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PROSPECTUS
SMITH BARNEY SERIES FUND
INTERMEDIATE HIGH GRADE PORTFOLIO
April 29, 1995
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SMITH BARNEY SERIES FUND
Intermediate High Grade Portfolio
388 Greenwich Street
New York, New York 10013
Contract Owner Inquiries: (212) 723-9217
Smith Barney Series Fund is a diversified, open-end management investment
company (the "Fund"), with ten portfolios (the "Portfolios"), each with separate
goals and investment policies. Shares of the Intermediate High Grade Portfolio
(the "Portfolio") may be acquired only by investing in a qualifying variable
annuity or variable life insurance contract (a "Contract") offered by
participating life insurance companies.
The Portfolio's investment goal is to provide as high a level of current
income as is consistent with the protection of capital. The Portfolio invests in
U.S. government securities and high-grade corporate bonds of U.S. issuers.
There can be no guarantee that the Portfolio's investment goal will be
achieved since any investment involves risks. Discussions of the Portfolio's
investments, and their related risks, are found in the sections of this
Prospectus entitled "Investment Goal and Policies of the Portfolio," "Additional
Investments" and "Special Considerations and Risk Factors."
This Prospectus, which sets forth certain information about the Fund and the
Portfolio that you should know before investing, should be read in conjunction
with the applicable Contract prospectus and retained for future reference.
Additional information about the Fund and the Portfolio has been filed with the
Securities and Exchange Commission (the "SEC") in a document entitled "Statement
of Additional Information," dated April 29, 1995, as amended or supplemented
from time to time, which is available upon request and without charge by calling
or writing the Fund at the telephone number or address set forth below or by
contacting a representative of a participating life insurance company.
The Fund is responsible only for statements that are included in this
Prospectus, the Statement of Additional Information or in authorized sales
material. The Statement of Additional Information is incorporated by reference
into this Prospectus in its entirety.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT CONTRACT PROSPECTUS. BOTH
PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is April 29, 1995.
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CONTENTS
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SUMMARY.................................................................... 1
EXPENSES OF THE PORTFOLIO.................................................. 2
INVESTMENT GOAL AND POLICIES OF THE PORTFOLIO.............................. 4
ADDITIONAL INVESTMENTS..................................................... 4
CERTAIN INVESTMENT GUIDELINES.............................................. 10
SPECIAL CONSIDERATIONS AND RISK FACTORS.................................... 10
PORTFOLIO TRANSACTIONS..................................................... 12
NET ASSET VALUE............................................................ 13
HOW TO USE THE PORTFOLIO................................................... 13
DIVIDENDS AND TAXES........................................................ 14
MANAGEMENT OF THE FUND..................................................... 15
PORTFOLIO MANAGEMENT....................................................... 16
CUSTODIAN AND TRANSFER AGENT............................................... 16
DISTRIBUTOR................................................................ 16
ADDITIONAL INFORMATION..................................................... 17
THE PORTFOLIO'S PERFORMANCE................................................ 17
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No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, the Statement of
Additional Information or the Fund's official sales literature in connection
with the offering of the Fund's shares, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund. This Prospectus does not constitute an offer in any state in which,
or to any person to whom, the offer may not lawfully be made.
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SUMMARY
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The following summary is qualified in its entirety by detailed information
appearing elsewhere in this Prospectus and in the Statement of Additional
Information. Cross-references in this summary are to headings in the Prospectus.
The Portfolio. The Portfolio is one of ten portfolios of the Fund, a
diversified, open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Portfolio's
investment objective is to provide as high a level of current income as is
consistent with the protection of capital. The Portfolio invests in U.S.
government securities and high-grade corporate bonds of U.S. issuers. See
"Additional Information."
Management. Smith Barney Mutual Funds Management Inc. ("SBMFM") serves as
the Portfolio's investment adviser and administrator. SBMFM is a wholly-owned
subsidiary of Smith Barney Holdings Inc. ("Holdings"), which in turn is a wholly
owned subsidiary of Travelers Group Inc., a diversified financial services
holding company engaged, through its subsidiaries, principally in four business
segments: Investment Services, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance Services. See "Management of the
Fund."
Buying Shares. Shares of the Portfolio are offered only to Contract owners
as set forth in the specific Contract prospectus. A Contract owner can direct
the allocation of part or all of his or her net purchase payment to the
Portfolio. In the future, Contract owners may be offered the opportunity to
invest in one or more of the other portfolios of the Fund. See "How to Use the
Portfolio."
Redeeming Shares. Shares may be redeemed as described in the applicable
Contract prospectus. See "How to Use the Portfolio."
Risk Factors and Special Considerations. The non-publicly traded and
illiquid securities which the Portfolio may hold may have to be sold at lower
prices, or may remain unsold, when the Portfolio desires to dispose of them.
Government stripped mortgage-backed securities in which the Portfolio may invest
are sensitive to changes in interest rates and to prepayment of the mortgages.
The foreign securities in which the Portfolio may invest, may be subject to
certain risks in addition to those inherent in U.S. investments. The medium- and
lower-rated securities as well as unrated securities and the securities of
unseasoned issuers that the Portfolio may hold, some of which have speculative
characteristics, may be subject to greater market fluctuation and risk of loss
of income or principal than higher-rated securities. The Portfolio may make
certain investments and employ certain investment techniques that involve other
risks, including entering into repurchase agreements, lending portfolio
securities and entering into futures contracts and related options as hedges.
These risks and those associated with when-issued and delayed delivery
transactions, put and call options, covered option writing, forward roll
transactions and reverse repurchase agreements, are described under "Investment
Goal and Policies of the Portfolio" and "Special Considerations and Risk
Factors."
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EXPENSES OF THE PORTFOLIO
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The Portfolio will bear its own expenses. Operating expenses for the
Portfolio generally will consist of all costs not specifically borne by the
Portfolio's investment adviser, administrator and/or distributor, including
organizational costs, investment advisory and administration fees, fees for
necessary professional and brokerage services, fees for any pricing service, the
costs of regulatory compliance and costs associated with maintaining legal
existence and shareholder relations. From time to time, the investment adviser,
administrator and/or distributor may waive all or a portion of the fees payable
to it by the Portfolio, thereby reducing the expenses of the Portfolio. A
detailed description of the expenses involved in investing in a Contract and the
Portfolio is included in the Contract prospectus.
Financial Highlights
The following information with respect to the years ended December 31, 1994
and 1993 has been audited by Coopers & Lybrand L.L.P., independent accountants,
whose report thereon appears in the Fund's Annual Report dated December 31,
1994, which if not included with this Prospectus, may be obtained without
charge. This information should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report which
is incorporated by reference into the Statement of Additional Information.
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FINANCIAL HIGHLIGHTS
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<TABLE>
<CAPTION>
For the year ended For the year ended For the year ended For the year ended
December 31, 1994 December 31, 1993 December 31, 1992 December 31, 1991
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<S> <C> <C> <C> <C>
Net asset value, beginning of year $ 10.69 $10.29 $10.24 $10.00
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Income from investment operations:
Net investment income* 0.61 0.55 0.45 0.03
Net realized and unrealized gain/(loss) on investments (0.94) 0.26 0.08 0.21
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Total from investment operations (0.33) 0.81 0.53 0.24
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Less distributions:
Dividends from net investment income (0.61) (0.36) (0.48) --
Distributions from capital gains (0.09) (0.05) -- --
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Total distributions (0.70) (0.41) (0.48) --
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Net asset value, end of year $ 9.66 $10.69 $10.29 $10.24
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Total return+ (3.05)% 8.00% 5.28% 2.40%
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Ratios to average net assets/supplemental data:
Net assets, end of year (000's) $13,280 $9,859 $3,621 $ 697
Ratio of operating expenses to average net assets++ 0.85% 0.85% 0.85% 0.80%
Ratio of net investment income/(loss) to average net assets 6.57% 5.25% 4.75% 4.49%
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Portfolio turnover rate 90% 139% 124% --
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</TABLE>
* Net investment income before waiver of fees and reimbursement of expenses by
investment adviser and/or custodian and/or transfer agent and/or IDS or its
predecessors was $(0.14), $0.32, $0.50, $0.59 for the fiscal period ended
December 31, 1991 and the fiscal years ended December 31, 1992, 1993 and
1994, respectively.
+ Total return represents aggregate total return for the period.
++ Operating expense ratio before fees waived and expenses reimbursed by the
affiliated agents was 26.28%, 2.28%, 1.36% and 1.05% for the fiscal period
ended December 31, 1991, and the fiscal years ended December 31, 1992, 1993
and 1994, respectively.
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INVESTMENT GOAL AND POLICIES OF THE PORTFOLIO
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Investment Goal
The Portfolio's goal is to provide as high a level of current income as is
consistent with the protection of capital. This investment goal may not be
changed without the approval of the holders of a majority (as defined in the
1940 Act) of the outstanding shares of the Portfolio. There can, of course, be
no guarantee that the Portfolio will achieve its investment goal. Additional
information about investment strategies that the Portfolio may employ and
investment policies mentioned below appears in the Statement of Additional
Information.
Investment Policies
The Portfolio will seek to achieve its goal by investing, under normal
circumstances, substantially all - but no less than 65% - of its assets in U.S.
government securities and high-grade corporate bonds of U.S. issuers (i.e.,
bonds rated within the two highest rating categories by Standard & Poor's
Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's") or, if not
rated, believed by SBMFM to be of comparable quality). Under normal market
conditions, the average weighted maturity of the Portfolio's assets will be
between three and ten years. The portion of the Portfolio's assets not invested
in intermediate-term U.S. government securities and U.S. corporate bonds may be
invested in short-term U.S. government and corporate obligations, convertible
securities and preferred stock that is not convertible into common stock. The
Portfolio may not hold securities rated lower than Baa by Moody's or BBB by S&P
or unrated securities deemed to be comparable to securities rated below
investment grade. The Portfolio may invest up to 10% of its total assets in
government stripped mortgage-backed securities and may invest in floating or
variable rate demand notes.
ADDITIONAL INVESTMENTS
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Money Market Instruments
The Portfolio may, as a cash management tool, hold up to 20% of the value
of its total assets in cash and invest in short-term instruments and, for
temporary defensive purposes, may hold cash and invest in short-term instruments
without limitation. Short-term instruments in which the Portfolio may invest
include: U.S. government securities; obligations of banks having at least $1
billion in assets (including certificates of deposit, time deposits and bankers'
acceptances of U.S. or foreign banks, U.S. savings and loan associations and
similar institutions); commercial paper rated no lower than A-2 by S&P or Prime-
2 by Moody's or the equivalent from another nationally recognized statistical
rating organization ("NRSRO") or, if unrated, of an issuer having an
outstanding, unsecured debt issue then rated within the two highest rating
categories; and repurchase agreements with respect to any of the foregoing
entered into with banks and non-bank dealers approved by the Fund's Board of
Trustees.
U.S. Government Securities
The U.S. government securities in which the Portfolio may invest include:
direct obligations of the United States Treasury (such as Treasury Bills,
Treasury Notes and Treasury Bonds), and obligations issued by U.S. government
agencies and instrumentalities, including securities that are supported by the
full faith and credit of the United States (such as certificates issued by
GNMA); securities that are supported by the right of the issuer to borrow from
the U.S. Treasury (such as securities of Federal Home Loan Banks); and
securities that are supported only by the credit of the instrumentality (such as
bonds issued by FNMA and FHLMC). Treasury Bills have maturities of less than one
year, Treasury Notes have maturities of one to ten years and Treasury Bonds
generally have maturities of greater than ten years at the date of issuance.
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The Portfolio may invest up to 5% of its net assets in U.S. government
securities for which the principal repayment at maturity, while paid in U.S.
dollars, is determined by reference to the exchange rate between the U.S. dollar
and the currency of one or more foreign countries ("Exchange Rate-Related
Securities"). Exchange Rate-Related Securities are issued in a variety of forms,
depending on the structure of the principal repayment formula. The principal
repayment formula may be structured so that the securityholder will benefit if a
particular foreign currency to which the security is linked is stable or
appreciates against the U.S. dollar. In the alternative, the principal repayment
formula may be structured so that the securityholder benefits if the U.S. dollar
is stable or appreciates against the linked foreign currency. Finally, the
principal repayment formula can be a function of more than one currency and,
therefore, be designed in either of the aforementioned forms or a combination of
those forms.
Investments in Exchange Rate-Related Securities entail special risks. There
is the possibility of significant changes in rates of exchange between the U.S.
dollar and any foreign currency to which an Exchange Rate-Related Security is
linked. If currency exchange rates do not move in the direction or to the extent
anticipated at the time of purchase of the security, the amount of principal
repaid at maturity might be significantly below the par value of the security,
which might not be offset by the interest earned by the Portfolio over the term
of the security. 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. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors. The imposition or modification of foreign
exchange controls by the United States or foreign governments or intervention by
central banks also could affect exchange rates. Finally, there is no assurance
that sufficient trading interest to create a liquid secondary market will exist
for particular Exchange Rate-Related Securities due to conditions in the debt
and foreign currency markets. Illiquidity in the forward foreign exchange market
and the high volatility of the foreign exchange market may from time to time
combine to make it difficult to sell an Exchange Rate-Related Security prior to
maturity without incurring a significant price loss.
Repurchase Agreements. The Portfolio may engage in repurchase agreement
transactions on portfolio securities, in each case with banks which are the
issuers of instruments acceptable for purchase by the Portfolio and with certain
dealers listed on the Federal Reserve Bank of New York's list of reporting
dealers. Under the terms of a typical repurchase agreement, the Portfolio would
acquire an underlying debt obligation for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Portfolio to resell, the obligation at an agreed-upon price and time,
thereby determining the yield during the Portfolio's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Portfolio's holding period. The value of the underlying
securities will be monitored by the Portfolio's investment adviser to ensure
that it at least equals at all times the total amount of the repurchase
obligation, including interest. The Portfolio bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its obligations and
the Portfolio is delayed or prevented from exercising its rights to dispose of
the collateral securities, including the risk of a possible decline in the value
of the underlying securities during the period while the Portfolio seeks to
assert these rights. The Portfolio's investment adviser, acting under the
supervision of the Fund's Board of Trustees, reviews on an ongoing basis the
value of the collateral and the creditworthiness of those banks and dealers with
which the Portfolio enters into repurchase agreements to evaluate potential
risks. A repurchase agreement is considered to be a loan collateralized by the
underlying securities under the 1940 Act.
Covered Option Writing. The Portfolio may write put and call options on
securities. The Portfolio realizes fees (referred to as "premiums") for granting
the rights evidenced by the options. A put option embodies the right of its
purchaser to compel the writer of the option to purchase from the option holder
an underlying security at a specified price at any time during the option
period. In contrast, a call option embodies the right of its purchaser
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to compel the writer of the option to sell to the option holder an underlying
security at a specified price at any time during the option period. Thus, the
purchaser of a put option written by the Portfolio has the right to compel the
Portfolio to purchase from it the underlying security at the agreed-upon price
for a specified time period, while the purchaser of a call option written by the
Portfolio has the right to purchase from the Portfolio the underlying security
owned by the Portfolio at the agreed-upon price for a specified time period.
Upon the exercise of a put option written by the Portfolio, the Portfolio
may suffer a loss equal to the difference between the price at which the
Portfolio is required to purchase the underlying security plus the premium
received for writing the option and its market value at the time of the option
exercise. Upon the exercise of a call option written by the Portfolio, the
Portfolio may suffer a loss equal to the difference between the security's
market value at the time of the option exercise less the premium received for
writing the option and the Portfolio's acquisition cost of the security.
The Portfolio will write only covered options. Accordingly, whenever the
Portfolio writes a call option, it will continue to own or have the present
right to acquire the underlying security for as long as it remains obligated as
the writer of the option. To support its obligation to purchase the underlying
security if a put option is exercised, the Portfolio that has written a put
option will either (a) deposit with PNC in a segregated account cash, U.S.
government securities or other high grade debt obligations having a value at
least equal to the exercise price of the underlying securities or (b) continue
to own an equivalent number of puts of the same "series" (that is, puts on the
same underlying security having the same exercise prices and expiration dates as
those written by the Portfolio) or an equivalent number of puts of the same
"class" (that is, puts on the same underlying security) with exercise prices
greater than those that it has written (or, if the exercise prices of the puts
that it holds are less than the exercise prices of those that it has written, it
will deposit the difference with PNC in a segregated account).
The Portfolio may engage in a closing purchase transaction to realize a
profit, to prevent an underlying security from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the outstanding
option's expiration). To effect a closing purchase transaction, the Portfolio
would purchase, prior to the holder's exercise of an option that the Portfolio
has written, an option of the same series as that on which the Portfolio desires
to terminate its obligation. The obligation of the Portfolio under an option
that it has written would be terminated by a closing purchase transaction, but
the Portfolio would not be deemed to own an option as the result of the
transaction. There can be no assurance that the Portfolio will be able to effect
closing purchase transactions at a time when it wishes to do so. To facilitate
closing purchase transactions, however, the Portfolio ordinarily will write
options only if a secondary market for the options exist on a U.S. securities
exchange or in the over-the-counter market. The staff of the SEC considers most
over-the-counter options to be illiquid. The ability to terminate options
positions established in the over-the-counter market may be more limited than in
the case of exchange-traded options and also may involve the risk that
securities dealers participating in such transactions would fail to meet their
obligations to the Portfolio.
Lending of Securities. The Portfolio may lend its portfolio securities to
brokers, dealers and other financial organizations. By lending its securities,
the Portfolio 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. Loans of portfolio
securities, if and when made, by the Portfolio may not exceed 33 1/3% of the
Portfolio's total assets, taken at value. Loans of portfolio securities will be
collateralized by cash, letters of credit or U.S. government securities, which
are maintained at all times in an amount equal to the current market value of
the loaned securities. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account of
the Portfolio.
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Futures and Options on Futures. When deemed advisable by its investment
adviser, the Portfolio may enter into interest rate futures contracts and may
enter into related options that are traded on a U.S. exchange or board of trade.
These transactions will be made solely for the purpose of hedging against the
effects of changes in the value of portfolio securities due to anticipated
changes in interest rates, market conditions and currency values, as the case
may be. All futures and options contracts will be entered into only when the
transactions are economically appropriate to the reduction of risks inherent in
the management of the Portfolio.
An interest rate futures contract provides for the future sale by one party
and the purchase by the other party of a specified amount of a particular
financial instrument (debt security) at a specified price, date, time and place.
Similarly, a foreign currency futures contract provides for the future sale by
one party and the purchase by another party of a certain amount of a particular
currency at a specified price, date, time and place. Stock index futures
contracts are based on indices that reflect the market value of common stock of
the firms included in the indices. An index futures contract is an agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index contract was
originally entered into. An option on an interest rate, stock index or currency
futures contract gives the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and short position if the option is a put) at a specified exercise price at
any time prior to the expiration date of the option.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. There can be no assurance that there will be a
correlation between price movements in the underlying securities, index or
currency, on the one hand, and price movements in the securities that are the
subject of the hedge, on the other hand. Positions in futures contracts and
options on futures contracts may be closed out only on the exchange or board of
trade on which they were entered into, and there can be no assurance that an
active market will exist for a particular contract or option at any particular
time.
The Portfolio may not enter into futures and options contracts for which
aggregate initial margin deposits and premiums paid for unexpired options to
establish such positions that are not bona fide hedging positions (as defined by
the Commodity Futures Trading Commission) exceed 5% of the fair market value of
the Portfolio's assets, after taking into account unrealized profits and
unrealized losses on futures contracts into which it has entered. With respect
to long positions in futures or options on futures, the Portfolio will "cover"
the position in a manner consistent with SEC guidance.
When-Issued Securities and Delayed Delivery Transactions. The Portfolio may
purchase and sell securities on a when-issued basis, which calls for the
purchase (or sale) of securities at an agreed-upon price on a specified future
date. The Portfolio will enter into a when-issued transaction for the purpose of
acquiring portfolio securities and not for the purpose of leverage. In such
transactions, delivery of the securities occurs beyond the normal settlement
periods, but no payment or delivery is made by, and no interest accrues to, the
Portfolio prior to the actual delivery or payment by the other party to the
transaction. Due to fluctuations in the value of securities purchased or sold on
a when-issued or delayed delivery basis, the returns obtained on such securities
may be higher or lower then the returns available in the market on the dates
when the investments are actually delivered to the buyers. The Portfolio will
establish a segregated account consisting of cash, U.S. government securities or
other high-grade debt obligations in an amount equal to the amount of its when-
issued and delayed delivery commitments. Placing securities rather than cash in
the segregated account may have a leveraging effect on the Portfolio's net
assets. The Portfolio will not accrue income with respect to a when-issued
security prior to its stated delivery date.
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Purchasing Options on Securities and Stock Indices. The Portfolio may
purchase put and call options that are traded on a U.S. securities exchange. The
Portfolio may utilize up to 10% of its assets to purchase put options on
portfolio securities and may do so at or about the same time that it purchases
the underlying security or at a later time. By buying a put, the Portfolio
limits its risk of loss from a decline in the market value of the underlying
security until the put expires. Any appreciation in the value of and yield
otherwise available from the underlying security, however, will be partially
offset by the amount of the premium paid for the put option and any related
transaction costs. The Portfolio may utilize up to 10% of its assets to purchase
call options on portfolio securities. Call options may be purchased by the
Portfolio in order to acquire the underlying securities for the Portfolio at a
price that avoids any additional cost that would result from a substantial
increase in the market value of a security. The Portfolio also may purchase call
options to increase its return to investors at a time when the call is expected
to increase in value due to anticipated appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing
sale transactions (sales by the Portfolio, prior to the exercise of options that
it has purchased, of options of the same series), and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the option plus the related transaction costs.
Covered Option Writing. The Portfolio may write put and call options on
securities. The Portfolio realizes fees (referred to as "premiums") for granting
the rights evidenced by the options. A put option embodies the right of its
purchaser to compel the writer of the option to purchase from the option holder
an underlying security at a specified price at any time during the option
period. In contrast, a call option embodies the right of its purchaser to compel
the writer of the option to sell to the option holder an underlying security at
a specified price at any time during the option period. Thus, the purchaser of a
put option written by the Portfolio has the right to compel the Portfolio to
purchase from it the underlying security at the agreed-upon price for a
specified time period, while the purchaser of a call option written by the
Portfolio has the right to purchase from the Portfolio the underlying security
owned by the Portfolio at the agreed-upon price for a specified time period.
Upon the exercise of a put option written by the Portfolio, the Portfolio
may suffer a loss equal to the difference between the price at which the
Portfolio is required to purchase the underlying security plus the premium
received for writing the option and its market value at the time of the option
exercise. Upon the exercise of a call option written by the Portfolio, the
Portfolio may suffer a loss equal to the difference between the security's
market value at the time of the option exercise less the premium received for
writing the option and the Portfolio's acquisition cost of the security.
The Portfolio will write only covered options. Accordingly, whenever the
Portfolio writes a call option, it will continue to own or have the present
right to acquire the underlying security for as long as it remains obligated as
the writer of the option. To support its obligation to purchase the underlying
security if a put option is exercised, the Portfolio that has written a put
option will either (a) deposit with PNC in a segregated account cash, U.S.
government securities or other high grade debt obligations having a value at
least equal to the exercise price of the underlying securities or (b) continue
to own an equivalent number of puts of the same "series" (that is, puts on the
same underlying security having the same exercise prices and expiration dates as
those written by the Portfolio) or an equivalent number of puts of the same
"class" (that is, puts on the same underlying security) with exercise prices
greater than those that it has written (or, if the exercise prices of the puts
that it holds are less than the exercise prices of those that it has written, it
will deposit the difference with PNC in a segregated account).
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The Portfolio may engage in a closing purchase transaction to realize a
profit, to prevent an underlying security from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the outstanding
option's expiration). To effect a closing purchase transaction, the Portfolio
would purchase, prior to the holder's exercise of an option that the Portfolio
has written, an option of the same series as that on which the Portfolio desires
to terminate its obligation. The obligation of the Portfolio under an option
that it has written would be terminated by a closing purchase transaction, but
the Portfolio would not be deemed to own an option as the result of the
transaction. There can be no assurance that the Portfolio will be able to effect
closing purchase transactions at a time when it wishes to do so. To facilitate
closing purchase transactions, however, the Portfolio will write options only if
a secondary market for the options exists on a U.S. securities exchange or in
the over-the-counter market. The staff of the SEC considers most over-the-
counter options to be illiquid. The ability to terminate options positions
established in the over-the-counter market may be more limited than in the case
of exchange-traded options and also may involve the risk that securities dealers
participating in such transactions would fail to meet their obligations to the
Portfolio.
Forward Roll Transactions. In order to enhance current income, the
Portfolio may enter into forward roll transactions with respect to mortgage-
related securities issued by GNMA, FNMA and FHLMC. In a forward roll
transaction, the Portfolio sells a mortgage security to a financial institution,
such as a bank or broker-dealer, and simultaneously agrees to repurchase a
similar security from the institution at a later date at an agreed-upon price.
The mortgage securities that are repurchased will bear the same interest rate as
those sold, but generally will be collateralized by different pools of mortgages
with different prepayment histories than those sold. During the period between
the sale and repurchase, the Portfolio will not be entitled to receive interest
and principal payments on the securities sold. Proceeds of the sale will be
invested in short-term instruments, particularly repurchase agreements, and the
income from these investments, together with any additional fee income received
on the sale, will generate income for the Portfolio exceeding the yield on the
securities sold. Forward roll transactions involve the risk that the market
value of the securities sold by the Portfolio may decline below the repurchase
price of those securities. At the time the Portfolio enters into a forward roll
transaction, it will place in a segregated custodial account cash, U.S.
government securities or high grade debt obligations having a value equal to the
repurchase price (including accrued interest) and will subsequently monitor the
account to insure that such equivalent value is maintained. Forward roll
transactions are considered to be borrowings by the Portfolio.
Reverse Repurchase Agreements. The Portfolio may enter into reverse
repurchase agreement transactions with member banks of the Federal Reserve
System or with certain dealers listed on the Federal Reserve Bank of New York's
list of reporting dealers. A reverse repurchase agreement, which is considered a
borrowing by the Portfolio, involves a sale by the Portfolio of securities that
it holds concurrently with an agreement by the Portfolio to repurchase the same
securities at an agreed-upon price and date. The Portfolio typically will invest
the proceeds of a reverse repurchase agreement in money market instruments or
repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of the proceeds is known as leverage. The
Portfolio will enter into a reverse repurchase agreement for leverage purposes
only when the interest income to be earned from the investment of the proceeds
is greater than the interest expense of the transaction. The Portfolio also may
use the proceeds of reverse repurchase agreements to provide liquidity to meet
redemption requests when the sale of the Portfolio's securities is considered to
be disadvantageous. At the time the Portfolio enters into a reverse repurchase
agreement with a broker-dealer (but not a bank), it will place in a segregated
custodial account cash, U.S. government securities or high grade debt
obligations having a value equal to its obligations under the reverse repurchase
agreements.
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CERTAIN INVESTMENT GUIDELINES
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Up to 10% of the total assets of the Portfolio may be invested in
securities with contractual or other restrictions on resale and other
instruments that are not readily marketable, including (a) repurchase agreements
with maturities greater than seven days, (b) futures contracts and related
options for which a liquid secondary market does not exist and (c) time deposits
maturing in more than seven calendar days. The Portfolio may borrow from banks
for temporary or emergency purposes, but not for leverage, in an amount up to
30% of its assets, and may pledge its assets to the same extent in connection
with such borrowings. Whenever borrowings from banks exceed 5% of the value of
the assets of the Portfolio, the Portfolio will not make any additional
investments. Except for the limitations on borrowing, the investment guidelines
set forth in this paragraph may be changed at any time without shareholder
consent by vote of the Board of Trustees of the Fund. A complete list of
investment restrictions that identifies additional restrictions that cannot be
changed without the approval of a majority of the Portfolio's outstanding shares
is contained in the Statement of Additional Information.
SPECIAL CONSIDERATIONS AND RISK FACTORS
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This section describes certain investments of the Portfolio and related
risks. Further information concerning investments of the Portfolio and related
risks may be found in the Appendix to this Prospectus and in the Statement of
Additional Information.
Fixed-Income Securities
The market value of fixed-income obligations of the Portfolio will be
affected by general changes in interest rates, which will result in increases or
decreases in the value of fixed-income obligations held by the Portfolio. The
market value of the Portfolio's fixed-income obligations can be expected to vary
inversely in relation to changes in prevailing interest rates. In addition,
fixed-income securities in which the Portfolio may invest may not yield as high
a level of current income as might be achieved by investing in securities with
less liquidity and safety and longer maturities.
Non-Publicly Traded and Illiquid Securities
The Portfolio may purchase securities that are not publicly traded. The
sale of securities that are not publicly traded is typically restricted under
federal securities laws. As a result, the Portfolio may be forced to sell these
securities at less than fair market value or may not be able to sell them when
its investment adviser believes it desirable to do so. The Portfolio's
investments in illiquid securities are subject to the risk that should the
Portfolio desire to sell any of these securities when a ready buyer is not
available at a price that the Portfolio deems representative of their value, the
value of the Portfolio's net assets could be adversely affected.
Government Stripped Mortgage-Backed Securities
The Portfolio may invest up to 10% of its total assets in government
stripped mortgage-backed securities issued and guaranteed by GNMA, FNMA or
FHLMC. These securities represent beneficial ownership interests in either
periodic principal distributions ("principal-only") or interest distributions
("interest-only") on mortgage-backed certificates issued by GNMA, FNMA or FHLMC,
as the case may be. The certificates underlying government stripped mortgage-
backed securities represent all or part of the beneficial interest in pools of
mortgage loans.
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Investing in government stripped mortgage-backed securities involves the
risks normally associated with investing in mortgage-backed securities issued by
the government or government related entities. In addition, the yields on
government stripped mortgage-backed securities are extremely sensitive to the
prepayment experience on the mortgage loans underlying the certificates
collateralizing the securities. If a decline in the level of prevailing interest
rates results in a rate of principal prepayments higher than anticipated,
distributions of principal will be accelerated, thereby reducing the yield to
maturity on interest-only government stripped mortgage-backed securities and
increasing the yield to maturity on principal-only government stripped mortgage-
backed securities. Sufficiently high prepayment rates could result in the
Portfolio not fully recovering its initial investment in an interest-only
government stripped mortgage-backed security. Government stripped mortgage-
backed securities are currently traded in an over-the-counter market maintained
by several large investment banking firms. There can be no assurance that the
Portfolio will be able to effect a trade of a government stripped mortgage-
backed security at a time when it wishes to do so, although the Portfolio will
acquire government stripped mortgage-backed securities only if a secondary
market for the securities exists at the time of acquisition.
Foreign Securities
The Portfolio may invest in obligations of companies and governments of
foreign nations, which involve certain risks in addition to the usual risks
inherent in U.S. investments. These risks include those resulting from
revaluation of currencies, future adverse political and economic developments
and the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers and the lack of uniform accounting, auditing and financial
reporting standards or of other regulatory practices and requirements comparable
to those applicable to U.S. companies. The performance of the Portfolio when
investing in foreign securities may be adversely affected by fluctuations in
value of one or more foreign currencies relative to the U.S. dollar. Moreover,
securities of many foreign companies may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies. In addition,
with respect to certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Portfolio, including the withholding
of dividends. Foreign securities may be subject to foreign government taxes that
could reduce the return on such securities. Changes in foreign currency exchange
rates may affect the value of portfolio securities and the appreciation or
depreciation of investments. Investment in foreign securities also may result in
higher expenses due to the cost of converting foreign currency to U.S. dollars,
the payment of fixed brokerage commissions on foreign exchanges, which generally
are higher than commissions on U.S. exchanges, and the expense of maintaining
securities with foreign custodians.
Medium- and Lower-rated, and Unrated Securities
The Portfolio may invest in medium- or lower-rated securities and unrated
securities of comparable quality. Generally, these securities offer a higher
current yield than is offered by higher-rated securities, but also will likely
have some quality and protective characteristics that, in the judgment of the
rating organizations, are outweighed by large uncertainties or major risk
exposures to adverse conditions and are predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation. The market values of certain of these securities
also tend to be more sensitive to individual corporate developments and changes
in economic conditions than higher-quality securities. In addition, medium- and
lower-rated securities and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and lower-rated, and comparable
unrated, securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during a major economic downturn or during sustained periods of
rising interest rates may be
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impaired. The risk of loss due to default by such issuers is significantly
greater because medium- and lower-rated securities and unrated securities
generally are unsecured and frequently are subordinated to the prior payment of
senior indebtedness. In light of these risks, SBMFM, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take various
factors established by the Fund's Board of Trustees into consideration, which
may include, as applicable, the issuer's financial resources, its sensitivity to
economic conditions and trends, the operating history of and the community
support for the facility financed by the issue, the ability of the issuer's
management and regulatory matters.
The markets in which medium- and lower-rated or comparable unrated
securities are traded generally are more limited than those in which higher-
rated securities are traded. The existence of limited markets for these
securities may restrict the availability of securities for the Portfolio to
purchase and also may have the effect of limiting the ability of the Portfolio
to (a) obtain accurate market quotations for purposes of valuing securities and
calculating net asset value and (b) sell securities at their fair value either
to meet redemption requests or to respond to changes in the economy or the
financial markets. The market for medium- and lower-rated, and comparable
unrated, securities is relatively new and has not fully weathered a major
economic recession. Any such recession, however, would disrupt severely the
market for such securities and adversely affect the value of such securities,
and could adversely affect the ability of the issuers of such securities to
repay principal and pay interest thereon.
Fixed-income securities, including medium- and lower-rated, and comparable
unrated, securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Portfolio. If an issuer exercises these rights during periods of declining
interest rates, the Portfolio may have to replace the security with a lower
yielding security resulting in a decreased return to the Portfolio.
The market value of securities in lower rating categories is more volatile
than that of higher quality securities, and the markets in which medium- and
lower-rated or comparable unrated securities are traded are more limited than
those in which higher-rated securities are traded. Adverse publicity and
investor perceptions also may have a negative impact on the value and liquidity
of lower-rated, high yield securities, especially in a limited trading market.
Subsequent to its purchase by the Portfolio, an issue of securities may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Portfolio. Neither event will require sale of such securities by
the Portfolio involved, but the Portfolio's investment adviser will consider
such event in its determination of whether the Portfolio should continue to hold
the securities.
Securities that are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to their capacity to pay interest and repay
principal. Securities that are rated B generally lack characteristics of the
desirable investment and assurance of interest and principal payments over any
long period of time may be small. Securities that are rated Caa or CCC are of
poor standing. These issues may be in default or present elements of danger with
respect to principal or interest.
PORTFOLIO TRANSACTIONS
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All orders for transactions in securities, options, futures contracts and
options on futures contracts on behalf of the Portfolio will be placed by SBMFM
with broker-dealers that SBMFM selects, including Smith Barney and other
affiliated brokers. The Portfolio may utilize Smith Barney or a Smith Barney-
affiliated broker in connection with a purchase or sale of securities when SBMFM
believes that the broker's charge for the transaction does not exceed usual and
customary levels. The same standard applies to the use of Smith
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Barney or a Smith Barney-affiliated broker as a commodities broker in connection
with entering into futures contracts and options on futures contracts.
NET ASSET VALUE
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The value of an individual share of the Portfolio is the net asset value of
that share. The net asset value per share of the Portfolio will be calculated
each day, Monday through Friday, except on days when the New York Stock
Exchange, Inc. (the "NYSE") is closed. The NYSE is currently scheduled to be
closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas, and on the preceding
Friday or subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively. Net asset value per share of the Portfolio is determined
as of the close of regular trading on the NYSE (currently 4:00 p.m., New York
time).
Net asset value per share is computed by dividing the value of the
Portfolio's net assets by the total number of its shares outstanding. Generally,
the Portfolio's investments are valued at market value or, in the absence of a
market value with respect to any portfolio securities, at fair value as
determined by or under the direction of the Fund's Board of Trustees. A security
that is primarily traded on a U.S. or foreign exchange (including securities
traded through the National Market System) is valued at the last sale price on
that exchange or, if there were no sales during the day, at the current quoted
bid price. Portfolio securities that are primarily traded on foreign exchanges
are generally valued at the preceding closing values of such securities on their
respective exchanges, except that when an occurrence subsequent to the time a
value was so established is likely to have changed the value, then the fair
value of those securities will be determined by consideration of other factors
by or under the direction of the Fund's Board of Trustees or its delegates.
Over-the-counter securities that are not traded through the National Market
System and securities listed or traded on certain foreign exchanges whose
operations are similar to the U.S. over-the-counter market are valued on the
basis of the bid price at the close of business on each day. An option is
generally valued at the last sale price or, in the absence of a last sale price,
the last offer price. Investments in U.S. government securities (other than
short-term securities) are valued at the average of the quoted bid and asked
prices in the over-the-counter market. Short-term investments that mature in 60
days or less are valued at amortized cost when the Fund's Board of Trustees
determines that this constitutes fair value. The value of a futures contract
equals the unrealized gain or loss on the contract, which is determined by
marking the contract to the current settlement price for a like contract
acquired on the day on which the futures contract is being valued. A settlement
price may not be used if the market makes a limit move with respect to the
security, index or currency underlying the futures contract. In such event, the
futures contract will be valued at a fair market price to be determined by or
under the direction of the Fund's Board of Trustees. Further information
regarding the Fund's valuation policies is contained in the Statement of
Additional Information.
HOW TO USE THE PORTFOLIO
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Investing in the Portfolio
In order to invest in shares of the Portfolio, an investor must be a
variable annuity or variable life insurance contract owner. For further
information regarding a Contract, see the description provided in the Contract
prospectus.
Sales Charges and Surrender Charges
The Fund does not assess any sales charge, either when it sells or when it
redeems shares of the Portfolio. However, surrender charges that may be assessed
under the Contract are described in the Contract prospectus. Mortality and
expense risk fees and other charges are also described in the Contract
prospectus.
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Redeeming and Exchanging Shares
A participating insurance company will redeem shares of the Portfolio in
response to full or partial surrenders under the terms of the Contract.
Generally, payment upon redemption will be made within three days after
receiving a valid redemption request (unless redemption is suspended or payment
is delayed as permitted in accordance with SEC regulations). The Fund will use
the net asset value at the close of trading on the NYSE on the day the notice of
surrender or transfer is received. If the request is received after the close of
trading on the NYSE, the shares will be redeemed at the net asset value at the
close of the next business day. The value of any redeemed shares may be more or
less than their original purchase price.
A detailed description of how to surrender a Contract is included in the
Contract prospectus, which must accompany this prospectus. It is conceivable
that in the future it may be disadvantageous for both variable annuity accounts
and variable life insurance accounts, or for variable accounts of different
insurance companies, to invest simultaneously in the Portfolio, although
currently neither the insurance companies nor the Portfolio foresee any such
disadvantages to either variable annuity or variable life insurance policy of
owners of any insurance company. The Fund's Board of Trustees intends to monitor
events in order to identify any material conflicts between such policy owners
and to determine what action, if any, should be taken in response thereto.
DIVIDENDS AND TAXES
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Dividends
Net Investment Income. Dividends and distributions will be automatically
reinvested, without a sales charge, in the shareholder's account at net asset
value in additional shares of the Portfolio, unless the shareholder instructs
the Portfolio to pay all dividends and distributions in cash. Net investment
income, including dividends on stocks and interest on bonds or other securities
the Fund holds, is distributed to the shareholders of the Portfolio on a monthly
basis. The shareholders of this Portfolio are the separate accounts of
participating life insurance companies.
Capital Gains. Distributions of any net realized capital gains of the
Portfolio will be paid annually shortly after the close of the fiscal year in
which they are earned.
Taxes
In the opinion of counsel to the Fund, the Portfolio will be treated as a
separate taxpayer with the result that, for federal income tax purposes, the
amounts of investment income and capital gains earned will be determined on a
portfolio (rather than on a Fund-wide) basis.
The Fund intends that the Portfolio will meet the requirements for
qualification each year as a "regulated investment company" within the meaning
of the Internal Revenue Code of 1986, as amended (the "Code"). In order to
qualify as a regulated investment company, the Portfolio must meet certain
income and diversification tests, including the requirement that it derive less
than 30% of its gross income in each taxable year from the sale or other
disposition of (a) stock or securities held for less than three months, (b)
options, futures or forward contracts (other than options, futures or forward
contracts on foreign currencies) held for less than three months and (c) foreign
currencies (or options, futures or forward contracts on such foreign currencies)
held for less than three months but only if such currencies (or options, futures
or forward contracts) are not directly related to the Portfolio's principal
business of investing in stock or securities (or options or futures with respect
to stock or securities). As a regulated investment company and provided
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certain distribution requirements are met, the Portfolio will not be subject to
federal income tax on its net investment income and net capital gains that it
distributes to its shareholders. Dividends paid by the Portfolio from taxable
investment income and distributions of short-term capital gains will be treated
as ordinary income in the hands of the shareholders for federal income tax
purposes, whether received in cash or reinvested in additional shares.
Distributions of net long-term capital gains will be treated as long-term
capital gains in the hands of the shareholders, if certain notice and
designation requirements are satisfied, whether paid in cash or reinvested in
additional shares, regardless of the length of time the investor has held shares
of the Portfolio.
The Fund has been informed that the separate accounts represented by a
Contract should, for federal income tax purposes, be considered the shareholders
of the Portfolio.
To comply with regulations under Section 817(h) of the Code, the Portfolio
will be required to diversify its investments so that on the last day of each
calendar quarter no more than 55% of the value of its assets is represented by
any one investment, no more than 70% is represented by any two investments, no
more than 80% is represented by any three investments and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For the purposes of Section 817(h) of
the Code, obligations of the United States Treasury and each U.S. government
agency or instrumentality are treated as securities of separate issuers.
The Treasury Department has indicated that it may issue future
pronouncements addressing the circumstances in which a variable contract owner's
control of the investments of a separate account may cause the variable contract
owner, rather than the insurance company, to be treated as the owner of the
assets held by the separate account. If the variable contract owner is
considered the owner of the securities underlying the separate account, income
and gains produced by those securities would be included currently in the
variable contract owner's gross income. It is not known what standards will be
set forth in such pronouncements or when, if at all, these pronouncements may be
issued.
In the event that rules or regulations are adopted, there can be no
assurance that the Portfolio will be able to operate as currently described in
this Prospectus, or that the Fund will not have to change the investment goal or
investment policies of the Portfolio. While the Portfolio's investment goal is
fundamental and may be changed only by a vote of a majority of the Portfolio's
outstanding shares, the Fund's Board of Trustees reserves the right to modify
the investment policies of the Portfolio as necessary to prevent any such
prospective rules and regulations from causing a Contract owner to be considered
the owner of the shares of the Portfolio.
Please refer to the Contract prospectus for information regarding the
federal income tax treatment of distributions.
MANAGEMENT OF THE FUND
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Board of Trustees
Overall responsibility for management and supervision of the Fund and its
portfolios, including the Portfolio, rests with the Fund's Board of Trustees.
The Trustees approve all significant agreements between the Fund and the persons
or companies that furnish services to the Fund and the Portfolio, including
agreements with SBMFM, the Fund's custodian, transfer agent and distributor. The
day-to-day operations of the Portfolio are delegated to SBMFM. The identities
and backgrounds of the Trustees and officers of the Fund, together with certain
additional information about them, are contained in the Statement of Additional
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Information. By virtue of the responsibilities assumed by SBMFM, the Fund
requires no employees other than its executive officers, none of whom devotes
full time to the affairs of the Fund.
Investment Adviser and Administrator
Subject to the supervision and direction of the Fund's Board of Trustees,
SBMFM manages the Portfolio in accordance with the Portfolio's goal and stated
investment policies, makes investment decisions for the Portfolio, places orders
to purchase and sell securities on behalf of the Portfolio and employs
professional portfolio managers and securities analysts who provide research
services to the Portfolio.
SBMFM, located at 388 Greenwich Street, New York, New York 10013, provides
investment advisory and management services to investment companies affiliated
with Holdings. SBMFM renders investment advice to investment companies that had
aggregate assets under management as of March 31, 1995, in excess of $53
billion.
PORTFOLIO MANAGEMENT
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John C. Bianchi is a Vice President and Investment Officer of the
Portfolio. Mr. Bianchi has served as a Managing Director of SBMFM (and its
predecessors) since October 1989. Prior to that time, Mr. Bianchi served as
Senior Vice President of Bernstein Macaulay. G. Ruppert Vernon Jr. has served as
a Vice President of SBMFM (and its predecessors) since October 1989. Prior to
that time, Mr. Vernon served as an Assistant Vice President of E.F. Hutton and
Company Inc.
The Fund's management discussion and analysis, and additional performance
information regarding the portfolios of the Fund, including the Portfolio,
during the fiscal year ended December 31, 1994, is included in the Annual Report
dated December 31, 1994. A copy of the Annual Report may be obtained upon
request without charge from a Smith Barney Financial Consultant or by writing or
calling the Fund at the address or phone number listed on page one of this
Prospectus.
CUSTODIAN AND TRANSFER AGENT
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PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, acts as custodian of the Fund's investments generally.
TSSG, located at Exchange Place, Boston, Massachusetts, 02109, acts as the
Fund's transfer and dividend paying agent.
DISTRIBUTOR
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Smith Barney, a subsidiary of Holdings, located at 388 Greenwich Street,
New York, New York, 10013, serves as distributor of the Fund's shares, for which
it receives no separate fee from the Fund. Insurance companies offering the
Contracts pay Smith Barney for the services it provides and the expenses it
bears in distributing the Contracts, including payment of commissions for sales.
Insurance companies offering the Contracts will bear certain additional costs in
connection with the offering of the Portfolio's shares, including the costs of
printing and distributing prospectuses, statements of additional information and
sales literature.
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ADDITIONAL INFORMATION
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Formation
The Fund was organized on May 13, 1991, under the laws of the Commonwealth
of Massachusetts and is a business entity commonly known as a "Massachusetts
business trust." The Fund is registered with the SEC as a diversified, open-end
management investment company, as defined in the 1940 Act. The Fund commenced
operations on October 16, 1991, under the name Shearson Series Fund. On October
14, 1994, the Fund changed its name to its current name, Smith Barney Series
Fund.
Shares of Beneficial Interest
The Fund offers shares of beneficial interest of separate series with a par
value of $.001 per share. Shares of ten series have been authorized. When
matters are submitted for shareholder vote, shareholders of each portfolio will
have one vote for each full share owned and proportionate, fractional votes for
fractional shares held.
For a discussion of the rights of Contract owners concerning the voting of
shares, please refer to the Contract prospectus. Generally, shares of the Fund
vote by individual portfolio on all matters except (a) matters affecting only
the interests of one or more of the portfolios, in which case only shares of the
affected portfolio or portfolios would be entitled to vote, or (b) when the 1940
Act requires that shares of the portfolios be voted in the aggregate. All shares
of the Fund vote together as one series for the election of Trustees. There will
normally be no meetings of shareholders for the purpose of electing Trustees
unless less than a majority of the Trustees holding office have been elected by
shareholders, at which time the Trustees then in office will call a
shareholders' meeting for the election of Trustees. Any Trustee may be removed
from office upon the vote of shareholders holding at least two-thirds of the
Fund's outstanding shares at a meeting called for that purpose. The Trustees are
required to call such a meeting upon the written request of shareholders holding
at least 10% of the Fund's outstanding shares. In addition, shareholders who
meet certain criteria will be assisted by the Fund in communicating with other
shareholders in seeking the holding of such a meeting.
The participating life insurance company will send owners of the Contract a
semi-annual report and an audited annual report, each of which includes a list
of the investment securities held by the Portfolio at the end of the period
covered. Contract owners may make inquiries regarding the Portfolio from a
representative of the participating life insurance company.
THE PORTFOLIO'S PERFORMANCE
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Total Return
From time to time, the Portfolio may advertise its "average annual total
return" over various periods of time. Such total return figures show the average
percentage change in value of an investment in the Portfolio from the beginning
date of the measuring period to the end of the measuring period. These figures
reflect changes in the price of the Portfolio's shares and assume that any
income dividends and/or capital gains distributions made by the Portfolio during
the period were reinvested in shares of the Portfolio. Figures will be given for
recent one-, five- and ten-year periods (if applicable), and may be given for
other periods as well (such as from commencement of the Portfolio's operations,
or on a year-by-year basis). When considering average annual total return
figures for periods longer than one year, it is important to note that the
Portfolio's annual total return for any one year in the period might have been
greater or less than the average for the entire period. The Portfolio also may
use
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"aggregate" total return figures for various periods, representing the
cumulative change in value of an investment in the Portfolio for the specific
period (again reflecting changes in the Portfolio's share prices and assuming
reinvestment of dividends and distributions). Aggregate total returns may be
shown by means of schedules, charts or graphs and may indicate subtotals of the
various components of total return (i.e., change in value of initial investment,
income dividends and capital gains distributions).
It is important to note that yield and total return figures are based on
historical earnings and are not intended to indicate future performance. The
Statement of Additional Information describes the method used to determine the
Portfolio's yield and total return. Shareholders may make inquiries regarding
the Portfolio, including current yield quotations or total return figures, to a
Smith Barney Financial Consultant.
In reports or other communications to shareholders or in advertising
material, the Portfolio may compare its performance with that of other mutual
funds as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar independent services that monitor the performance of mutual funds or
with other appropriate indices of investment securities, such as the S&P 500,
Salomon Brothers World Government Bond Index, Lehman Brothers Government Bond
Index and Lehman Brothers Mortgage-Backed Securities Index, with the Consumer
Price Index, Dow Jones Industrial Average or NASDAQ, or with investment or
savings vehicles. The performance information also may include evaluations of
the Portfolio published by nationally recognized ranking services and by
financial publications that are nationally recognized, such as Barron's,
Business Week, Forbes, Fortune, Institutional Investor, Investor's Business
Daily, Kiplinger's Personal Finance Magazine, Money, Morningstar Mutual Fund
Values, Mutual Fund Forecaster, The New York Times, Stranger's Investment
Advisor, USA Today, U.S. News & World Report and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Any such advertisement also would
include the standard performance information required by the SEC as described
above. For these purposes, the performance of the Portfolio, as well as the
performance of other mutual funds or indices, do not reflect sales charges, the
inclusion of which would reduce the Portfolio's performance.
The Portfolio may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
A Contract owner's actual return on its investment in this Portfolio will
be affected by Contract charges imposed by the separate accounts of the
participating life insurance companies.
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PROSPECTUS
Smith Barney Series Fund SB Ed. 9-95
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