlying deposit
collateral is fully insured by the FDIC.
+ Continuance of the rating is contingent upon S&P's receipt of
closing documentation confirming investments and cash flow.
* Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.
"NR" Indicates no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does
not rate a particular type of obligation as a matter of policy.
COMMERCIAL PAPER RATINGS
Moody's
Issuers rated "Prime-1" (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment will normally be evidenced by the following
characteristics: leading market positions in well-established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; well-established
access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated "Prime-2" (or related supporting institutions) have
strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
S&P
A-1 - This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issuers
determined to possess overwhelming safety characteristics will be
noted with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for
issues designated A-1.
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