SMITH BARNEY SERIES FUND
388 Greenwich Street, New York, New York 10013 (212) 723-
9218
STATEMENT OF ADDITIONAL INFORMATION
May 1, 1995
as amended August 4, 1995
This Statement of Additional Information expands upon
and supplements the information contained in the current
Prospectus of Smith Barney Series Fund (the "Fund"),
relating to ten investment portfolios offered by the Fund
(the "Portfolios"), dated May 1, 1995, as amended or
supplemented from time to time, and should be read in
conjunction with the Fund's Prospectus. The Fund's
Prospectus may be obtained from a Smith Barney Financial
Consultant or by writing or calling the Fund 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>
<CAPTION>
CONTENTS
For ease of reference, the same section headings are
used in both the Prospectus and this Statement of Additional
Information, except where shown below.
<S> <C>
Investment Goals and Policies of the Portfolios 2
Management of the Fund 25
Purchase of Shares (See in the Prospectus
"How to Use the Fund") 34
Redemption of Shares (See in the Prospectus "How
to Use the Fund") 34
Net Asset Value 35
Performance Data (See in the Prospectus "The
Portfolios' Performance") 36
Taxes (See in the Prospectus "Dividends and Taxes") 41
Custodian and Transfer Agent 43
Financial Statements 44
Appendix 45
</TABLE>
INVESTMENT GOALS AND POLICIES OF THE PORTFOLIOS
The Fund's Prospectus discusses the investment goals of
each of the ten Portfolios currently offered by the Fund and
the policies to be employed to achieve those goals. This
section contains supplemental information concerning the
types of securities and other instruments in which the
Portfolios may invest, the investment policies and portfolio
strategies that the Portfolios may utilize and certain risks
attendant to such investments, policies and strategies.
United States Government Securities (All Portfolios)
United States government securities include debt
obligations of varying maturities issued or guaranteed by
the United States government or its agencies or
instrumentalities ("U.S. government securities"). Direct
obligations of the United States Treasury include a variety
of securities that differ in their interest rates,
maturities and dates of issuance.
U.S. government securities include not only direct
obligations of the United States Treasury but also
securities issued or guaranteed by the Federal Housing
Administration, Federal Financing Bank, Export-Import Bank
of the United States, Small Business Administration,
Government National Mortgage Association, General Services
Administration, Federal Home Loan Banks, Federal Home Loan
Mortgage Corporation, Federal National Mortgage Association,
Maritime Administration, Tennessee Valley Authority,
Resolution Trust Corporation, District of Columbia Armory
Board, Student Loan Marketing Association and various
institutions that previously were or currently are part of
the Farm Credit System (which has been undergoing a
reorganization since 1987). Because the United States
government is not obligated by law to provide support to an
instrumentality that it sponsors, a Portfolio will invest in
obligations issued by such an instrumentality only if its
investment adviser ("Adviser") determines that the credit
risk with respect to the instrumentality does not make its
securities unsuitable for investment by the Portfolio.
Bank Obligations (All Portfolios)
U.S. commercial banks organized under Federal law are
supervised and examined by the U.S. 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 ("FDIC"). U.S. 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 a Portfolio, depending upon the principal amount
of certificates of deposit ("CDs") of each bank held by the
Portfolio) and are subject to Federal examination and to a
substantial body of Federal law and regulation. As a result
of government regulations, U.S. branches of U.S. 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 and of
foreign branches of foreign banks, such as CDs and time
deposits ("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. Such obligations 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 and foreign branches of foreign 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 record keeping
requirements. In addition, less information may be publicly
available about a foreign branch of a U.S. bank or about a
foreign bank than about a U.S. bank.
Obligations of U.S. branches of foreign banks may be
general obligations of the parent bank, in addition to being
general obligations of the issuing branch, or may be limited
by the terms of specific obligations and by governmental
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 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.
In view of the foregoing factors associated with the
purchase of CDs and TDs issued by foreign branches of U.S.
banks, by U.S. branches of foreign banks or by foreign
branches of foreign banks, the Advisers will carefully
evaluate such investments on a case-by-case basis.
The Money Market Portfolio will not purchase TDs
maturing in more than seven calendar days and will limit its
investment in TDs maturing from two business days through
seven calendar days to 10% of its total assets. Except when
maintaining a temporary defensive position, the Portfolio
will invest more than 25% of its assets in short-term bank
instruments of the types discussed above.
The Money Market Portfolio may purchase a CD issued by
a bank, savings and loan association or similar institution
with less than $1 billion in assets (a "Small Issuer CD") so
long as (a) the issuer is a member of the FDIC or Office of
Thrift Supervision and is insured by the Savings Association
Insurance Fund ("SAIF"), which is administered by the FDIC
and is backed by the full faith and credit of the U.S.
government, and (b) the principal amount of the Small Issuer
CD is fully insured and is no more than $100,000. The Money
Market Portfolio will at any one time hold only one Small
Issuer CD from any one issuer.
Savings and loan associations whose CDs may be
purchased by the Portfolios are supervised by the Office of
Thrift Supervision and are insured by SAIF. As a result,
such savings and loan associations are subject to regulation
and examination.
Commercial Paper (All Portfolios)
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 a Portfolio, 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. A
Portfolio, therefore, may not invest in a master demand
note, if as a result more than 10% of the value of the
Portfolio's total assets would be invested in such notes and
other illiquid securities.
Ratings as Investment Criteria (All Portfolios)
In general, the ratings of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Corporation ("S&P") and
other nationally recognized statistical rating organizations
("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 by the
Portfolios as initial criteria for the selection of
portfolio securities, but the Portfolios 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 ratings of
Moody's, S&P and other NRSROs and their significance.
Subsequent to its purchase by a 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. In addition, it is possible that Moody's, S&P or
another 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 the Portfolio, but
the relevant Adviser will consider such events in its
determination of whether the Portfolio should continue to
hold the securities.
In addition, to the extent that the rating given by
Moody's, S&P or another NRSRO changes as a result of changes
in such organization or its rating system, or due to a
corporate reorganization of such organization, a Portfolio
will attempt to use comparable ratings as standards for its
investments in accordance with its investment goal and
policies.
The Money Market Portfolio is prohibited from
purchasing a security unless that security is (a) rated by
at least two NRSROs (such as Moody's or S&P) with the
highest rating assigned to short-term debt securities (or,
if not rated or rated by only one agency, is determined to
be of comparable quality) or (b) rated by at least two
NRSROs within the two highest ratings assigned to short-term
debt securities (or, if not rated or rated by only one
agency, is determined to be of comparable quality) and not
more than 5% of the assets of the Portfolio will be invested
in such securities. Determinations of comparable quality
shall be made in accordance with procedures established by
the Board of Trustees of the Fund.
Reverse Repurchase Agreements ( International Equity
Portfolio)
The Fund does not currently intend to commit more than
5% of the International Equity Portfolio's net assets to
reverse repurchase agreements. The Portfolio may enter into
reverse repurchase agreements with broker/dealers and other
financial institutions. Such agreements involve the sale of
portfolio securities with an agreement to repurchase the
securities at an agreed-upon price, date and interest
payment and have the characteristics of borrowing. Since
the proceeds of reverse repurchase agreements are invested,
this would introduce the speculative factor known as
"leverage." The securities purchased with the funds
obtained from the agreement and securities collateralizing
the agreement will have maturity dates no later than the
repayment date. Generally the effect of such a transaction
is that the Portfolio can recover all or most of the cash
invested in the portfolio securities involved during the
term of the reverse repurchase agreement, while in many
cases it will be able to keep some of the interest income
associated with those securities. Such transactions are
only advantageous if the Portfolio has an opportunity to
earn a greater rate of interest on the cash derived from the
transaction than the interest cost of obtaining the cash.
Opportunities to realize earnings from the use of the
proceeds equal to or greater than the interest required to
be paid may not always be available, and the Portfolio
intends to use the reverse repurchase technique only when
its Adviser believes it will be advantageous to the
Portfolio. The use of reverse repurchase agreements may
exaggerate any interim increase or decrease in the value of
the participating Portfolio's assets. The Fund's custodian
will maintain a separate account for the Portfolio with
securities having a value equal to or greater than such
commitments.
Lending of Portfolio Securities (Intermediate High Grade,
Diversified Strategic Income, Equity Income, Equity Index,
Growth & Income, Appreciation, Total Return, International
Equity and Emerging Growth Portfolios)
These Portfolios have the ability to lend portfolio
securities to brokers, dealers and other financial
organizations. Such loans, if and when made, may not exceed
33.33% of a Portfolio's total assets, taken at value. A
Portfolio will not lend portfolio securities to Smith Barney
Inc. ("Smith Barney") or its affiliates unless it has
applied for and received specific authority to do so from
the Securities and Exchange Commission ("SEC"). Loans of
portfolio securities will be collateralized by cash, letters
of credit or U.S. government securities, which will be
maintained at all times in an amount at least equal to the
current market value of the loaned securities. From time to
time, a Portfolio 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 that is unaffiliated
with the Portfolio and is acting as a "finder."
By lending its portfolio securities, a 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. A Portfolio
will comply with the following conditions whenever its
portfolio securities are loaned: (a) the Portfolio 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
Portfolio must be able to terminate the loan at any time;
(d) the Portfolio must receive reasonable interest on the
loan, as well as an amount equal to any dividends, interest
or other distributions on the loaned securities, and any
increase in market value; (e) the Portfolio may pay only
reasonable custodian fees in connection with the loan; and
(f) voting rights on the loaned securities may pass to the
borrower; however, if a material event adversely affecting
the investment in the loaned securities occurs, the Fund's
Board of Trustees 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 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
Adviser to be of good standing and will not be made unless,
in the judgment of the relevant Adviser, the consideration
to be earned from such loans would justify the risk.
Hedging Transactions
As described in the Prospectus, certain of the
Portfolios may enter into various types of securities, index
and currency futures, options and related contracts in order
to hedge the existing or anticipated value of its portfolio.
Further information about certain of these techniques
follows.
No Portfolio is required to enter into hedging
transactions with regard to its foreign currency-denominated
securities and a Portfolio will not do so unless deemed
appropriate by its Adviser. This method of protecting the
value of the Portfolio's securities against a decline in the
value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes
a rate of exchange which one can achieve at some future
point in time.
A Portfolio will not, however, enter into such
transactions in a manner which would adversely affect its
status as an investment company for Federal securities law
or income tax purposes. Each Portfolio will invest in these
instruments only in markets believed by its Adviser to be
active and sufficiently liquid.
Options on Securities (Intermediate High Grade, Diversified
Strategic Income, Equity Income, Equity Index, Growth &
Income, Total Return, International Equity and Emerging
Growth Portfolios)
These Portfolios may engage in the writing of covered
put and call options and may enter into closing
transactions. The Intermediate High Grade, Diversified
Strategic Income, Equity Income, Total Return, International
Equity and Emerging Growth Portfolios also may purchase put
and call options.
The principal reason for writing covered call options
on securities is to attempt to realize, through the receipt
of premiums, a greater return than would be realized on the
securities alone. In return for a premium, the writer of a
covered call option 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 Portfolio 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 a Portfolio 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. A Portfolio may write (a) in-the-money call
options when its 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 a Portfolio as the writer
of an option continues, the Portfolio may be assigned an
exercise notice by the broker-dealer through which the
option was sold, requiring the Portfolio 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 Portfolio effects a closing purchase transaction. A
Portfolio 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 underling security when it writes
a put option, a Portfolio will be required to deposit in
escrow the underlying security or other assets in accordance
with the rules of the Options Clearing Corporation
("Clearing Corporation") and of the securities exchange on
which the option is written.
An option position may be closed out only where there
exists a secondary market for an option of the same series
on a recognized securities exchange or in the over-the-
counter market. In light of this fact and current trading
conditions, the Intermediate High Grade, Diversified
Strategic Income, Equity Income, Total Return, International
Equity and Emerging Growth Portfolios expect to purchase not
only call or put options issued by the Clearing Corporation,
but also options in the domestic and foreign over-the-
counter markets. The Portfolios expect to write options
only on U.S. securities exchanges, except that the
Diversified Strategic Income, Total Return, International
Equity and Emerging Growth Portfolios may write options in
the over-the-counter market and options on U.S. government
securities may be written in the over-the-counter market by
each of the Portfolios with option writing authority.
A Portfolio may realize a profit or loss upon entering
into a closing transaction. In cases in which a Portfolio
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 Portfolio has purchased an option and
engages in a closing sale transaction, whether the Portfolio
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 Portfolio initially paid for
the original option plus the related transaction costs.
Although a Portfolio 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 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 Portfolio
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 Portfolios 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 a Portfolio that are
deemed covered by virtue of the Portfolio'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 Portfolio has written options may
exceed the time within which the Portfolio must make
delivery in accordance with an exercise notice. In these
instances, a Portfolio may purchase or temporarily borrow
the underlying securities for purposes of physical delivery.
By so doing, the Portfolio will not bear any market risk,
because the Portfolio 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
Portfolio 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 a Portfolio may write
covered call options. If a Portfolio 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
Portfolio will compensate for the decline in the value of
the cover by purchasing an appropriate additional amount of
those securities.
Stock Index Options (Equity Index, Total Return,
International Equity and Emerging Growth Portfolios)
The Equity Index, Total Return, International Equity
and Emerging Growth Portfolios may purchase call options on
stock indexes listed on U.S. securities exchanges for the
purpose of hedging its portfolio. The Total Return
Portfolio may also write call and buy put options on stock
indexes. A stock index fluctuates with changes in the
market values of the stocks included in the index. Stock
index options may be 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 Daily Price Index
of 500 Common Stocks ("S&P 500"). Indexes also may be based
on an industry or market segment.
Options on stock indexes are generally similar to
options on stock except that the delivery requirements are
different. Instead of giving the right to take or make
delivery of stock at a specified price, an option on a stock
index gives the holder the right to receive a cash "exercise
settlement amount" equal to (a) the amount, if any, by which
the fixed exercise price of the option exceeds (in the case
of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of
exercise, multiplied by (b) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing
level of the stock index upon which the option is based
being greater than, in the case of a call, or less than, in
the case of a put, the exercise price of the option. The
amount of cash received will be equal to such difference
between the closing price of the index and the exercise
price of the option, expressed in dollars, times a specified
multiple. The writer of the option is obligated, in return
for the premium received, to make delivery of this amount.
The writer may offset its position in stock index options
prior to expiration by entering into a closing transaction
on an exchange, or it may let the option expire unexercised.
The effectiveness of purchasing 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 the Portfolio will
realize a gain or loss from the purchase or writing of
options on an index depends upon movements in the level of
stock prices in the stock market generally or, in the case
of certain indexes, in an industry or market segment, rather
than movements in the price of a particular stock.
Accordingly, successful use by the Portfolio 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 price of individual stocks.
A Portfolio will engage in stock index options
transactions only when determined by its Adviser to be
consistent with the Portfolio'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.
Futures Activities (Intermediate High Grade, Diversified
Strategic Income, Equity Income, Equity Index, Growth &
Income, Total Return, International Equity and Emerging
Growth Portfolios)
The Intermediate High Grade, Diversified Strategic
Income, Equity Income, Growth & Income, Total Return,
International Equity and Emerging Growth Portfolios may
enter into interest rate futures contracts, the Equity
Index, Equity Income, Growth & Income, Total Return,
International Equity and Emerging Growth Portfolios may
enter into stock index futures contracts, the Diversified
Strategic Income and International Equity Portfolios may
enter into foreign currency futures contracts, and each such
Portfolio may enter into related options that are traded on
a U.S. exchange or board of trade.
An interest rate futures contract provides for the
future sale by one party and the purchase by another party
of a certain amount of a specific 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. A stock 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 written.
No physical delivery of the underlying securities in the
index is made.
The purpose of the acquisition or sale of a futures
contract by a Portfolio, other than the Equity Index, Total
Return, International Equity and Emerging Growth Portfolios,
is to mitigate the effects of fluctuations in the value of
its securities caused by anticipated changes in interest
rates, market conditions or currency 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 entered into by a Portfolio, an
increase in the value of the futures contracts could only
mitigate - but not totally offset - the decline in the value
of the Portfolio.
No consideration is paid or received by a Portfolio
upon entering into a futures contract. Initially, a
Portfolio will be required to deposit with the broker an
amount of cash or cash equivalents equal to approximately 1%
to 10% of the contract amount (this amount is subject to
change by the 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 Portfolio upon termination of
the futures contract, assuming all contractual obligations
have been satisfied. Subsequent payments, known as
"variation margin", to and from the broker will be made
daily as the price of the securities, currency or index
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 Portfolio
may elect to close the position by taking an opposite
position, which will operate to terminate the Portfolio'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 Portfolio is subject to the ability of its
Adviser to predict correctly movements in interest rates,
changes in market conditions or fluctuations in 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, index or currency
and movements in the price of the securities or currency
that is the subject of a 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.
Although the Portfolios intend to enter into futures
contracts only if there is an active market for such
contracts, there is no assurance that an active market will
exist for the contracts at any particular time. Most U.S.
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
Portfolio 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 or value of the currency 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 Portfolio has hedged against the possibility of a
change in interest rates, market conditions or currency
values adversely affecting the value of securities held in
its portfolio and interest rates, market conditions or
currency values move in a direction opposite to that which
has been anticipated, the Portfolio will lose part or all of
the benefit of the increased value of securities or
currencies that it has hedged because it will have
offsetting losses in its futures positions. In addition, in
such situations, if the Portfolio had insufficient cash, it
may have to sell securities to meet daily variation margin
requirements at a time when it may be disadvantageous to do
so. These sales of securities may, but will not
necessarily, be at increased prices that reflect the change
in interest rates, market conditions or currency values, as
the case may be.
Options on Futures Contracts. An option on a 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 futures
contract at a specified exercise price at any time prior to
the expiration date of the option. 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 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 Portfolio holding the options.
The Portfolios may purchase and write put and call
options on futures contracts that are traded on a U.S.
exchange or board of trade as a hedge against changes in the
value of their portfolio securities, or, in the case of the
Equity Index Portfolio, in anticipation of the purchase of
securities, and may enter into closing transactions with
respect to such options to terminate existing positions.
There is no guarantee that such closing transactions can be
effected.
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
will be based upon predictions by an Adviser as to
anticipated trends, which predictions could prove to 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
securities being hedged.
When-Issued Securities and Delayed Delivery Transactions
(Intermediate High Grade, Diversified Strategic Income,
Equity Income, Growth & Income, Emerging Growth,
International Equity and Total Return Portfolios)
To secure an advantageous price or yield, the
Intermediate High Grade, Diversified Strategic Income,
Equity Income, Growth & Income, Emerging Growth,
International Equity and Total Return Portfolios may
purchase certain securities on a when-issued basis or
purchase or sell securities for delayed-delivery. A
Portfolio will enter into such transactions for the purpose
of acquiring portfolio securities and not for the purpose of
leverage. Delivery of the securities in such cases occurs
beyond the normal settlement periods, but no payment or
delivery is made by a Portfolio prior to the reciprocal
delivery or payment by the other party to the transaction.
In entering into a when-issued or delayed-delivery
transaction, a Portfolio 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, to a lesser extent, 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 a Portfolio of
securities on a when-issued or delayed delivery basis, a
segregated account in the name of the Portfolio consisting
of cash or liquid debt securities equal to the amount of the
when-issued or delayed delivery commitments will be
established at PNC Bank, National Association
("PNC"), the Fund's custodian. For the purpose of
determining the adequacy of the securities in the account,
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 Portfolio
involved. On the settlement date, the Portfolio 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 themselves
(which may have a greater or lesser value than the
Portfolio's payment obligations).
Mortgage Related Securities (Intermediate High Grade,
Diversified Strategic Income and Growth & Income Portfolios)
The mortgage pass-through securities in which these
Portfolios may invest may be backed by adjustable-rate, as
well as conventional, mortgages. Those backed by adjustable-
rate mortgages bear interest at a rate that is adjusted
monthly, quarterly or annually. 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 the age of the mortgage.
Because prepayment rates of individual mortgage pools vary
widely, it is not possible to accurately predict the average
life of a particular pool. Pools of mortgages with varying
maturities or different characteristics will have varying
average life assumptions and the prepayment experience of
securities backed by adjustable-rate mortgages may vary from
those backed by fixed-rate mortgages.
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. Government mortgage related securities
are backed by the full faith and credit of the United
States. Government National Mortgage Association ("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 United States. Issuers of such securities
include Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("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 United States, the stock of
which is owned by the Federal Home Loan Banks.
Participation certificates representing interests in
mortgages from the FHLMC national portfolio are guaranteed
as to the timely payment of interest and ultimate collection
of principal by FHLMC.
The Portfolios expect that private, governmental or
government-related entities may 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, the Portfolios,
consistent with their investment goals and policies, will
consider making investments in such new types of securities.
American, European and Continental Depository Receipts
(Equity Income, Growth & Income, Appreciation, Total Return,
International Equity and Emerging Growth Portfolios)
The Equity Income, Growth & Income, Appreciation, Total
Return, International Equity and Emerging Growth Portfolios
may invest in the securities of foreign and U.S. issuers in
the form of American Depositary Receipts ("ADRs") and
European Depositary 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 Depositary Receipts ("CDRs"), are receipts
issued in Europe, typically by foreign banks and trust
companies, that evidence ownership of either foreign or U.S.
securities. Generally, ADRs, in registered form, are
designed for use in U.S. securities markets and EDRs and
CDRs, in bearer form, are designed for use in European
securities markets.
Currency Exchange Transactions (Diversified Strategic
Income, International Equity and Emerging Growth Portfolio)
The Diversified Strategic Income, International Equity
and Emerging Growth Portfolios' dealings in forward currency
exchange will be limited to hedging involving either
specific transactions or portfolio positions. Transaction
hedging is the forward purchase or sale of currency with
respect to specific receivables or payables of the
Portfolio, generally arising in connection with the purchase
or sale of its portfolio securities. Position hedging is
the forward sale of currency with respect to portfolio
security positions denominated or quoted in the currency.
The Portfolios may not position hedge with respect to a
particular currency to an extent greater than the aggregate
market value at any time of the securities held in its
portfolio denominated or quoted in or currently convertible
(such as through exercise of an option or consummation of a
forward contract) into that particular currency. If a
Portfolio 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 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 one of these methods, unless the covering
contract closes out the first contract, or (d) depositing
into a segregated account with Boston Safe cash or readily
marketable securities in an amount equal to the value of the
Portfolio's total assets committed to the consummation of
the forward contract and not otherwise covered. In the case
of transaction hedging, any securities placed in the 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 U.S. dollars or into other appropriate
currencies.
At or before the maturity of a forward contract, the
Portfolio 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 Portfolio
will obtain, on the same maturity date, the same amount of
the currency it is obligated to deliver. If the Portfolio
retains the portfolio security and engages in an offsetting
transaction, the Portfolio, 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 the
Portfolio's entering into a forward contract for the sale of
a currency and the date it enters into an offsetting
contract for the purchase of the currency, the Portfolio
will realize a gain to the extent 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
Portfolio will realize 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 Portfolio 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 Portfolio
may not be able to contract to sell the currency at a price
above the devaluation level it anticipates.
Foreign Currency Options (Diversified Strategic Income,
International Equity and Emerging Growth Portfolios)
The Diversified Strategic Income, Emerging Growth and
International Equity Portfolios may purchase put and call
options on foreign currencies for the purpose of hedging
against changes in future currency exchange rates. Put
options convey the right to sell the underlying currency at
a price that 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 that is expected to be lower than the spot price of
the currency at the time the option expires.
A Portfolio may use foreign currency options under the
same circumstances that it could use forward currency
exchange transactions. A decline in the U.S. dollar value
of a foreign currency in which the Portfolio's securities
are denominated, for example, will reduce the U.S. dollar
value of the securities, even if their value in the foreign
currency remains constant. In order to protect against such
diminution in the value of securities it holds, the
Portfolio may purchase put options on the foreign currency.
If the value of the currency does decline, the Portfolio
will have the right to sell the currency for a fixed amount
in U.S. 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 U.S.
dollar value of a currency in which securities to be
acquired are denominated is projected, thereby potentially
increasing the cost of the securities, the Portfolio 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 Portfolio 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 Portfolio 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.
Floating Rate and Variable Rate Obligations (Money Market
Portfolio)
The Money Market Portfolio may purchase floating rate
and variable rate obligations, including participation
interests therein. Variable rate obligations provide for a
specified periodic adjustment in the interest rate, while
floating rate obligations have an interest rate that changes
whenever there is a change in the external interest rate.
The Portfolio may purchase floating rate and variable rate
obligations that carry a demand feature that would permit
the Portfolio to tender them back to the issuer or
remarketing agent at par value prior to maturity.
Frequently, floating rate and variable rate obligations are
secured by letters of credit or other credit support
arrangements provided by banks.
Convertible Securities (International High Grade, Equity
Income, Growth & Income, Appreciation, Total Return,
Emerging Growth and International Equity Portfolios)
The International High Grade, Equity Income, Growth &
Income, Appreciation, Total Return, Emerging Growth and
International Equity Portfolios may invest in convertible
securities, which 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
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, 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 non-convertible
securities.
Preferred Stock (Intermediate High Grade, Diversified
Strategic Income, Equity Income, Appreciation, Total Return,
Emerging Growth and International Equity Portfolios)
The Intermediate High Grade, Diversified Strategic
Income, Equity Income, Appreciation, Total Return, Emerging
Growth and International Equity Portfolios may invest in
preferred stocks, which, 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.
Warrants (Equity Income, Appreciation, Growth & Income,
Total Return, International Equity and Emerging Growth
Portfolios)
The Equity Income, Appreciation, Growth & Income, Total
Return, International Equity and Emerging Growth Portfolios
may invest in 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, warrants may be considered more
speculative than certain other types of investments. Also,
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.
Repurchase Agreements (All Portfolios)
The Portfolios may enter into repurchase agreements
with banks, which are the issuers of instruments acceptable
for purchase by the Fund, and with certain dealers on the
Federal Reserve Bank of New York's list of reporting
dealers. A repurchase agreement is a short-term investment
in which the purchaser acquires ownership of a debt security
and the seller agrees to repurchase the obligation at a
future time and set price, usually not more than seven days
from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase
agreements are collateralized by the underlying debt
securities and may be considered to be loans under the
Investment Company Act of 1940, as amended (the "1940 Act").
The Portfolio will make payment for such securities only
upon physical delivery or evidence of book entry transfer to
the account of a custodian or bank acting as agent. The
seller under a repurchase agreement will be required to
maintain the value of the underlying securities marked to
market daily at not less than the repurchase price. The
underlying securities (securities of the United States
government, or its agencies and instrumentalities) may have
maturity dates exceeding one year. The Portfolios do not
bear the risk of a decline in value of the underlying
security unless the seller defaults under its repurchase
obligation. See "Appendix - Certain Investment Strategies"
in the Prospectus for further information.
Restricted Securities (All Portfolios)
Each Portfolio may invest up to 10% (15% in the case of
the Total Return, Emerging Growth and International Equity
Portfolios) of the value of its net assets in restricted
securities (i.e., securities which may not be sold without
registration under the Securities Act of 1933, as amended)
and in other securities that are not readily marketable,
including repurchase agreements maturing in more than seven
days. Restricted securities are generally purchased at a
discount from the market price of unrestricted securities of
the same issuer. Investments in restricted securities are
not readily marketable without some time delay. Investments
in securities which have no readily available market value
are valued at fair value as determined in good faith by the
Fund's Board of Trustees. Ordinarily, a Portfolio would
invest in restricted securities only when it receives the
issuer's commitment to register the securities without
expense to the Portfolio. However, registration and
underwriting expenses (which may range from 7% to 15% of the
gross proceeds of the securities sold) may be paid by the
Portfolio. A Portfolio position in restricted securities
might adversely affect the liquidity and marketability of
such securities, and the Portfolio might not be able to
dispose of its holdings in such securities at reasonable
price levels.
Short Sales Against the Box (Equity Income, International
Equity, Emerging Growth and Total Return Portfolios)
Each of the Equity Income, International Equity,
Emerging Growth and Total Return Portfolios may enter into a
short sale of common stock such that when the short position
is open the Portfolio 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 Portfolio 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 Portfolio delivers the convertible or exchangeable
securities to close out its short position. Although prior
to delivery a Portfolio will have to pay an amount equal to
any dividends paid on the common stock sold short, the
Portfolio will receive the dividends from the preferred
stock or interest from the debt securities convertible or
exchangeable into the stock sold short, plus a portion of
the interest earned from the proceeds of the short sale.
The Portfolio will deposit, in a segregated account with the
Fund's custodian, convertible preferred stock or convertible
debt securities in connection with short sales against the
box.
Investment Restrictions
The investment restrictions numbered 1 through 14 have
been adopted by the Fund with respect to the Portfolios as
fundamental policies for protection of shareholders. Under
the 1940 Act, a Portfolio's fundamental policy may not be
changed without the vote of a majority (as defined in the
1940 Act) of the outstanding voting securities of that
Portfolio. Majority is defined in the 1940 Act as the
lesser of (a) 67% or more of the shares present at a Fund
meeting, if the holders of more than 50% of the outstanding
shares of that Portfolio are present or represented by
proxy, or (b) more than 50% of the outstanding shares. A
fundamental policy affecting a particular Portfolio may not
be changed without the vote of a majority of the outstanding
shares of that Portfolio. Investment restrictions 15
through 21 are non-fundamental policies and may be changed
by vote of a majority of the Fund's Board of Trustees at any
time.
The investment policies adopted by the Fund prohibit a
Portfolio from:
1. Purchasing the securities of any issuer (other
than U.S. government securities) if as a result more than 5%
of the value of the Portfolio's total assets would be
invested in the securities of the issuer, except that, with
respect to each Portfolio other than the Money Market
Portfolio, up to 25% of the value of the Portfolio's total
assets may be invested without regard to this 5% limitation.
2. Purchasing more than 10% of the voting securities
of any one issuer or more than 10% of the securities of any
class of any one issuer; provided that this limitation shall
not apply to investments in U.S. government securities.
3. Purchasing securities on margin, except that the
Portfolio may obtain any short-term credits necessary for
the clearance of purchases and sales of securities. For
purposes of this restriction, the deposit or payment of
initial or variation margin in connection with futures
contracts or related options will not be deemed to be a
purchase of securities on margin.
4. Making short sales of securities or maintaining a
short position, except for "Short sales against the box."
5. Borrowing money or issuing senior securities,
except that (a) the Portfolio may borrow from banks for
temporary or emergency (not leveraging) purposes including
the meeting of redemption requests that might otherwise
require the untimely disposition of securities in an amount
not exceeding 30% of the value of the Portfolio's total
assets (including the amount borrowed), valued at market
less liabilities (not including the amount borrowed) at the
time the borrowing is made, (b) one or more of the
Portfolios may enter into futures contracts, reverse
repurchase agreements and forward roll transactions and (c)
the International Equity Portfolio may borrow up to one-
third of the Portfolio's assets. In the event that the
asset coverage for a Portfolio's borrowings falls below 30%,
the Portfolio would reduce, within three days (excluding
Saturdays, Sundays and holidays), the amount of its
borrowings in order to provide for 30% asset coverage.
Whenever borrowings pursuant to (a) above exceeds 5% of the
value of a Portfolio's total assets, the Portfolio (other
than the International Equity Portfolio) will not make any
additional investments.
6. Pledging, hypothecating, mortgaging or otherwise
encumbering more than 30% of the value of the Portfolio's
total assets. For purposes of this restriction, (a) the
deposit of assets in escrow in connection with the writing
of options and the purchase of securities on a when-issued
or delayed delivery basis, (b) the International Equity
Portfolio's pledge of its assets to secure permitted
borrowing and (c) collateral arrangements with respect to
(i) the purchase and sale of stock options, options on
foreign currencies and options on stock indexes and (ii)
initial or variation margin for futures contracts will not
be deemed to be pledges of a Portfolio's assets.
7. Underwriting the securities of other issuers,
except insofar as the Portfolio may be deemed an underwriter
under the Securities Act of 1933, as amended, by virtue of
disposing of portfolio securities.
8. Purchasing or selling real estate or interests in
real estate, except that the Portfolio may purchase and sell
securities that are secured, directly or indirectly, by real
estate and may purchase securities issued by companies that
invest or deal in real estate.
9. Investing in commodities, except that one or more
of the Portfolios may invest in futures contracts and
options on futures contracts.
10. Investing in oil, gas or other mineral exploration
or development programs, except that the Portfolios may
invest in the securities of companies that invest in or
sponsor these programs.
11. Making loans to others, except through the
purchase of qualified debt obligations, loans of portfolio
securities and entry into repurchase agreements.
12. Investing in securities of other investment
companies registered or required to be registered under the
1940 Act, except as they may be acquired as part of a
merger, consolidation, reorganization, acquisition of assets
or an offer of exchange or as otherwise permitted by law.
13. Purchasing any securities that would cause more
than 25% of the value of the Portfolio's total assets at the
time of purchase to be invested in the securities of issuers
conducting their principal business activities in the same
industry; provided that this limitation shall not apply to
the purchase of (a) U.S. government securities or (b) with
respect to the Money Market Portfolio, U.S. dollar-
denominated bank instruments such as certificates of
deposit, time deposits, bankers' acceptances and letters of
credit that have been issued by U.S. banks or (c) with
respect to the Equity Income Portfolio, the securities of
companies within the utility industry.
14. Purchasing, writing or selling puts, calls,
straddles, spreads or combinations thereof, except as
permitted under the Portfolio's investment goals and
policies.
15. Purchasing restricted securities, illiquid
securities or other securities that are not readily
marketable if more than 10% (15% in the case of the Total
Return, International Equity and Emerging Growth Portfolios)
of the total assets of the Portfolio would be invested in
such securities.
16. Investing more than 10% of its total assets in
time deposits maturing in more than seven calendar days.
17. 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 less than three
years. (For purposes of this limitation, issuers include
predecessors, sponsors, controlling persons, general
partners, guarantors and originators of underlying assets
which have less than three years of continuous operation or
relevant business experience.)
18. Making investments for the purpose of exercising
control or management.
19. Purchasing or retaining securities of any company
if, to the knowledge of the Fund, any of the Fund's officers
or Trustees or any officer or director of an Adviser or sub-
investment adviser individually owns more than 1/2 of 1% of
the outstanding securities of such company and together they
own beneficially more than 5% of the securities.
20. Investing in warrants (except as permitted under
the Portfolio's investment goals and policies or other than
warrants acquired by the Portfolio as part of a unit or
attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or
market) would exceed 5% of the value of the Portfolio's net
assets or if, as a result, more than 2% (5% in the case of
the International Equity Portfolio) of the Portfolio's net
assets would be invested in warrants not listed on a
recognized U.S. or foreign exchange to the extent permitted
by applicable state securities laws.
21. With regard to the Equity Income Portfolio,
purchase 10% or more of the voting securities of a public
utility or public utility holding company, so as to become a
public utility holding company as defined in the Public
Utility Holding Company Act of 1935, as amended.
The Fund 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 Fund determine that any such commitment
is no longer in the best interests of the Portfolio and its
shareholders, the Fund will revoke the commitment by
terminating the sale of shares of the Portfolio in the state
involved. Except for investment restriction number 5, the
percentage limitations contained in the restrictions listed
above apply at the time of purchases of securities.
Portfolio Turnover
The Money Market Portfolio may attempt to increase
yields by trading to take advantage of short-term market
variations, which results in high portfolio turnover.
Because purchases and sales of money market instruments are
usually effected as principal transactions, this policy does
not result in high brokerage commissions to the Portfolio.
The other Portfolios do not intend to seek profits through
short-term trading. Nevertheless, the Portfolios will not
consider portfolio turnover rate a limiting factor in making
investment decisions.
A Portfolio's turnover rate is calculated by dividing
the lesser of purchases or sales of its portfolio securities
for the year by the monthly average value of the portfolio's
securities. Securities or options with remaining maturities
of one year or less on the date of acquisition are excluded
from the calculation. Under certain market conditions, a
Portfolio authorized to engage in transactions in options
may experience increased portfolio turnover as a result of
its investment strategies. For instance, the exercise of a
substantial number of options written by a Portfolio (due to
appreciation of the underlying security in the case of call
options or depreciation of the underlying security in the
case of put options) could result in a turnover rate in
excess of 100%. A portfolio turnover rate of 100% would
occur if all of a Portfolio's securities that are included
in the computation of turnover were replaced once during a
period of one year.
The Portfolios cannot accurately predict their
portfolio turnover rates but anticipate that annual turnover
for each Portfolio will not exceed the following
percentages: Intermediate High Grade Portfolio - 100%;
Diversified Strategic Income Portfolio - 100%; Equity Income
Portfolio - 100%; Equity Index Portfolio - 20%; Growth &
Income Portfolio - 50%; Appreciation Portfolio - 50%; Total
Return Portfolio - 100%; Emerging Growth Portfolio - 100%;
and International Equity Portfolio - 100%. For regulatory
purposes, the portfolio turnover rate for the Money Market
Portfolio will be considered 0%.
For the 1994 and 1993 fiscal years, the portfolio
turnover rates for Portfolios having operations during the
stated periods were as follows:
<TABLE>
<S> <C> <C>
Portfolio Fiscal Year EndedDecember 31, 1994 Fiscal Year
EndedDecember 31, 1993
Intermediate High Grade Portfolio 90% 139%
Diversified Strategic Income Portfolio 54% 94%
Equity Income Portfolio 21% 4%
Equity Index Portfolio 1% 1%
Growth & Income Portfolio 77% 78%
Appreciation Portfolio 61% 33%
Total Return Portfolio 118% -
Emerging Growth Portfolio 66% -
International Equity Portfolio 12% -
</TABLE>
Certain other practices that may be employed by a
Portfolio also could result in high portfolio turnover. For
example, portfolio securities may be sold in anticipation of
a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise)
and later sold. In addition, a security may be sold and
another of comparable quality purchased at approximately the
same time to take advantage of what an Adviser believes to
be a temporary disparity in the normal yield relationship
between the two securities. These yield disparities may
occur for reasons not directly related to the investment
quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for,
or supply of, various types of securities. Higher portfolio
turnover rates can result in corresponding increases in
brokerage commissions. Short-term gains realized from
portfolio transactions are taxable to shareholders as
ordinary income. See "Dividends and Taxes."
Portfolio turnover rates may vary greatly from year to
year as well as within a particular year and may be affected
by cash requirements for redemptions of a Portfolio's shares
as well as by requirements that enable the Portfolio to
receive favorable tax treatment.
The Fund's Board of Trustees will review periodically
the commissions paid by the Portfolios to determine if the
commissions paid over representative periods of time were
reasonable in relation to the benefits inuring to the
Portfolios.
Portfolio Transactions
Most of the purchases and sales of securities for a
Portfolio, whether effected on a securities exchange or over-
the-counter, will be effected in the primary trading market
for the securities. Decisions to buy and sell securities
for a Portfolio are made by its Adviser, which also is
responsible for placing these transactions, subject to the
overall review of the Fund's Trustees. With respect to the
Diversified Strategic Income Portfolio, decisions to buy and
sell U.S. securities for the Portfolio are made by Smith
Barney Mutual Funds Management Inc. ("SBMFM"), the
Portfolio's Adviser, which also is responsible for placing
these transactions; however, the responsibility to make
investment decisions with respect to foreign securities and
to place these transactions rests with Smith Barney Global
Capital Management, Inc. ("Global Capital Management"), the
Portfolio's sub-investment adviser. Although investment
decisions for each Portfolio are made independently from
those of the other accounts managed by its Adviser,
investments of the type the Portfolio may make also may be
made by those other accounts. When a Portfolio and one or
more other accounts managed by its Adviser are prepared to
invest in, or desire to dispose of, the same security,
available investments or opportunities for sales will be
allocated in a manner believed by the Adviser to be
equitable to each. In some cases, this procedure may
adversely affect the price paid or received by a Portfolio
or the size of the position obtained or disposed of by the
Portfolio.
Transactions on U.S. stock exchanges and some foreign
stock exchanges involve the payment of negotiated brokerage
commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among
different brokers. Commissions generally are fixed on most
foreign exchanges. There is generally no stated commission
in the case of securities traded in U.S. or foreign over-the-
counter markets, but the prices of those securities include
undisclosed commissions or mark-ups. The cost of securities
purchased from underwriters includes an underwriting
commission or concession and the prices at which securities
are purchased from and sold to dealers include a dealer's
mark-up or mark-down. U.S. government securities generally
are purchased from underwriters or dealers, although certain
newly issued U.S. government securities may be purchased
directly from the United States Treasury or from the issuing
agency or instrumentality.
The following table sets forth certain information
regarding each Portfolio's payment of brokerage commissions
with the exception of the Money Market Portfolio and
Intermediate High Grade Portfolio, which did not pay any
brokerage commissions during these time periods.
<TABLE>
<CAPTION>
Fiscal Year Ended
December 31, 1994
<S>Portfolio <C>Total Brokerage Commissions Paid
<C>Brokerage Commissions Paid to Smith Barney
Diversified Strategic Income Portfolio $ 2,515 ------
Equity Income Portfolio 54,816 $8,442
Equity Index Portfolio 1,377 -----
Growth & Income Portfolio 55,941 4,380
Appreciation Portfolio 100,831 5,952
Total Return Portfolio 73,782 ------
Emerging Growth Portfolio 21,824 ------
International Equity Portfolio 144,755 ------
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
December 31, 1993
<S>Portfolio <C>Total Brokerage Commissions Paid
<C>Brokerage Commissions Paid to Shearson Lehman Brothers
Inc. and/or Smith Barney Shearson Inc.
Equity Income Portfolio $52,560 $7,518
Equity Index Portfolio $ 2,727 $------
Growth & Income Portfolio $42,972 $4,818
Appreciation Portfolio $67,361 $2,499
Total Return Portfolio $ 1,410 $-----
Emerging Growth Portfolio $ 1,342 $-----
International Equity Portfolio $ 7,413 $ 416
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended
December 31, 1992
<S>Portfolio <C>Total Brokerage CommissionPaid
<C>Brokerage Commissions Paid to Shearson Lehman Brothers
Inc.
Equity Income Portfolio $30,510 $7,884
Equity Index Portfolio $ 1,142 $------
Growth & Income Portfolio $22,980 $6,786
Appreciation Portfolio $48,003 $8,664
</TABLE>
<TABLE>
<CAPTION>Fiscal Year EndedDecember 31, 1994 Equity Income
Portfolio Growth & Income Portfolio Appreciation
Portfolio
<S> <C> <C> <C>
% of Total Brokerage Commission paid to Smith Barney Inc.
15.4% 7.8% 5.9%
% of Total Transactionsinvolving Commissions paid to Smith
Barney Inc. 13.4% 7.8% 6.0%
</TABLE>
In selecting brokers or dealers to execute securities
transactions on behalf of a Portfolio, its Adviser seeks the
best overall terms available. In assessing the best overall
terms available for any transaction, each Adviser will
consider the factors that the Adviser deems relevant,
including the breadth of the market in the security, the
price of the security, the financial condition and execution
capability of the broker or dealer and the reasonableness of
the commission, if any, for the specific transaction and on
a continuing basis. In addition, each advisory agreement
between the Fund and an Adviser authorizes the Adviser, in
selecting brokers or dealers to execute a particular
transaction and in evaluating the best overall terms
available, to consider the brokerage and research services
(as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934) provided to the Fund, the
other Portfolios and/or other accounts over which the
Adviser or its affiliates exercise investment discretion.
The fees under the investment advisory agreements and the
sub-investment advisory and/or administration agreements
between the Fund and the Advisers and the sub-investment
advisers and/or administrator, respectively, are not reduced
by reason of their receiving such brokerage and research
services. The Fund's Board of Trustees, in its discretion,
may authorize the Advisers to cause the Portfolios to pay a
broker that provides such brokerage and research services a
brokerage commission in excess of that which another broker
might have charged for effecting the same transaction, in
recognition of the value of such brokerage and research
services. The Fund's Board of Trustees periodically will
review the commissions paid by the Portfolios to determine
if the commissions paid over representative periods of time
were reasonable in relation to the benefits inuring to the
Fund.
To the extent consistent with applicable provisions of
the 1940 Act and the rules and exemptions adopted by the SEC
thereunder, the Fund's Board of Trustees has determined that
portfolio transactions for a Portfolio may be executed
through Smith Barney and other affiliated broker-dealers if,
in the judgment of its Adviser, the use of such broker-
dealer is likely to result in price and execution at least
as favorable as those of other qualified broker-dealers, and
if, in the transaction, such broker-dealer charges the
Portfolio a rate consistent with that charged to comparable
unaffiliated customers in similar transactions. In
addition, under rules recently adopted by the SEC, Smith
Barney may directly execute transactions for a Portfolio of
the Fund on the floor of any national securities exchange,
provided: (a) the Board of Trustees has expressly authorized
Smith Barney to effect such transactions; and (b) Smith
Barney annually advises the Fund of the aggregate
compensation it earned on such transactions. Over-the-
counter purchases and sales are transacted directly with
principal market makers except in those cases in which
better prices and executions may be obtained elsewhere.
The Portfolios will not purchase any security,
including U.S. government securities, during the existence
of any underwriting or selling group relating thereto of
which Smith Barney is a member, except to the extent
permitted by the SEC.
The Portfolios may use Smith Barney as a commodities
broker in connection with entering into futures contracts
and options on futures contracts. Smith Barney has agreed
to charge the Portfolios commodity commissions at rates
comparable to those charged by Smith Barney to its most
favored clients for comparable trades in comparable
accounts.
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of
certain of the organizations that provide services to the
Fund. These organizations are as follows:
<TABLE>
<S> <C>
Name Service
Van Kampen American Capital Investment
Adviser to Emerging
Asset Management, Inc. Growth
Portfolio
Travelers Investment Management Investment
Adviser to
Company ("TIMCO") Equity Index
Portfolio
SBMFM Investment Adviser to
Money Market,
Intermediate
High Grade, Diversified
Strategic
Income, Equity Income,
Growth
and Income, Appreciation,
Total
Return and International
Equity Portfolios;
Administrator
to each Portfolio
Global Capital Management Sub-Investment
Adviser to
Diversified Strategic
Income
Portfolio
Smith Barney Distributor
PNC Custodian
The Shareholder Services Group, Transfer and
Dividend Paying
Inc. ("TSSG"), a subsidiary Agent
of First Data Corporation
</TABLE>
These organizations and the functions they perform for
the Fund are discussed in the Prospectus and in this
Statement of Additional Information.
Trustees and Officers of the Fund
The names of the Trustees and executive officers of the
Fund, together with information as to their principal
business occupations during the past five years, are set
forth below. Each Trustee who is an "interested person" of
the Fund, as defined in the 1940 Act, is indicated by an
asterisk. As of March 31, 1995, Trustees and officers of
the Fund as a group owned no shares of the Fund.
Burt N. Dorsett, Trustee (Age 64). Managing Partner of
Dorsett, McCabe Management, Inc., an investment counseling
firm; Director of Research Corporation Technologies, Inc., a
non-profit patent-clearing and licensing firm. His address
is 201 East 62nd Street, New York, New York 10021.
Elliot S. Jaffe, Trustee (Age 68). Chairman of the
Board and President of The Dress Barn, Inc. His address is
30 Dunnigan Drive, Suffern, New York 10901.
* Heath B. McLendon, Chairman of the Board and
Investment Officer (Age 61). Managing Director of Smith
Barney, President of SBMFM and Chairman of Smith Barney
Strategy Advisers Inc.; prior to July 1993, Senior Executive
Vice President of Shearson Lehman Brothers Inc. ("Shearson
Lehman Brothers") ; Vice Chairman of Asset Management, a
division of Shearson Lehman Brothers, a Director of PanAgora
Asset Management, Inc. and PanAgora Asset Management
Limited. His address is 388 Greenwich Street, New York, New
York 10013. Mr. McLendon also serves as Chairman of the
Board of 41 other mutual funds of the Smith Barney Mutual
Funds.
Cornelius C. Rose, Jr., Trustee (Age 61). President,
Cornelius C. Rose Associates, Inc., financial consultants,
and Chairman and Director of Performance Learning Systems,
an educational consultant. His address is Fair Oaks,
Enfield, New Hampshire 03748.
John C. Bianchi, Vice President and Investment Officer
(Age 39). Investment Officer of SBMFM; prior to November 7,
1994, Managing Director of Greenwich Street Advisors; prior
to July 1993, Managing Director of Shearson Lehman Advisors.
His address is 388 Greenwich Street, New York, New York
10013.
Sandip A. Bhagat, Investment Officer (Age 35).
President of TIMCO; prior to 1995, Senior Portfolio Manager
for TIMCO's quantitative active equity strategies. His
address is One Tower Square, Hartford, Connecticut 06183-
2030.
Harry D. Cohen, Vice President and Investment Officer
(Age 54). President and Director of Smith Barney Investment
Advisors, a division of SBMFM; Executive Vice President of
Smith Barney; prior to July 1993, President of Asset
Management, a Division of Shearson Lehman Brothers. His
address is 388 Greenwich Street, New York, New York 10013.
James C. Conroy, Vice President and Investment Officer
(Age 43). Investment Officer of SBMFM; prior to November 7,
1994, Managing Director of Greenwich Street Advisors; prior
to July 1993, Managing Director of Shearson Lehman Advisors.
His address is 388 Greenwich Street, New York, New York
10013.
Victor Filatov, Vice President and Investment Officer
(Age 43). Managing Director of Smith Barney, President and
Director of Smith Barney Global Capital Management Inc.;
prior to 1993, Vice President of J.P. Morgan Securities Inc.
His address is 10 Piccadilly, London, WIV 9LA, U.K.
R. Jay Gerken, Vice President and Investment Officer
(Age 44). Managing Director of Greenwich Street Advisors, a
division of SBMFM; prior to July 1993, Managing Director of
Shearson Lehman Advisors. His address is 388 Greenwich
Street, New York, New York 10013.
John G. Goode, Vice President and Investment Officer
(Age 41). Managing Director of Smith Barney; President and
Chief Executive Officer of Davis Skaggs Investment
Management, a division of SBMFM. His address is One Sansome
Street, San Francisco, California 94104.
Peter Hable, Vice President and Investment Officer (Age
36). Investment Officer of SBMFM. His address is One Sansome
Street, San Francisco, California 94104.
Kent A. Kelley, Investment Officer (Age 45). Chief
Executive Officer of TIMCO; prior to 1995, President and
Chief Investment Officer of TIMCO; prior to 1992, Executive
Vice President of TIMCO. His address is One Tower Square,
Hartford, Connecticut 06183-2030.
Jack S. Levande, Vice President and Investment Officer
(Age 48). Investment Officer of SBMFM; prior to November 7,
1994, Managing Director of Greenwich Street Advisors; prior
to July 1993, Managing Director of Shearson Lehman Advisors.
His address is 388 Greenwich Street, New York, New York
10013.
Gary Lewis, Vice President and Investment Officer (Age
41). Investment Vice President of Van Kampen American
Capital Asset Management, Inc. His address is 2800 Post Oak
Boulevard, Houston, Texas 77056.
George Mueller, Vice President and Investment Officer
(Age 54). Investment Officer of SBMFM; prior to November 7,
1994, Senior Vice President of Greenwich Street Advisors;
prior to July 1993, Managing Director of Shearson Lehman
Advisors. His address is 388 Greenwich Street, New York,
New York 10013.
George V. Novello, Vice President and Investment
Officer (Age 43). Managing Director of Greenwich Street
Advisors, a division of SBMFM; prior to July 1993, Managing
Director of Shearson Lehman Advisors. His address is 388
Greenwich Street, New York, New York 10013.
Jeffrey Russell, Vice President and Investment Officer
(Age 37). Managing Director of Smith Barney; Vice President
and Assistant Secretary of Fenimore International Management
Corporation. His address is 388 Greenwich Street, New York,
New York 10013.
Alan T. Sachtleben, Vice President and Investment
Officer (Age 53). Executive Vice President and Director of
Van Kampen American Capital Asset Management, Inc.;
Executive Vice President of Van Kampen American Capital
Holding, Inc and Van Kampen American Capital. His address
is 2800 Post Oak Boulevard, Houston, Texas 77056.
Jessica M. Bibliowicz, President (Age 35). Executive
Vice President Smith Barney, prior to 1994, Director of
Sales and Marketing for Prudential Mutual Funds; prior to
1990, First Vice President of Asset Management, a division
of Shearson Lehman Brothers Inc. Ms. Bibliowicz also serves
as President of 40 other mutual funds of the Smith Barney
Mutual Funds. Her address is 388 Greenwich Street, New
York, New York 10013.
Phyllis Zahorodny, Vice President and Investment
Officer (Age 37). Managing Director of Greenwich Street
Advisors; prior to July 1993, Managing Director of Shearson
Lehman Advisors. Her address is 388 Greenwich Street, New
York, New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer
(Age 37). Managing Director of Smith Barney; Director and
Senior Vice President of SBMFM. Mr. Daidone also serves as
Senior Vice President and Treasurer of 41 other Smith Barney
Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Christina T. Sydor, Secretary (Age 44). Managing
Director of Smith Barney; General Counsel and Secretary of
SBMFM. Ms. Sydor also serves as Secretary of 41 other Smith
Barney Mutual Funds. Her address is 388 Greenwich Street,
New York, New York 10013.
No officer, director or employee of Smith Barney, the
Advisers, Global Capital Management or any of their
affiliates receives any compensation from the Fund for
serving as an officer or Trustee of the Fund. The Fund pays
each Trustee who is not a director, officer or employee of
Smith Barney, the Advisers, Global Capital Management or any
of their affiliates a fee of $5,000 per annum plus $500 per
meeting attended and reimburses them for travel and out-of-
pocket expenses. For the fiscal year ended December 31,
1994, such fees and expenses totaled $27,745.
For the calendar year ended December 31, 1994, the
Trustees of the Fund were paid the following compensation:
<TABLE> <C>
<S>Trustee <C>Aggregate Compensation from the Fund
<C>Pension or Retirement Benefits Accrued as Part of Fund
Expenses Aggregate Compensation from the Smith Barney
Mutual Funds
Burt N. Dorsett (12)* $7,500 0
34,300
Elliot S. Jaffe (12)* 7,500 0
33,300
Heath McLendon(41)* ----- --
- --------
Cornelius C. Rose, Jr. (12)* 7,500 0
33,300
* Number of director/trusteeships held with other mutual
funds in the Smith Barney Mutual Fund family.
</TABLE>
Advisers, Sub-Investment Adviser, Administrator and Sub-
Administrator
Each Adviser serves as investment adviser to one or
more Portfolios pursuant to a separate written agreement
with each Portfolio (an "Advisory Agreement"). The Advisory
Agreements for the Money Market Portfolio, Intermediate High
Grade Portfolio, Equity Income Portfolio, Appreciation
Portfolio, Diversified Strategic Income Portfolio and Growth
& Income Portfolio were most recently approved by the Board
of Trustees, including a majority of the Trustees who are
not interested persons, on July 20, 1994. The Advisory
Agreements for the Total Return, International Equity and
Emerging Growth Portfolios were approved by the Fund's Board
of Trustees on July 20, 1994. SBMFM serves as administrator
to each Portfolio pursuant to a separate written agreement
with each Portfolio (an "Administration Agreement") .
The Administration Agreement was most recently
approved by the Fund's Board of Trustees, including a
majority of the disinterested Trustees, on July 20, 1994.
Certain of the services provided by, and the fees
paid by the Fund to, the Advisers under the Advisory
Agreements, SBMFM under its Administration Agreement
and Global Capital Management under its sub-investment
advisory Agreement are described in the Prospectus.
SBMFM is a wholly owned subsidiary of Smith Barney
Holdings Inc. ("Holdings"), which, in turn, is a wholly
owned subsidiary of The Travelers Inc. ("Travelers").
Travelers is a diversified financial services holding
company principally engaged in the business of providing
investment, consumer finance and insurance services.
Van Kampen American Capital Asset Management,
Inc. is a wholly owned subsidiary of American Capital
Management & Research, Inc., an indirect wholly owned
subsidiary of Van Kampen American Capital, Inc.
Smith Barney, the Fund's distributor, and Global
Capital Management, sub-investment adviser to Diversified
Strategic Income Portfolio, are subsidiaries of Holdings.
Certain of the services provided to the Fund by
SBMFM as administrator are described in the
Prospectus under "Management of the Fund." In addition to
those services, SBMFM pays the salaries of all
officers and employees who are employed by both it and the
Fund, maintains office facilities for the Fund, furnishes
the Fund with statistical and research data, clerical help
and accounting, data processing, bookkeeping, internal
auditing and legal services and certain other services
required by the Fund, prepares reports to the Fund's
shareholders and prepares tax returns, reports to and
filings with the SEC and state blue sky authorities.
SBMFM bears all expenses in connection with the
performance of its services.
Each Adviser and Global Capital Management pays the
salaries of all officers and employees who are employed by
both them and the Fund, maintains office facilities for the
Fund and bear all expenses in connection with the
performance of their respective services under their
Agreements with the Fund.
The Portfolios incurred the following investment
advisory fees for the past three years, which were partially
waived for the years ended December 31, 1994, 1993 and 1992
by their respective Adviser:
<TABLE>
<C> <C> <C>
<S>Portfolio Fiscal Year EndedDecember 31, 1994 Fiscal
Year EndedDecember 31, 1993 Fiscal Year EndedDecember 31,
1992
Money Market Portfolio $ 19,592 $ 7,643
$ 6,123
Intermediate High Grade Portfolio 49,279
25,734 8,818
Diversified Strategic Income Portfolio 238,422
133,663 36,728
Equity Income Portfolio 223,055 206,623
62,981
Equity Index Portfolio 38,236 25,538
13,325
Growth & Income Portfolio 127,450 79,917
28,401
Appreciation Portfolio 444,244 364,632
196,339
Total Return Portfolio 78,167 419
n/a
Emerging Growth Portfolio 68,528
431 n/a
International Equity Portfolio 193,164
1,422 n/a
</TABLE>
For the fiscal year ended December 31, 1992, the
Diversified Strategic Income Portfolio incurred $18,364 in
sub-investment advisory fees, $4,407 of which was waived by
Lehman Brothers Global Asset Management Limited ("LBGAM"),
the sub-investment adviser of the Portfolio prior to March
22, 1994. For the fiscal year ended December 31, 1993, the
Diversified Strategic Income Portfolio incurred $44,556 in
sub-investment advisory fees, $515 of which was waived by
LBGAM. For the period from January 1, 1994 through March
22, 1994, the Diversified Strategic Income Portfolio
incurred $14,919 in sub-investment advisory fees, $0 of
which was waived by LBGAM. For the period from March 23,
1994 through December 31, 1994, the Diversified Strategic
Income Portfolio incurred $64,555 in sub-investment advisory
fees, $0 of which was waived by Global Capital Management.
The Portfolios then in existence incurred the following
sub-investment advisory and administration fees for the past
three years, which were partially waived by The Boston
Company Advisors, Inc.("Boston Advisors") for the years
ended December 31, 1992 and December 31, 1993; respectively,
and the Portfolios incurred administration fees, which were
partially waived for the year ended December 31, 1994 as
follows:
<TABLE>
<S> <C> <C> <C>
Portfolio Fiscal Year EndedDecember 31, 1994 Fiscal Year
EndedDecember 31, 1993 Fiscal Year EndedDecember 31, 1992
Money Market Portfolio $ 13,062 $ 5,096
$ 4,082
Intermediate High Grade Portfolio 24,639
12,867 4,409
Diversified Strategic Income Portfolio 105,966
59,406 24,485
Equity Income Portfolio 99,135 91,832
27,991
Equity Index Portfolio 19,119 12,769
6,662
Growth & Income Portfolio 56,644 35,519
12,623
Appreciation Portfolio 161,543 132,593
71,396
Total Return Portfolio 28,424 152
- ------
Emerging Growth Portfolio 18,274
115 ------
International Equity Portfolio 45,450
335 ------
</TABLE>
For the year ended December 31, 1994, the investment
adviser and administrator waived fees to the Portfolios as
follows:
<TABLE>
<S> <C> <C>
Portfolio InvestmentAdviser BostonAdvisors
Money Market Portfolio $ 6,198 $ 4,132
Intermediate High Grade Portfolio 6,939
3,470
Equity Index Portfolio 9,185 4,592
Total Return Portfolio 4,652 1,692
Emerging Growth Portfolio 10,509 2,802
International Equity Portfolio 14,886
3,503
</TABLE>
For the year ended December 31, 1994, IDS Life
reimbursed expenses to the Portfolios as follows:
<TABLE>
<S> <C>
Money Market Portfolio $ 16,616
Intermediate High Grade Portfolio 12,616
Equity Index Portfolio 25,496
Total Return Portfolio 7,873
Emerging Growth Portfolio 18,068
International Equity Portfolio 23,712
For the year ended December 31, 1993, the investment
adviser and administrator waived fees to the Portfolios as
follows:
</TABLE>
<TABLE>
<S> <C> <C>
Portfolio InvestmentAdviser BostonAdvisors
Money Market Portfolio $ 5,078 $ 3,385
Intermediate High Grade Portfolio 8,383
4,191
Diversified Strategic Income Portfolio 1,544
685
Equity Index Portfolio 8,795 4,397
Growth & Income Portfolio 630 280
Total Return Portfolio 419 152
Emerging Growth Portfolio 308 82
International Equity Portfolio 1,048
246
</TABLE>
For the year ended December 31, 1993, the investment
adviser and administrator reimbursed expenses in the amounts
of $52 and $19, respectively, to the Total Return Portfolio.
For the year ended December 31, 1993, IDS Life
reimbursed expenses to the Portfolios as follows:
<TABLE>
<S> <C>
Money Market Portfolio $17,889
Intermediate High Grade Portfolio 16,459
Diversified Strategic Income Portfolio 2,816
Equity Index Portfolio 28,169
Growth & Income Portfolio 1,085
Total Return Portfolio 1,472
Emerging Growth Portfolio 2,915
International Equity Portfolio 1,902
</TABLE>
For the year ended December 31, 1992, the investment
advisers and sub-investment adviser waived fees to the
Portfolios then in existence as follows:
<TABLE>
<S> <C> <C>
Portfolio InvestmentAdvisers BostonAdvisors
Money Market Portfolio $ 4,280 $ 2,853
Intermediate High Grade Portfolio 5,928
2,964
Diversified Strategic Income Portfolio 8,816
5,877
Equity Income Portfolio 11,122 4,943
Equity Index Portfolio 6,974 3,487
Growth & Income Portfolio 9,382 4,170
Appreciation Portfolio 19,370 7,044
</TABLE>
For the year ended December 31, 1992, IDS Life
reimbursed expenses to the Portfolios then in existence as
follows:
<TABLE>
<S> <C>
Money Market Portfolio $14,624
Intermediate High Grade Portfolio 15,865
Diversified Strategic Income Portfolio 25,396
Equity Income Portfolio 19,510
Equity Index Portfolio 31,633
Growth & Income Portfolio 20,683
Appreciation Portfolio 29,950
</TABLE>
The Fund bears expenses incurred in its operation,
including taxes, interest, brokerage fees and commissions,
if any; fees of Trustees who are not officers, directors,
shareholders or employees of the Advisers, Global Capital
Management or Smith Barney; SEC fees and state blue
sky qualification fees; charges of custodians; transfer and
dividend disbursing agents' 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 of corporate meetings and of
preparation and printing of prospectuses and shareholder
reports for regulatory purposes and for distribution to
shareholders.
Each Adviser, Global Capital Management and SBMFM
have agreed that if in any fiscal year the aggregate
expenses of any Portfolio that they serve (including fees
payable pursuant to their service agreements with the Fund,
but excluding interest, taxes, brokerage and, if permitted
by the relevant state securities commissions, extraordinary
expenses) exceed the expense limitation of any state having
jurisdiction over the Portfolio, the relevant Adviser,
Global Capital Management and SBMFM, as appropriate,
will reduce their fees for the Portfolio for that excess
expense to the extent required by state law in the same
proportion as their respective fees bear to the combined
fees for investment advice and administration. A fee
reduction, if any, will be reconciled on a monthly basis.
The most restrictive annual expense limitation applicable to
any Portfolio is 2.50% of the first $30 million of the
Portfolio's average net assets, 2.00% of the next $70
million of the average net assets and 1.50% of the remaining
average net assets of each Portfolio. No fee reduction was
required for the fiscal year ended December 31, 1993.
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the Fund.
Stroock & Stroock & Lavan serves as counsel to the Trustees
who are not interested persons of the Fund.
KPMG Peat Marwick LLP ("Peat Marwick"), independent
accountants, 345 Park Avenue, New York, New York 10154,
serve as auditors of the Fund and will render an opinion on
the Fund's financial statement annually beginning with the
fiscal year ending December 31, 1995. Prior to KPMG Peat
Marwick's appointment, Coopers & Lybrand L.L.P., independent
accountants, served as auditors of the Fund and rendered an
opinion on the Fund's financial statements for the fiscal
year ended December 31, 1994.
Organization of the Fund
The Fund was organized as a business trust under the
laws of the Commonwealth of Massachusetts pursuant to a
Master Trust Agreement dated May 13, 1991, as amended from
time to time (the "Trust Agreement"). On October 14, 1994,
the Trust changed its name to its current name, Smith Barney
Series Fund.
In the interest of economy and convenience,
certificates representing shares in the Fund are not
physically issued. PNC maintains a record of each
shareholder's ownership of Fund shares. Shares do not have
cumulative voting rights, which means that holders of more
than 50% of the shares voting for the election of Trustees
can elect all of the Trustees. Shares are transferable but
have no preemptive, conversion or subscription rights.
Annuity owners generally vote by Portfolio, except with
respect to the election of Trustees and the selection of
independent public accountants. The variable account will
vote the shares of the Fund held by the variable account at
regular and special meetings of the shareholders of the
various Portfolios in accordance with instructions received
from the owners of the an individual flexible premium
deferred combination fixed and variable annuity contract or
a certificate evidencing interest in a master group flexible
premium deferred variable annuity (the "Contract") offerred
by certain insurance companies designated by the Fund,
having a voting interest in the relevant Subaccount. For a
discussion of the rights of Contract owners concerning the
voting of shares, please refer to the Contract Prospectus.
There will be no meetings of shareholders for the
purpose of electing Trustees unless and until such time as
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. Under the 1940 Act, shareholders of
record of no less than two-thirds of the outstanding shares
of the Fund may remove a Trustee through a declaration in
writing or by vote cast in person or by proxy at a meeting
called for that purpose. Under the Trust Agreement, the
Trustees are required to call a meeting of shareholders for
the purpose of voting upon the question of removal of any
such Trustee when requested in writing to do so by the
shareholders of record of not less than 10% of the Fund's
outstanding shares.
Massachusetts law provides that shareholders could,
under certain circumstances, be held personally liable for
the obligations of the Fund. However, the Trust Agreement
disclaims shareholder liability for acts or obligations of
the Fund and requires that notice of such disclaimer be
given in each agreement, obligation or instrument entered
into or executed by the Fund or a Trustee. The Trust
Agreement provides for indemnification from the Fund's
property for all losses and expenses of any shareholder held
personally liable for the obligations of the Fund. Thus,
the risk of an Contract owner incurring financial loss on
account of shareholder liability is limited to circumstances
in which the Fund would be unable to meet its obligations, a
possibility that the Fund's management believes is remote.
Upon payment of any liability incurred by the Fund, the
shareholder paying the liability will be entitled to
reimbursement from the general assets of the Fund. The
Trustees intend to conduct the operations of the Fund in
such a way so as to avoid, as far as possible, ultimate
liability of the shareholders for liabilities of the Fund.
PURCHASE OF SHARES
The Fund 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 the
Fund and directing the allocation of part or all of the net
purchase payment to one or more of ten subaccounts, each of
which invests in a Portfolio as permitted under the Contract
Prospectus. Investors should read this Statement of
Additional Information and the Fund's Prospectus dated May
1, 1995 along with 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.
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 Fund will redeem any shares presented by the
Subaccounts, its sole shareholders, for redemption.
The Subaccounts' policy on when or whether to buy or
redeem Fund shares is described in the Annuity prospectus.
Payment upon redemption of shares of a Portfolio is
normally made within seven 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 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 Fund's Board of Trustees 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 Annuity.
NET ASSET VALUE
As noted in the Prospectus, the Fund will not calculate
the net asset value of the Portfolios on certain holidays.
On those days, securities held by a Portfolio may
nevertheless be actively traded, and the value of the
Portfolio's shares could be significantly affected.
Because of the need to obtain prices as of the close of
trading on various exchanges throughout the world, the
calculation of the net asset values of certain Portfolios
may not take place contemporaneously with the determination
of the prices of some of their respective portfolio
securities used in such calculation. A security that is
listed or traded on more than one exchange is valued at the
quotation on the exchange determined to be the primary
market for such security. All assets and liabilities
initially expressed in foreign currency values will be
converted into U.S. dollar values at the mean between the
bid and offered quotations of such currencies against U.S.
dollars as last quoted by any recognized dealer. If such
quotations are not available, the rate of exchange will be
determined in good faith by the Fund's Board of Trustees. In
carrying out the Board's valuation policies, SBMFM, as
admistrator , may consult with an independent pricing
service (the "Pricing Service") retained by the Fund.
Debt securities of U.S. issuers (other than U.S.
government securities and short-term investments) are valued
by SBMFM , after consultation with the Pricing
Service. When, in the judgment of the Pricing Service,
quoted bid prices for investments are readily available and
are representative of the bid side of the market, these
investments are valued at the mean between the quoted bid
prices and asked prices. Investments for which, in the
judgment of the Pricing Service, there are no readily
obtainable market quotations are carried at fair value as
determined by the Pricing Service. The procedures of the
Pricing Service are reviewed periodically by the officers of
the Fund under the general supervision and responsibility of
the Fund's Board of Trustees.
The Money Market Portfolio
The valuation of the portfolio securities of the Money
Market Portfolio is based upon their amortized cost, which
does not take into account unrealized capital gains or
losses. Amortized cost valuation involves initially valuing
an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium
regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method
provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is
higher or lower than the price a Fund would receive if it
sold the instrument.
The use by the Money Market Portfolio of the amortized
cost method of valuing its portfolio securities is permitted
by a rule adopted by the SEC. Under this rule, the
Portfolio must maintain a dollar-weighted average portfolio
maturity of ninety days or less, purchase only instruments
having remaining maturities of thirteen months or less, and
invest only in securities determined by the Board of
Trustees of the Fund to be "Eligible Securities," as
determined by the SEC, with minimal credit risks. Pursuant
to the rule, the Fund's Board of Trustees also has
established procedures designed to stabilize, to the extent
reasonably possible, the Portfolio's price per share as
computed for the purpose of sales and redemptions at $1.00.
Such procedures include review of the Portfolio's holdings
by the Fund's Board of Trustees, at such intervals as it may
deem appropriate, to determine whether the Portfolio's net
asset value calculated by using available market quotations
or market equivalents deviates from $1.00 per share based on
amortized cost.
The rule also provides that the extent of any deviation
between the Portfolio's net asset value based upon available
market quotations or market equivalents and the $1.00 per
share net asset value based on amortized cost must be
examined by the Fund's Board of Trustees. In the event that
the Fund's Board of Trustees determines that a deviation
exists that may result in material dilution or other unfair
results to investors or existing shareholders, pursuant to
the rule the Fund's Board of Trustees must cause the
Portfolio to take such corrective action as the Fund's Board
of Trustees regards as necessary and appropriate, including:
selling portfolio instruments prior to maturity to realize
capital gains or losses or to shorten average portfolio
maturity; withholding dividends or paying distributions from
capital gains; redeeming shares in kind; or establishing a
net asset value per share by using available market
quotations.
PERFORMANCE DATA
From time to time, the Fund may quote yield or total
return in advertisements or in reports and other
communications to shareholders.
Yield
For a Portfolio other than the Money Market Portfolio,
the thirty-day yield figure described in the Prospectus and
shown below is calculated according to a formula prescribed
by the SEC. The formula can be expressed as follows:
YIELD = 2[(a-b + 1) - 1]6
cd
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 that were
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 value of the debt
obligations.
The yields for the 30-day period ended December 31,
1994 for the Diversified Strategic Income Portfolio and the
Intermediate High Grade Portfolio were 8.83% and 7.04%,
respectively.
The yield for the Money Market Portfolio is computed by
(a) determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account
in the Portfolio having a balance of one share at the
beginning of a seven day period for which yield is to be
quoted; (b) subtracting a hypothetical charge reflecting
deductions from shareholder accounts;(c) dividing the
difference by the value of the account at the beginning of
the period to obtain the base period return; and (d)
annualizing the results (i.e., multiplying the base period
return by 365/7). The net change in the value of the
account reflects the value of additional shares purchased
with dividends declared on the original share and any such
additional shares, but does not include realized gains and
losses or unrealized appreciation and depreciation. In
addition, the Portfolio may calculate a compound effective
annualized yield by adding one to the base period return
(calculated as described above), raising the sum to a power
equal to 365/7 and subtracting one. For the seven-day
period ended December 31, 1994, the annualized yield for the
Money Market Portfolio was 5.20% and the effective yield was
5.33%. For the same seven-day period, the Portfolio's
average maturity was 11 days.
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 such Portfolio's portfolio, 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
A Portfolio's "average annual total return" figure
described in the Prospectus and shown below is 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
payment made at the beginning of the one-, five- or ten-year
(or other) period at the end of the one-, five- or ten-year
(or other) period (or fractional portion thereof).
The ERV assumes complete redemption of the hypothetical
investment at the end of the measuring period. A
Portfolio's net investment income changes in response to
fluctuations in interest rates and the expenses of the
Portfolio.
The average annual total returns for the Portfolios
then in existence were as follows for the periods indicated
(reflecting the waivers of investment advisory and
administration fees and reimbursement of expenses):
<TABLE>
<S>Portfolio <C>For the one-year period ended December 31,
1994 <C>Per annum for the period from commencement of
operations through December 31, 1994
Intermediate High Grade Portfolio (3.05) % 3.85 % *
Diversified Strategic Income Portfolio (2.81) % 3.74 % *
Equity Income Portfolio (10.20) % 3.88 % *
Equity Index Portfolio 0.85 % 6.99 % *
Growth & Income Portfolio (3.20) % 4.77 % *
Appreciation Portfolio (1.12) % 5.27 % *
Total Return Portfolio 7.40 % 9.82 % **
Emerging Growth Portfolio (7.48) % (3.43) % **
International Equity Portfolio (8.36) % (7.35) % **
* Portfolio commenced operations on October 16, 1991.
** Portfolio commenced operations on December 3, 1993.
</TABLE>
The average annual total returns for the Portfolios
then in existence were as follows for the periods indicated
(without the effect of waivers of investment advisory and
administration fees and reimbursement of expenses):
<TABLE>
<S>Portfolio <C>For the one-year period ended December 31,
1994 <C>For the period from commencement of operations
through December 31, 1994
Intermediate High Grade Portfolio (3.24) % 2.59 % *
Diversified Strategic Income Portfolio (2.81)
% 3.52 % *
Equity Income Portfolio (10.20)% 3.72 % *
Equity Index Portfolio 0.35 % 5.84 % *
Growth & Income Portfolio (3.20)% 4.34 % *
Appreciation Portfolio (1.12)% 5.21 % *
Total Return Portfolio 7.30 % 9.53 % **
Emerging Growth Portfolio (7.55) % (4.06) % **
International Equity Portfolio (8.36) % (7.53) % **
* Portfolio commenced operations on October 16, 1991.
** Portfolio commenced operations on December 3, 1993.
</TABLE>
Aggregate Total Return
A Portfolio's aggregate total return figure described
in the Prospectus and shown below represents the cumulative
change in the value of an investment in a Portfolio for the
specified period and is computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial payment of
$10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of the one-, five- or ten-
year period at the end of the one-, five- or ten-year period
(or fractional portion thereof), assuming reinvestment of
all dividends and distributions.
The aggregate total returns for the Portfolios then in
existence were as follows for the periods indicated
(reflecting the waiver for investment advisory and
administration fees and reimbursement of expenses):
<TABLE>
<S>Portfolio <C>For the one-year period ended December 31,
1994 <C>Per annum for the period from commencement of
operations through December 31, 1994
Intermediate High Grade Portfolio (3.05) % 12.87 % *
Diversified Strategic Income Portfolio (2.81) % 12.51 % *
Equity Income Portfolio (10.20) % 13.00 % *
Equity Index Portfolio 0.85 % 24.21 % *
Growth & Income Portfolio (3.20) % 16.11 % *
Appreciation Portfolio (1.12) % 17.92 % *
Total Return Portfolio 7.40 % 10.62 % **
Emerging Growth Portfolio (7.48) % (3.69) %**
International Equity Portfolio (8.36) % (7.90) %**
* Portfolio commenced operations on October 16, 1991.
** Portfolio commenced operations on December 3, 1993.
</TABLE>
The aggregate total returns for the Portfolios then in
existence were as follows for the periods indicated (without
the effect of waivers for investment advisory and
administration fees and reimbursement of expenses):
<TABLE>
<S>Portfolio <C>For the one-year period ended December 31,
1994 <C>For the period from commencement of operations
through December 31, 1994
Intermediate High Grade Portfolio (3.24) % 8.56 % *
Diversified Strategic Income Portfolio N/A 11.75 % *
Equity Income Portfolio N/A 12.43 % *
Equity Index Portfolio 0.35 % 19.98 % *
Growth & Income Portfolio N/A 14.60 % *
Appreciation Portfolio N/A 17.72 % *
Total Return Portfolio 7.30 % 10.31 % **
Emerging Growth Portfolio (7.55) % (4.36) % **
International Equity Portfolio (8.36) % (8.10)
% **
* Portfolio commenced operations on October 16, 1991.
** Portfolio commenced operations on December 3, 1993.
</TABLE>
It is important to note that the yield and total return
figures set forth above are based on historical earnings and
are not intended to indicate future performance.
From time to time, the Fund may quote the performance
of a Portfolio in terms of total return in reports or other
communications to shareholders or in advertising material.
A Portfolio's total return combines principal changes and
income dividends and capital gains distributions reinvested
for the periods shown. Principal changes are based on the
difference between the beginning and closing net asset
values for the period. The period selected will depend upon
the purpose of reporting the performance.
A Portfolio's performance will vary from time to time
depending upon market conditions, the composition of its
portfolio and its operating expenses. Consequently, any
given performance quotation should not be considered
representative of the Portfolio's performance for any
specified period in the future. In addition, because
performance will fluctuate, it may not provide a basis for
comparing an investment in a Portfolio with certain bank
deposits or other investments that pay a fixed yield for a
stated period of time.
The following comparative performance information may
be used from time to time in advertising the Fund's shares:
(1) Average of Savings Accounts, which is measure of
all kinds of savings deposits, including longer-term
certificates (based on figures supplied by the U.S. League
of Savings Institutions). Savings accounts offer a
guaranteed rate of return on principal, but no opportunity
for capital growth. During a portion of the period, the
maximum rates paid on some savings deposits were fixed by
law.
(2) The Consumer Price Index, which is a measure of
the average change in prices over time in a fixed market
basket of goods and services (e.g., food, clothing, shelter,
fuels, transportation fares, charges for doctors' and
dentists' services, prescription medicines, and other goods
and services that people buy for day-to-day living).
(3) Data and mutual fund rankings published or
prepared by Lipper Analytical Services, Inc., which ranks
mutual funds by overall performance, investment objectives
and assets.
(4) Bear Stearns Foreign Bond Index, which provides
simple average returns for individual countries and GNP-
weighted index, beginning in 1975. The returns are broken
down by local market and currency.
(5) Ibbottson Associates International Bond Index,
which provides a detailed breakdown of local market and
currency returns since 1960.
(6) S&P 500 which is a widely recognized index composed
of the capitalization-weighted average of the price of 500
of the largest publicly traded stocks in the U.S.
(7) Salomon Brothers Broad Investment Grade Index
which is a widely used index composed of U.S. domestic
government, corporate and mortgage-back fixed income
securities.
(8) Dow Jones Industrial Average.
(9) Financial News Composite Index.
(10) Morgan Stanley Capital International World
Indices, including, among others, the Morgan Stanley Capital
International Europe, Australia, Far East Index ("EAFE
Index"). The EAFE index is an unmanaged index of more than
800 companies of Europe, Australia and the Far East.
(11) Data and comparative performance rankings
published or prepared by CDA Investment Technologies, Inc.
(12) Data and comparative performance rankings
published or prepared by Wiesenberger Investment Company
Service.
Indices prepared by the research departments of such
financial organizations as Salomon Brothers, Inc., Merrill
Lynch, Pierce, Fenner & Smith, Inc., Bear Stearns & Co.,
Inc., Morgan Stanley, and Ibbottson Associates may be used,
as well as information provided by the Federal Reserve
Board. In addition, performance rankings and ratings
reported periodically in national financial publications.
TAXES
Each Portfolio will be treated as a separate taxpayer
for federal income tax purposes with the result that: (a)
each Portfolio must qualify separately as a regulated
investment company; and (b) the amounts of investment income
and capital gains earned will be determined on a Portfolio-
by-Portfolio (rather than on a Fund-wide) basis.
Regulated Investment Company Status
The Fund intends that each Portfolio will qualify
separately each year as a "regulated investment company"
under Subchapter M of 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 receives annually at least 90% of its net
investment income from dividends, interest, payments with
respect to securities loans and gains from the sale or other
disposition of stock or securities, or foreign currencies,
or other income derived with respect to its business of
investing in such stock, securities or currencies. In
addition, each Portfolio must distribute at least 90% of its
net investment income each year.
To qualify as a regulated investment company, a
Portfolio also must earn less than 30% of its gross income
from the disposition of certain investments held for less
than three months. The 30% test will limit the extent to
which a Portfolio may: sell stock or securities held for
less than three months; effect short sales of stock or
securities held for less than three months (or of
substantially identical securities); write certain options,
futures and forward contracts which expire in less than
three months; and effect closing transactions with respect
to call or put options that have been written or purchased
within the preceding three months. (If a Portfolio
purchases a put option for the purpose of hedging an
underlying portfolio security, the acquisition of the option
is treated as a short sale of the underlying security
unless, for purposes of the 30% test only, the option and
the security are acquired on the same date.) Finally, as
discussed below, this requirement also may limit investments
by certain Portfolios in options on stock indices, options
on nonconvertible debt securities, futures contracts and
options on futures contracts. Legislation currently pending
before the U.S. Congress would repeal the 30% test.
However, it is impossible to predict whether the legislation
will become law, and if so enacted, what form it will
eventually take.
If a Portfolio is the holder of record of any stock on
the record date for any dividends payable with respect to
such stock, such dividends are included in the Portfolio's
gross income not as of the date received but as of the later
of (a) the date such stock became ex-dividend with respect
to such dividends (i.e., the date on which a buyer of the
stock would not be entitled to receive the declared, but
unpaid, dividends) or (b) the date the Portfolio acquired
such stock.
Taxation of Investment by the Portfolios
A Portfolio's transactions in foreign currencies,
forward contracts, options, futures contracts (including
options and futures contracts on foreign currencies) and
warrants will be subject to special provisions of the Code
that, among other things, may affect the character of gains
and losses realized by the Portfolio (i.e., may affect
whether gains or losses are ordinary or capital), accelerate
recognition of income to the Portfolio and defer Portfolio
losses. These rules could therefore affect the character,
amount and timing of distributions to shareholders. These
provisions also (a) will require the Portfolio to mark-to-
market certain types of the positions in its portfolio
(i.e., treat them as if they were closed out) and (b) may
cause the Portfolio to recognize income without receiving
cash with which to pay dividends or make distributions in
amounts necessary to satisfy the 90% distribution
requirement for avoiding income tax. The Portfolio will
monitor its transactions, will make the appropriate tax
elections and will make the appropriate entries in its books
and records when it acquires any foreign currency, forward
contract, option, futures contract, warrant or hedged
investment in order to mitigate the effect of these rules
and prevent disqualification of the Portfolio as a regulated
investment company.
Segregated Asset Account
The Fund has been informed that certain of the life
insurance companies offerring Contracts intend to qualify
each of the subaccounts as a "segregated asset account"
within the meaning of the Code. For a subaccount to qualify
as a segregated asset account, the 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 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 Fund has undertaken to meet the diversification
requirements of Section 817(h) of the Code. This
undertaking may limit the ability of a particular Portfolio
to make certain otherwise permitted investments. In
particular, the ability of the Money Market and Intermediate
High Grade Portfolios to invest in U.S. government
securities other than direct United States Treasury
obligations may be materially limited by these
diversification requirements.
CUSTODIAN AND TRANSFER AGENT
PNC is located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103 and serves as the custodian
of the Fund pursuant to a custodian agreement. Under the
custodian agreement, PNC holds the Fund's portfolio
securities and keeps all necessary accounts and records.
For its services, PNC receives a monthly fee based upon the
month-end market value of securities held in custody and
also receives certain securities transaction charges
(including out-of-pocket expenses and costs of any foreign
and U.S. sub-custodians). The assets of the Fund are held
under bank custodianship in compliance with the 1940 Act.
TSSG, a subsidiary of First Data Corporation, is
located at Exchange Place, Boston, Massachusetts 02109, and
serves as the Fund's transfer and dividend-paying agent.
Under the transfer agency agreement, TSSG maintains the
shareholder account records for the Fund, handles certain
communications between shareholders and the Fund,
distributes dividends and distributions payable by the Fund
and produces statements with respect to account activity for
the Fund and its shareholders. For these services, TSSG
receives fees from the Fund computed on the basis of the
number of shareholder accounts that TSSG maintains for the
Fund during the month and is reimbursed for out-of-pocket
expenses.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal year ended
December 31, 1994, accompanies this Statement of Additional
Information and is incorporated herein by reference in its
entirety.
APPENDIX
DESCRIPTION OF S&P, MOODY'S AND OTHER RATINGS
Description of S&P Corporate Bond Ratings:
AAA - Bonds rated AAA have the highest rating assigned
by S&P to a debt obligation. Capacity to pay interest and
repay principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the highest
rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay
interest and repay principal although they are somewhat more
susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher
rated categories.
BBB - Bonds rated BBB are regarded as having an
adequate capacity to pay interest and repay principal.
Whereas they normally exhibit 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 bonds in this
category than for bonds in higher rated categories.
BB, B AND CCC - Bonds rated BB and B are 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 represents a lower
degree of speculation than B, and CCC represents the highest
degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to
adverse conditions.
Descriptions of Moody's Corporate Bond Ratings:
AAA - Bonds which are rated Aaa are judged to be the
best quality. They carry the smallest degree of investment
risk and are generally referred to as "gilt-edge." 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 which 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 which make
the long-term risks appear somewhat larger than in Aaa
securities.
A - Bonds which 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 which suggest a susceptibility to impairment
sometime in the future.
BAA - Bonds which 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 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 that are rated Caa are of poor standing.
These issues may be in default or present elements of danger
may exist with respect to principal or interest.
Moody's applies the numerical modifiers 1, 2 and 3 to
each generic rating classification from Aa through B. 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.
Description of other Corporate Bond Ratings:
Bonds rated AAA by IBCA Limited or its affiliate IBCA
Inc. (together, "IBCA") are obligations for which there is
the lowest expectation of investment risk. Capacity for
timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk
significantly. Bonds rated AA are obligations for which
there is a very low expectation of investment risk.
Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or
financial conditions may increase investment risk, albeit
not very significantly.
Bonds rated AAA by Fitch Investors Services, Inc.
("Fitch") are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated AAA.
Bonds rated AAA by Duff & Phelps Inc. ("Duff & Phelps")
are deemed to be of the highest credit quality: the risk
factors are negligible, being only slightly more than for
risk-free United States Treasury debt. AA indicates high
credit quality: protection factors are strong, and risk is
modest but may vary slightly from time to time because of
economic conditions.
Description of S&P Commercial Paper Ratings:
Commercial paper rated A-1 by S&P indicates that the
degree of safety regarding timely payment is either
overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted A-
1+. Capacity for timely payment on commercial paper rated A-
2 is strong, but the relative degree of safety is not as
high as for issues designated A-1.
Description of Moody's Commercial Paper Ratings:
The rating Prime-1 is the highest commercial paper
rating assigned by Moody's. Issuers rated Prime-1 (or
related supporting institutions) are considered to have a
superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting
institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics of
issuers rated Prime-1, 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 alternative liquidity is maintained.
Description of other Commercial Paper Ratings:
Short term obligations, including commercial paper,
rated A1+ by IBCA are obligations supported by the highest
capacity for timely repayment. Obligations rated A1 have a
very strong capacity for timely repayment. Obligations rated
A2 have a strong capacity for timely repayment, although
such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
Fitch employs the rating F-1+ to indicate issues
regarded as having the strongest degree of assurance for
timely payment. The rating F-1 reflects an assurance of
timely payment only slightly less in degree than issues
rated F-1+, while the rating F-2 indicates a satisfactory
degree of assurance for timely payment, although the margin
of safety is not as great as indicated by the F-1+ and F-1
categories.
Duff & Phelps employs the designation of Duff 1 with
respect to top grade commercial paper and bank money
instruments. Duff 1+ indicates the highest certainty of
timely payment: short-term liquidity is clearly outstanding
and safety is just below risk-free United States Treasury
short-term obligations. Duff 1- indicates high certainty of
timely payment. Duff 2 indicates good certainty of timely
payment: liquidity factors and company fundamentals are
sound.
The Thomson Bankwatch ("TBW") Short-Term Ratings apply
to commercial paper, other senior short-term obligations and
deposit obligations of the entities to which the rating has
been assigned, and apply only to unsecured instruments that
have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the
likelihood of an untimely payment of principal or interest.
TBW-1 The highest category; indicates a very high
degree of likelihood that principal and interest will be
paid on a timely basis.
TBW-2 The second highest category; while the degree
of safety regarding timely repayment of principal and
interest is strong, the relative degree of safety is not as
high as for issues rated "TBW-1."
Various of the NRSROs utilize rankings within rating
categories indicated by a + or -. The Fund, in accordance
with industry practice, recognizes such rankings within
categories as gradations, viewing for example S&P's rating
of A- 1 + and A-1 as being in S&P's highest rating category.
