Registration No. 33-
40603
811-6310
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. _____
Post-Effective Amendment No. 10
X
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 13
X
SMITH BARNEY SERIES FUND
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code:
(212) 723-9218
Christina T. Sydor, Esq.
Secretary
Smith Barney Series Fund
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent of Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing will become effective:
____ immediately upon filing pursuant to Rule 485(b)
X on May 1, 1995 pursuant to Rule 485(b)
60 days after filing pursuant to Rule 485(a)
on ____________ pursuant to Rule 485(a)
_____________________________________________________________________
_______________
The Registrant has previously filed a declaration of
indefinite registration of its shares pursuant to Rule 24f-2
under the Investment Company Act of 1940, as amended.
Registrant's Rule 24f-2 Notice for the fiscal year ended
December 31, 1994 was filed on February 24, 1995.
SMITH BARNEY SERIES FUND
FORM N-IA
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(b)
Part A.
Item No. Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Synopsis
3. Condensed Financial Financial Highlights;
Information The Portfolios' Performance
4. General Description of Cover Page; Investment Goals
Registrant and Policies of the
Portfolios; Additional
Investments; Certain
Investments and Guidelines;
Special Considerations and
Risk Factors; Additional
Information; Appendix
5. Management of the Fund Management of the Fund;
Portfolio Management;
Custodian and Transfer
Agent; Distributor
6. Capital Stock and Other Additional Information;
Securities Dividends and Taxes
7. Purchase of Securities Net Asset Value; Cover Page;
Being Offered How to Use the Fund;
Distributor
8. Redemption or Repurchase How to Use the Fund
9. Pending Legal Not Applicable
Proceedings
Part B Statement of
Item No. Additional Information
Caption
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and Additional Information;
History Distributor
13. Investment Objectives Investment Goals and
and Policies Policies of the Portfolios
14. Management of the Fund Management of the Fund
15. Control Persons and Management of the Fund
Principal
Holders of Securities
16. Investment Advisory and Management of the Fund;
Other Services Distributor
17. Brokerage Allocation Investment Goals and
and Policies -- Portfolio
Other Practices Transactions
18. Capital Stock and Other Net Asset Value; Performance
Securities Data
19. Purchase, Redemption Purchase of Shares;
and Pricing of Redemption of Shares
Securities Being
Offered
20. Tax Status Taxes
21. Underwriters Management of the Fund
22. Calculations of Performance Data
Performance Data
23. Financial Statements Financial Statements
Smith Barney
Series Fund
Prospectus dated April 29, 1995
Smith Barney Series Fund (the "Fund") is a diversified, open-
end management investment company - a mutual fund - with ten
portfolios (the "Portfolios"), each with separate goals and
investment policies:
The Appreciation Portfolio's goal is long-term appreciation
of capital. This Portfolio invests primarily in equity
securities.
The Diversified Strategic Income Portfolio's goal is high
current income. This Portfolio invests primarily in three
types of fixed-income securities - U.S. government and
mortgage securities, foreign government bonds and corporate
bonds rated below investment grade.
The Emerging Growth Portfolio's goal is capital
appreciation. This Portfolio invests primarily in common
stocks of small and medium sized companies considered to be
emerging growth companies by its investment adviser.
The Equity Income Portfolio's primary goal is current
income, with a secondary goal of long-term capital
appreciation. This Portfolio invests primarily in dividend-
paying common stocks, concentrating in securities of
companies in the utility industry.
The Equity Index Portfolios goal is to provide investment
results that, before deduction of operating expenses, match
the price and yield performance of U.S. publicly traded
common stocks, as measured by the Standard & Poor's Daily
Price Index of 500 Common Stocks (the "S&P 500"). This
Portfolio invests in the common stocks of companies
represented in the S&P 500.
The Growth & Income Portfolio's goal is income and long-term
capital growth. This Portfolio invests in dividend-paying
equity securities meeting certain specified investment
criteria.
The Intermediate High Grade Portfolio's goal is to provide
as high a level of current income as is consistent with the
protection of capital. This Portfolio invests in high
quality intermediate-term U.S. government securities and
corporate bonds of U.S. issuers.
The International Equity Portfolio's goal is to provide
total return on its assets from growth of capital and
income. This Portfolio invests in equity securities of
established non-United States issuers.
The Money Market Portfolio's goal is maximum current income
to the extent consistent with the preservation of capital
and the maintenance of liquidity. This Portfolio invests in
high quality short-term money market instruments.
The Total Return Portfolio's goal is to provide shareholders
with total return, consisting of long-term capital
appreciation and income. This Portfolio invests primarily in
a diversified portfolio of dividend-paying common stocks.
There can be no guarantee that the Portfolios' goals will be
achieved since any investment involves risks. An investment
in the Money Market Portfolio is neither insured nor
guaranteed by the United States government. Although the
Money Market Portfolio will seek to maintain a stable net
asset value of $1.00 per share, there can be no assurance
that the Portfolio will be able to do so. Discussions of the
investments each Portfolio will make, and their related
risks, are found in the sections of this Prospectus entitled
"Investment Goals and Policies of the Portfolios,"
"Additional Investments" and "Special Considerations" and in
the Appendix to this Prospectus.
This Prospectus sets forth briefly certain information about
the Fund and each of the Portfolios that you should know
before investing and should be retained for future
reference. Additional information about the Fund and the
Portfolios has been filed with the Securities and Exchange
Commission (the "SEC") in a document entitled "Statement of
Additional Information," dated April 29, 1995, as amended or
supplemented from time to time, which is available upon
request and without charge by calling or writing the Fund at
the telephone number or address set forth below or by
contacting a Smith Barney Financial Consultant.
The Fund is responsible only for statements that are
included in this Prospectus, the Statement of Additional
Information or in authorized sales material. The Statement
of Additional Information is incorporated by reference into
this Prospectus in its entirety. You cannot buy shares of
the Fund directly. You can invest in the Fund by buying
separate accounts which fund certain variable annuity and
variable life insurance (each referred to herein as a
"Contract") offered by designated insurance companies.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS
OF THE CONTRACT. BOTH PROSPECTUSES SHOULD BE READ CAREFULLY
AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Smith Barney Series Fund
388 Greenwich Street
New York, New York 10013
Contract Owner Inquiries: (212) 723-9217
#
Smith Barney Series Fund
#
Smith Barney Series Fund
Contents
Synopsis 3
Expenses of the Portfolios 5
Investment Goals and Policies of the Portfolios 10
Additional Investments 16
Certain Investment Guidelines 17
Special Considerations and Risk Factors 18
Portfolio Transactions. 22
Net Asset Value 22
How to Use the Fund 23
Dividends and Taxes 24
Management of the Fund 25
Portfolio Management 26
Custodian and Transfer Agent 27
Distributor 27
Additional Information 27
The Portfolios' Performance 28
Appendix 29
Synopsis
The Fund
The Fund is a diversified, open-end management investment
company registered under the Investment Company Act of 1940,
as amended (the "1940 Act"), which currently offers a
selection of ten Portfolios. See "Investment Goals and
Policies of the Portfolios" and "Additional Information."
Management
The organizations that perform services for the Fund are
listed below and are described more fully under "Management
of the Fund."
Name Service
American Capital Asset Management, Inc. Investment
Adviser to the Emerging Growth Portfolio
("American Capital")
The Boston Company Advisors, Inc. Sub-
Administrator to each Portfolio
("Boston Advisors")
Smith Barney Global Capital Management, Inc. Sub-
Investment Adviser to the Diversified Strategic
("Global Capital Management") Income
Portfolio
Smith Barney Mutual Funds Management Inc. Investment
Adviser to the Money Market Portfolio, the
("SBMFM") Intermediate High Grade
Portfolio, the Diversified Strategic Income Portfolio, the
Equity Income Portfolio, the Growth
& Income Portfolio, the Appreciation Portfolio, the Total
Return Portfolio and the International Equity Portfolio and
Administrator to each Portfolio
Travelers Investment Management Company Investment
Adviser to the Equity Index Portfolio
("TIMCO")
Davis Skaggs Investment Investment Advisor to the Total
Return Portfolio
Manager ("Davis Skaggs")
Name Service
Smith Barney Inc. Distributor
("Smith Barney")
Boston Safe Deposit and Trust Company Custodian
("Boston Safe")
The Shareholder Services Group, Inc. ("TSSG"),
Transfer and Dividend Paying Agent
a subsidiary of First Data Corporation
The Portfolios pay their respective investment advisers an
aggregate fee at annual percentage of the value of the
relevant Portfolio's average net assets as follows:
Appreciation Portfolio - 0.55%; Diversified Strategic Income
Portfolio - 0.45%; Emerging Growth Portfolio - 0.75%.; Equity
Income Portfolio - 0.45%; Equity Index Portfolio - 0.40%;
Growth & Income Portfolio - 0.45%; Intermediate High Grade
Portfolio - 0.40%; International Equity Portfolio - 0.85%;
Money Market Portfolio - 0.30%; and Total Return Portfolio
- - 0.55%. Global Capital Management, as sub-investment adviser
to the Diversified Strategic Income Portfolio, is paid a fee
by SBMFM, the Portfolio's investment adviser, at the annual
percentage of 0.15% of the value of the Portfolio's average
net assets. SBMFM, as administrator of the Portfolios, is
paid a fee at the annual percentage of 0.20% of the value of
each Portfolio's average net assets. Boston Advisors is paid
a portion of the administration fee paid by the Fund to
SBMFM at a rate agreed upon from time to time between Boston
Advisors and SBMFM. The aggregate management fees paid by
the Appreciation, Total Return, International Equity and
Emerging Growth Portfolios are higher than those fees paid
by most other investment companies, but not necessarily
higher than those paid by funds with similar investment
objectives and policies. See "Management of the Fund."
Buying Shares
Shares of the Fund are offered only to Contract owners as
set forth in the specific Contract. Typically a Contract
owner can direct the allocation of part or all of his or her
net purchase payment to one or more of the ten Portfolios of
the Fund. In the future, the Fund may establish
additional portfolios. See "How to Use the Fund."
Redeeming Shares
Shares may be redeemed as described in the applicable
Contract prospectus. See "How to Use the Fund."
Special Considerations
Investors in the Fund should be aware of the following
general observations: The market value of fixed-income
securities, which constitute a major part of the investments
of several Portfolios, may vary inversely in response to
changes in prevailing interest rates. The non-publicly
traded and illiquid securities, and the floating and
variable rate demand notes, which certain Portfolios may
hold, may have to be sold at lower prices, or may remain
unsold, when the Portfolios desire to dispose of them. The
mortgage-related securities, including government stripped
mortgage-backed securities, in which certain Portfolios may
invest, are sensitive to changes in interest rates and to
prepayment of the mortgages. The foreign securities,
including securities of developing countries, in which
several Portfolios may invest, may be subject to certain
risks in addition to those inherent in U.S. investments. The
medium-, lower- and unrated securities and the securities of
unseasoned issuers that certain Portfolios may hold, some of
which have speculative characteristics, may be subject to
greater market fluctuation and risk of loss of income or
principal than higher-rated securities. Emerging growth
companies, such as those in which the Emerging Growth
Portfolio may invest, may involve certain special risks.
Emerging growth companies often have limited product lines,
markets, or financial resources, and may be dependent upon
one or a few key people for management. The securities of
such companies may be subject to more abrupt or erratic
market movements than securities of larger, more established
companies or the market averages in general. The Equity
Income Portfolio's concentration policy may involve greater
risk and market fluctuation than if it invested in a broader
range of securities. One or more Portfolios may make certain
investments and employ certain investment techniques that
involve other risks, including entering into repurchase
agreements, lending portfolio securities and entering into
futures contracts and related options as hedges. These risks
and those associated with when-issued and delayed delivery
transactions, put and call options, covered option writing,
short sales against the box, forward roll transactions,
currency exchange transactions, options on foreign
currencies, interest rate and other hedging transactions and
reverse repurchase agreements, are described under
"Investment Goals and Policies of the Portfolios," "Special
Considerations" and in the Appendix to this Prospectus.
Expenses of the Portfolios
Each Portfolio will bear its own expenses. Operating
expenses for each Portfolio generally will consist of all
costs not specifically borne by its investment adviser, sub-
investment adviser, administrator and/or sub-administrator
or the Fund's distributor, including organizational costs,
investment advisory and administration fees, fees for
necessary professional and brokerage services, fees for any
pricing service, the costs of regulatory compliance and
costs associated with maintaining legal existence and
shareholder relations. From time to time, the investment
adviser, the sub-investment adviser and/or the administrator
of a Portfolio may waive all or a portion of the fees
payable to it by the Portfolio, thereby reducing the
expenses of the Portfolio. A detailed description of the
expenses involved in investing in a Contract and the
Portfolios is included in the Contract prospectus.
Financial Highlights
The following information with respect to the years ended
December 31, 1994, 1993, 1992 and 1991, respectively, have
been audited by Coopers & Lybrand L.L.P., independent
accountants, whose report thereon appears in the Fund's
Annual Report dated December 31, 1994, which if not included
with this prospectus, may be obtained without charge. This
information should be read in conjunction with the financial
statements and related notes that also appear in the Fund's
Annual Report which is incorporated by reference into the
Statement of Additional Information.
#
Smith Barney Series Fund
#
Smith Barney Series Fund
#
Smith Barney Series Fund
Smith Barney Series Fund
Financial Highlights For the Year ended December 31,
1994
Diversified
Money Intermediate Strategic
Equity Equity Growth Emerging
Total International
Market High Grade Income
Income Index & Income Appreciation
Growth Return Equity
Portfolio Portfolio Portfolio
Portfolio Portfolio Portfolio
Portfolio Portfolio Portfolio
Portfolio
Net asset value, beginning of year
$1.000 $10.69 $10.07 $11.55
$11.90 $11.37 $11.80 $10.41
$10.30 $10.05
Income from investment operations:
Net investment income** 0.035 0.61 0.58
0.58 0.23 0.27 0.20 0.00***
0.34 0.00***
Net realized and unrealized
gain/(loss) on investments -
(0.94) (0.86) (1.75) (0.14)
(0.63) (0.32) (0.78) 0.42# (0.84)
Total from investment operations 0.035
(0.33) (0.28) (1.17) 0.09 (0.36)
(0.12) (0.78) 0.76 (0.84)
Less distributions:
Dividends from net investment income
(0.035) (0.61) (0.58)
(0.49) (0.15) (0.26) (0.14)
0.00*** (0.28) *
*Distributions from capital gains -
(0.09) - (.02) (0.15) -
Distributions from capital - -
(.03) - - - - - -
- -
Total distributions (0.035)
(0.70) (0.61) (0.51) (0.30)
(0.26) (0.14) 0.00 (0.28) -
Net asset value, end of year $1.000
$9.66 $9.18 $9.87 $11.69
$10.75 $11.54 $9.63 $10.78 $9.21
Total return 3.56% (3.05)%
(2.81)% (10.20)% 0.85% (3.20)%
(1.12)% (7.48)% 7.40% (8.36)%
Ratios to average net assets/
supplemental data:
Net assets, end of year (000's)
$7,141 $13,280 $55,260 $44,417
$10,225 $29,625 $80,823
$11,539 $23,196 $28,413
Ratio of operating expenses to
average net assets 0.75% 0.85%
0.95% 0.84% 1.00% 0.93% 0.88%
1.20% 1.00% 1.30%
Ratio of net investment income/(loss) to
average net assets 3.65% 6.57%
7.31% 5.51% 2.10% 2.52% 1.75%
(0.17)% 3.84% 0.31%
Portfolio turnover rate - 90% 54%
21% 1% 77% 61% 66% 118%
12%
** Net investment income before
waiver of fees and reimbursement of expenses by investment
adviser and/or custodian and/or transfer agents and IDS
were: $0.0301, $0.59, N/A, N/A, $0.17, N/A, N/A, $(0.01),
$0.33, and $0.00, respectively, for the Money Market
Portfolio, Intermediate High Grade Portfolio, Diversified
Strategic Income Portfolio, Equity Income Portfolio, Equity
Index Portfolio, Growth & Income Portfolio, Appreciation
Portfolio, Emerging Growth Portfolio, Total Return Portfolio
and International Equity Portfolio.
*** Amount represents less than $0.01.
Total return represents aggregate total return for
the period indicated.
Operating expense ratios before
fees waived and expenses reimbursed by the affiliated agents
were: 1.26%, 1.05%, N/A, N/A, 1.53%, N/A, N/A, 1.59%, 1.11%,
and 1.51%, respectively, for the Money Market Portfolio,
Intermediate High Grade Portfolio, Diversified Strategic
Income Portfolio, Equity Index Portfolio, Growth & Income
Portfolio, Appreciation Portfolio, Emerging Growth
Portfolio, Total Return Portfolio and International Equity
Portfolio.
# The amount shown in this caption for each share
outstanding throughout the period may not accord with the
change in the aggregate gains and losses in the portfolio
securities for the period because of the timing of purchases
and withdrawal of shares in relation to the fluctuating
market values of the portfolios.
Financial Highlights continue on the next page.
Smith Barney Series Fund
#
#
Smith Barney Series Fund
Financial Highlights (continued) For the Year
ended December 31, 1993#
Diversified
Money Intermediate Strategic
Equity Equity Growth Emerging
Total International
Market High Grade Income
Income Index & Income Appreciation
Growth Return Equity
Portfolio Portfolio Portfolio
Portfolio Portfolio Portfolio
Portfolio Portfolio* Portfolio*
Portfolio*
Net asset value, beginning of year
$1.000 $10.29 $9.61 $10.90
$11.27 $10.68 $11.13 $10.00
$10.00 $10.00
Income from investment operations:
Net investment income** 0.023 0.55 0.70
0.53 0.20 0.30 0.15 0.01 0.01
0.00 ***
Net realized and unrealized
gain/(loss) on investments - 0.26
0.47 0.60 0.71 0.67 0.63 0.40
0.29 0.05
Total from investment operations 0.023
0.81 1.17 1.13 0.91 0.97 0.78
0.41 0.30 0.05
Less distributions:
Dividends from net investment income
(0.023) (0.36) (0.61)
(0.47) (0.16) (0.26) (0.11) -
- - -
Distributions from capital gains -
(.05) (.04) (.01) (0.12) -
- - - - -
Distributions in excess of realized gains -
- - (.05) - - (.02) - -
- - -
Distributions from capital - -
(.01) - - - - - -
- -
Total distributions (0.023)
(0.41) (0.71) (0.48) (0.28)
(0.28) (0.11) 0.00 0.00 0.00
Net asset value, end of year $1.000
$10.69 $10.07 $11.55 $11.90
$11.37 $11.80 $10.41 $10.30
$10.05
Total return 2.37% 8.00%
12.56% 10.41% 8.66% 9.09% 7.03%
4.10% 3.00% .50%
Ratios to average net assets/
supplemental data:
Net assets, end of year (000's)
$3,703 $9,859 $43,244 $60,160
$8,842 $25,549 $77,843 $2,257
$2,777 $5,867
Ratio of operating expenses to
average net assets 0.75% 0.85%
1.00% 0.87% 1.00% 1.00% 1.01%
1.05% 0.85% 1.08%
Ratio of net investment income/(loss) to
average net assets 2.34% 5.25%
7.14% 4.54% 1.77% 2.68% 1.35%
1.37% 1.93% (0.51)
Portfolio turnover rate - 139% 94%
4% 1% 78% 33% - -
- -
# The per share amounts have been calculated using the
monthly average shares method, which more appropriately
presents per share data for this year since use of the
undistributed net investment income method did not accord
with the results of operations.
* The Portfolios commenced operations on December 3,
1993.
** Net investment income before
waiver of fees and reimbursement of expenses by investment
adviser and/or custodian and/or transfer agent and American
Express Financial Advisors were: $0.009, $0.50, $0.70, N/A,
$0.10, $0.29, N/A, $(0.05), $(0.01), and $(0.02),
respectively, for the Money Market Portfolio, Intermediate
High Grade Portfolio, Diversified Strategic Income
Portfolio, Equity Income Portfolio, Equity Index Portfolio,
Growth & Income Portfolio, Appreciation Portfolio, Emerging
Growth Portfolio, Total Return Portfolio and International
Equity Portfolio.
*** Amount represents less than $0.01.
Total return represents aggregate total return for
the period.
Operating expense ratios before
fees waived and expenses reimbursed by the affiliated agents
were: 2.15%, 1.36%, 1.02%, N/A, 1.88%, 1.01%, N/A, 9.99%,
4.14%, and 2.96%, respectively, for the Money Market
Portfolio, Intermediate High Grade Portfolio, Diversified
Strategic Income Portfolio, Equity Income Portfolio, Equity
Index Portfolio, Growth & Income Portfolio, Appreciation
Portfolio, Emerging Growth Portfolio, Total Return Portfolio
and International Equity Portfolio.
Financial Highlights continue on the next page.
Smith Barney Series Fund
#
Smith Barney Series Fund
Financial Highlights (continued) For the Year
Ended December 31, 1992
Diversified
Money Intermediate Strategic
Equity Equity Growth
Market High Grade Income
Income Index & Income Appreciation
Portfolio Portfolio Portfolio
Portfolio Portfolio Portfolio
Portfolio
Net asset value, beginning of year
$1.000 $ 10.24 $ 10.14 $ 10.20
$10.62 $ 10.15 $ 10.49
Income from investment operations:
Net investment income** 0.027 0.45 0.67
0.45 0.17 0.27 0.11
Net realized and unrealized gain/(loss)
on investments - 0.08
(0.53) 0.72 0.55 0.55 0.53
Total from investment operations 0.027
0.53 0.14 1.17 0.72 0.82 0.64
Less distributions:
Dividends from net investment income
(0.027) (0.48) (0.67)
(0.47) (0.02) (0.29) (0.00)***
Distributions from net realized capital gains
- - - - - (0.05) - -
Distributions from capital - -
- - - - (0.00) *** -
Total distributions (0.027)
(0.48) (0.67) (0.47) (0.07)
(0.29) 0.00
Net asset value, end of year $1.000
$10.29 $9.61 $10.90 $11.27
$10.68 $11.13
Total return 2.75% 5.28%
1.42% 11.74% 6.74% 8.44% 6.13%
Ratios to average net assets/
supplemental data:
Net assets, end of year (000's)
$2,108 $3,621 $19,991 $25,985
$4,178 $10,951 $53,450
Ratio of operating expenses to average
net assets 0.75% 0.85%
1.00% 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average
net assets 2.79% 4.75%
7.70% 4.93% 2.10% 3.06% 1.61%
Portfolio turnover rate - 124% 65%
4% 8% 78% 14%
** Net investment income before
waiver of fees and reimbursement of expenses by investment
adviser and/or custodian and/or transfer agents were:
$0.013, $0.32, $0.64, $0.43, $0.02, $0.21 and $0.10,
respectively.
*** Amount represents less than $0.01.
Total return represents aggregate total return for
the period indicated.
Operating expense ratios before
fees waived and expenses reimbursed by the affiliated agents
were: 2.18%, 2.28%, 1.41%, 1.27%, 2.89%, 1.65%, and 1.16%,
respectively.
Financial Highlights continue on the next page.
Financial Highlights (continued) For the Period
Ended December 31, 1991
Diversified
Money Intermediate Strategic
Equity Equity Growth
Market High Grade Income
Income Index & Income Appreciation
Portfolio* Portfolio* Portfolio*
Portfolio* Portfolio* Portfolio*
Portfolio*
Net asset value, beginning of period
$1.000 $ 10.00 $ 10.00 $ 10.00 $
10.00 $ 10.00 $ 10.00
Income from investment operations:
Net investment income** 0.005 0.03 0.02
0.02 0.04 0.02 0.01
Net realized and unrealized gain on investments
Q 0.21 0.18 0.18 0.58 0.13
0.48
Total from investment operations 0.005
0.24 0.14 0.20 0.62 0.15 0.49
Less distributions:
Dividends from net investment income
(0.005) - - - - -
- -
Total distributions (0.005) -
- - - - - -
Net asset value, end of period
$1.000 $ 10.24 $ 10.14 $ 10.20 $
10.62 $ 10.15 $ 10.49
Total return 0.530% 2.40%
1.40% 2.00% 6.20% 1.40% 4.90%
Ratios to average net assets/
supplemental data:
Net assets, end of period (000's) $
830 $ 697 $ 3,914 $ 3,900 $
1,733 $ 1,904 $11,436
Ratio of operating expenses to average
net assets 0.650% 0.80%
0.94% 0.93% 0.98% 0.90% 0.94%
Ratio of net investment income to average
net assets 3.35% 4.49%
4.57% 4.14% 2.91% 4.14% 3.00%
Portfolio turnover rate - - -
- - - 3% -
* The Portfolios shown commenced operations on October
16, 1991.
** Net investment income before
waiver of fees and reimbursement of expenses by investment
adviser and/or custodian and/or transfer agent were:
$(0.029), $(0.14), $(0.01), $(0.01), $(0.05), $(0.05) and
$0.00, respectively.
Total return represents aggregate total return for
the period indicated.
Annualized operating expense
ratios before fees waived and expenses reimbursed by the
affiliated agents were: 21.47%, 26.28%, 7.76%, 8.34%, 7.60%,
20.02%, and 3.64%, respectively.
#
Smith Barney Series Fund
#
Smith Barney Series Fund
Investment Goals and Policies of the Portfolios
Set forth below is a description of the investment goals and
policies of the ten Portfolios currently offered by the
Fund, which consist of one money market Portfolio, two fixed-
income Portfolios and seven equity Portfolios. The
investment goals of a Portfolio may not be changed without
the approval of the holders of a majority (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act"))
of the outstanding shares of that Portfolio. There can, of
course, be no guarantee that the Portfolios will achieve
their investment goals. Additional information about
investment strategies that one or more of the Portfolios may
employ and investment policies mentioned below appears in
the Appendix to this Prospectus and in the Statement of
Additional Information. A description of the corporate bond
and commercial paper rating systems of Standard & Poor's
Corporation ("S&P"), Moody's Investors Service, Inc.
("Moody's") and other nationally recognized statistical
rating organizations ("NRSROs") is also contained in the
Statement of Additional Information.
Money Market Portfolio
Goal - The Money Market Portfolio's goal is maximum current
income to the extent consistent with the preservation of
capital and the maintenance of liquidity.
Investment Policies - In seeking to achieve its goal, the
Money Market Portfolio will invest in short-term money
market instruments, including: securities issued or
guaranteed by the U.S. government, its agencies and
instrumentalities ("U.S. government securities"); repurchase
agreements, U.S. and foreign bank time deposits,
certificates of deposit and bankers' acceptances; high-grade
commercial paper of U.S. and foreign issuers and other short-
term corporate debt obligations of such issuers that are
comparable in priority and security to such instruments,
including variable rate and floating rate instruments.
Except when maintaining a temporary defensive position, the
Portfolio intends to invest more than 25% of its assets in
short-term bank instruments. The Portfolio will invest in
money market instruments that are determined by SBMFM to
present minimal credit risks and which at the time of
purchase are considered to be "Eligible Securities," as
defined by the SEC.
The Portfolio will invest only in securities that are
purchased with and payable in U.S. dollars and that have
(or, pursuant to regulations adopted by the SEC, are deemed
to have) remaining maturities of 13 months or less at the
date of purchase by the Portfolio. The Portfolio will
maintain a dollar-weighted average portfolio maturity of 90
days or less. The Portfolio will follow these policies to
maintain a constant net asset value of $1.00 per share,
although there is no assurance that it can do so on a
continuing basis.
The Bond Portfolios
Intermediate High Grade Portfolio
Goal - The Intermediate High Grade Portfolio's goal is to
provide as high a level of current income as is consistent
with the protection of capital.
Investment Policies - The Intermediate High Grade Portfolio
will seek to achieve its goal by investing, under normal
circumstances, substantially all - but not less than 65% -
of its assets in U.S. government securities and high-grade
corporate bonds of U.S. issuers (i.e., bonds rated within
the two highest rating categories by Moody's or S&P or, if
not rated, believed by SBMFM to be of comparable quality).
Under normal market conditions, the average weighted
maturity of the Portfolio's assets will be between three and
ten years. The portion of the Portfolio's assets not
invested in intermediate-term U.S. government securities and
U.S. corporate bonds may be invested in short-term U.S.
government and corporate obligations, convertible securities
and preferred stock that is not convertible into common
stock. The Portfolio may not hold securities rated lower
than Baa by Moody's or BBB by S&P or unrated securities
deemed to be comparable to securities rated below investment-
grade. The Portfolio may invest up to 10% of its total
assets in government stripped mortgage-backed securities and
may invest in floating or variable rate demand notes.
Diversified Strategic Income Portfolio
Goal - The Diversified Strategic Income Portfolio's goal is
high current income.
Investment Policies - The Diversified Strategic Income
Portfolio will seek to achieve its goal through allocating
and reallocating its assets primarily among three types of
fixed-income securities - U.S. government and mortgage
related securities, foreign government securities and
corporate securities rated below investment-grade. Under
current market conditions, SBMFM expects to maintain 50% of
its assets in government/mortgage securities, 25% in foreign
government securities and 25% of its assets in high-yield
corporate securities. The portions of the Portfolio's assets
invested in each type of security will vary from time to
time and, at any given time, the Portfolio may be entirely
invested in a single type of fixed-income security. Under
normal circumstances, substantially all - but not less than
65% - of the Portfolio's assets will be invested in fixed-
income securities, including non-convertible preferred
stocks.
SBMFM and Global Capital Management will select investments
on the basis of an analysis of economic and market
conditions and relative risks and opportunities of those
types of fixed-income securities. In general, the particular
type or types of fixed-income securities selected for
investment by the Portfolio at any given time will be those
that, in the view of its investment advisers, offer the
highest income available at the time, unless the investment
adviser believes that such income potential is not
sufficient to justify the higher risks associated with these
securities. The Portfolio generally will invest in
intermediate- and long-term fixed-income securities with the
result that, under normal market conditions, the weighted
average maturity of the Portfolio's securities is expected
to be between five and twelve years.
Mortgage-related securities in which the Portfolio may
invest, which include mortgage obligations collateralized by
mortgage loans or mortgage pass-through certificates, will
be rated no lower than Aa by Moody's or AA by S&P or, if
unrated, will be deemed by SBMFM to be of comparable
quality. Under normal market conditions, the Portfolio's
mortgage-related holdings can be expected to consist
primarily of securities issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"). The
Portfolio may invest up to 35% of its assets in corporate
fixed-income securities of U.S. issuers rated Ba or lower by
Moody's or BB or lower by S&P, but not lower than Caa or
CCC, respectively, or in unrated securities deemed by SBMFM
and Global Capital Management to be of comparable quality.
Special considerations arising from investment in lower-
rated and unrated securities are described in "Special
Considerations and Risk Factors - Medium-, Lower- and
Unrated Securities." The Portfolio may also invest in fixed-
income securities issued by supranational organizations and
may engage in transactions in options, interest rate futures
contracts, options on interest rate futures contracts,
forward currency contracts, options on foreign currencies
and foreign currency futures contracts. Up to 5% of the
Portfolio's assets may be invested in developing countries.
The Equity Portfolios
Equity Income Portfolio
Goal - The Equity Income Portfolio's primary goal is current
income. Long-term capital appreciation is a secondary goal.
Investment Policies - The Equity Income Portfolio will seek
to achieve its goals principally through investment in
dividend-paying common stocks of companies whose prospects
for dividend growth and capital appreciation are considered
favorable by SBMFM. The Portfolio will normally invest at
least 65% of its assets in equity securities. Under normal
circumstances, the Portfolio will concentrate at least 25%
of its assets in equity and debt securities of companies in
the utility industry. A company will be considered to be in
the utility industry if it is principally engaged (i.e., at
least 50% of a company's assets consist of, or gross income
or net profits result from, utility operations or the
company is regulated as a utility by a government agency or
authority) in the manufacture, production, generation,
transmission and sale of electric and gas energy and
companies principally engaged in the communications field,
including entities such as telephone, telegraph, satellite,
microwave and other companies regulated by governmental
agencies as utilities that provide communication facilities
for the public benefit.
Other types of securities that may be held by the Portfolio
when deemed advisable by SBMFM include investment-
grade debt securities such as bonds, debentures and
commercial paper, U.S. government securities and money
market instruments, provided that up to 10% of the
Portfolio's assets may be invested in debt securities rated
as low as B by Moody's or S&P or in unrated securities
deemed by SBMFM to be of comparable quality. When the
outlook for common stocks is not considered promising in the
judgment of SBMFM, a substantial portion of the assets of
the Portfolio may be held in these other types of securities
for temporary defensive purposes.
The Portfolio's investments in common stocks will generally
be made in companies that share some of the following
characteristics: established operating histories; above-
average current dividend yields relative to the S&P 500; low
price/earnings ratios relative to the S&P 500; and strong
balance sheets and other financial characteristics. The
Portfolio may also invest in securities convertible into or
ultimately exchangeable for common stock (i.e., convertible
bonds or convertible preferred stock) and may purchase
common stocks that do not provide current income but which
offer opportunities for capital appreciation and future
income. The Portfolio also may enter into repurchase
agreements and reverse repurchase agreements, borrow money,
lend its portfolio securities, write covered options on
securities, purchase options on securities, sell securities
short against the box, purchase and sell securities on a
when-issued or delayed delivery basis and enter into
interest rate futures contracts and related options.
Equity Index Portfolio
Goal - The Equity Index Portfolio's goal is to provide
investment results that, before deduction of operating
expenses, match the price and yield performance of U.S.
publicly traded common stocks, as measured by the S&P 500.
Investment Policies - Once the Equity Index Portfolio
reaches a sufficient asset size, it will seek to achieve its
goal by owning all 500 stocks in the S&P 500 in proportion
to their actual market capitalization weightings. The
Portfolio will be reviewed daily and will be adjusted, when
necessary, to maintain security weightings as close to those
of the S&P 500 as possible, given the amount of assets in
the Portfolio at that time. The Portfolio may invest up to
5% of its assets in equity securities that are not included
in the S&P 500 if TIMCO believes such investments will
assist the Portfolio in approximating the return of the S&P
500. The Portfolio may use up to an additional 5% of its
assets to enter into stock index futures and related options
to increase efficiency, may lend portfolio securities and
write covered options to help offset operating expenses, and
may acquire money market instruments. Portfolio turnover is
expected to be lower than for most other investment
companies.
No attempt will be made to manage the Portfolio in the
traditional sense using economic, financial and market
analysis, nor will the adverse financial situation of an
issuer necessarily result in the elimination of its
securities from the Portfolio, unless the securities are
removed from the S&P 500. From time to time, administrative
adjustments may be made in the Portfolio because of changes
in the composition of the S&P 500. TIMCO reserves the right
to remove an investment from the Portfolio if, in its
opinion, the merit of the investment has been substantially
impaired by extraordinary events or financial conditions.
The Portfolio will use the S&P 500 as its standard for
performance comparison because the S&P 500 represents
approximately 70% of the total market value of all U.S.
common stocks, is well known to investors and is
representative of the performance of publicly traded U.S.
common stocks.
Growth & Income Portfolio
Goal - The Growth & Income Portfolio's goal is income and
long-term capital growth.
Investment Policies - The Growth & Income Portfolio will
seek to achieve its goal by investing in income-producing
equity securities, including dividend-paying common stocks,
securities that are convertible into common stocks and
warrants. SBMFM has developed quantitative investment
criteria against which prospective investments will be
evaluated and will make buy and sell decisions based on
those criteria. Those criteria establish parameters for
suitable investments and deal with such matters as market
capitalization, credit quality, dividend growth, historic
earnings, current yield and industry diversification. The
criteria, which may be changed by SBMFM in light of its
experience in managing the Portfolio or in response to
changing market or economic conditions, are designed to
identify companies with consistent dividend-paying
histories, relatively high levels of dividends, the capacity
to raise dividends in the future and the potential for
capital appreciation.
Under normal market conditions, the Portfolio will invest
substantially all - but not less than 65% - of its assets in
equity securities. The Portfolio may invest the remainder of
its assets in money market instruments, as well as in
corporate bonds, convertible securities and mortgage-related
securities that are rated investment-grade or are deemed to
be of comparable quality. The Portfolio may enter into
repurchase agreements, lend portfolio securities, enter into
interest rate and stock index futures and related options,
purchase or sell securities on a when-issued or delayed
delivery basis and write covered options.
Appreciation Portfolio
Goal - The Appreciation Portfolio's goal is long-term
appreciation of capital.
Investment Policies - The Appreciation Portfolio will
attempt to achieve its goal by investing primarily in equity
and equity-related securities that are believed to afford
attractive opportunities for appreciation. For example, the
Portfolio may invest in the securities of companies whose
earnings are expected to increase, companies whose
securities prices are lower than are believed justified in
relation to their underlying assets or earning power or
companies in which changes are anticipated that would result
in improved operations or profitability. The Portfolio's
investments will be broadly diversified among different
industries. In analyzing securities for investment, SBMFM
will consider many different factors, including past growth
records, management capability, future earnings prospects
and technological innovation, as well as general market and
economic factors that can influence the price of securities.
Under normal market conditions, substantially all - but not
less than 65% - of the Portfolio's assets will consist of
common stocks, but the Portfolio also may hold securities
convertible into common stocks and warrants. When SBMFM
believes that a conservative or defensive investment posture
is warranted or when opportunities for capital appreciation
do not appear attractive, the Portfolio may invest
temporarily in debt obligations, preferred securities or
short-term money market instruments. The Portfolio may from
time to time lend its portfolio securities and invest in
securities of non-U.S. issuers in the form of depositary
receipts representing interests in the common stocks of
foreign issuers.
Total Return Portfolio
Goal - The Total Return Portfolio's goal is to provide
shareholders with total return, consisting of long-term
capital appreciation and income.
Investment Policies - The Total Return Portfolio will seek
to achieve its goal by investing primarily in a diversified
portfolio of dividend-paying common stocks. The Portfolio
may engage in various portfolio strategies involving options
to seek to increase its return and to hedge its portfolio
against movements in the equity markets and interest rates.
Because the Portfolio seeks total return by emphasizing
investments in dividend-paying common stocks, it will not
have as much investment flexibility as total return funds
which may pursue their objective by investing in both income
and equity stocks without such an emphasis. The Portfolio
also may invest up to 10% of its assets in medium- or low-
rated securities (securities rated less than investment-
grade by Moody's or S&P) or unrated securities of comparable
quality, interest-paying debt securities, such as U.S.
government securities, and other securities, including
convertible bonds, convertible preferred stock and warrants.
In addition, the Portfolio will limit its investments in
warrants to 5% of its net assets. The Portfolio also may
lend its portfolio securities and enter into "short sales
against the box."
International Equity Portfolio
Goal - The International Equity Portfolio's goal is to
provide a total return on its assets from growth of capital
and income.
Investment Policies - Under normal market conditions, the
Portfolio will invest at least 65% of its assets in a
diversified portfolio of equity securities consisting of
dividend and non-dividend paying common stock, preferred
stock, convertible debt and rights and warrants to such
securities and up to 35% of the Portfolio's assets in bonds,
notes and debt securities (consisting of securities issued
in the Euro-currency markets or obligations of the United
States or foreign governments and their political
subdivisions) of established non-United States issuers.
Investments may be made for capital appreciation or for
income or any combination of both for the purpose of
achieving a higher overall return than might otherwise be
obtained solely from investing for growth of capital or for
income. There is no limitation on the percentage or amount
of the Portfolio's assets which may be invested for growth
or income and, therefore, from time to time the investment
emphasis may be placed solely or primarily on growth of
capital or solely or primarily on income. In seeking to
achieve its objective, the Portfolio presently expects to
invest its assets primarily in common stocks of established
non-United States companies which in the opinion of its
investment adviser have potential for growth of capital. In
determining whether the Portfolio will be invested for
capital appreciation or for income or any combination of
both, its investment adviser regularly analyzes a broad
range of international equity and fixed-income markets in
order to assess the degree of risk and level of return that
can be expected from each market.
The Portfolio will generally invest its assets broadly among
countries and will have represented in the portfolio
business activities in not less than three different
countries. Except as stated below, the Portfolio will invest
at least 65% of its assets in companies organized or
governments located in any area of the world other than the
United States, such as the Far East (e.g., Japan, Hong Kong,
Singapore, Malaysia), Western Europe (e.g., the United
Kingdom, Germany, the Netherlands, France, Italy,
Switzerland), Central and South America (e.g., Mexico, Chile
and Venezuela), Australia, Canada and such other areas and
countries as its investment adviser may determine from time
to time. The Portfolio may invest in securities issued by
companies formerly party to the Warsaw Pact. However, under
unusual economic or market conditions as determined by its
investment adviser, for defensive purposes the Portfolio may
temporarily invest all or a major portion of its assets in
U.S. government securities or in debt or equity securities
of companies incorporated in and having their principal
business activities in the United States. To the extent the
Portfolio's assets are invested for temporary defensive
purposes, such assets will not be invested in a manner
designed to achieve the Portfolio's investment objective.
In determining the appropriate distribution of investments
among various countries and geographic regions, the
investment adviser will ordinarily consider the following
factors: prospects for relative economic growth among
countries; expected levels of inflation; government policies
influencing business conditions; the outlook for currency
relationships; and the range of individual investment
opportunities available to international investors. In the
future, if any other relevant factors arise, they will also
be considered. In analyzing companies for investment, the
investment adviser ordinarily looks for one or more of the
following characteristics: an above-average earnings growth
per share; high return on invested capital; healthy balance
sheet; sound financial and accounting policies and overall
financial strength; strong competitive advantages; effective
research and product development and marketing; efficient
service; pricing flexibility; strength of management; and
general operating characteristics which will enable the
company to compete successfully in its market place.
Ordinarily, the Portfolio's investment adviser will not view
a company as being sufficiently well established to be
considered for inclusion in the Portfolio unless the
company, together with any predecessors, has been operating
for at least three fiscal years. It is expected that
securities held by the Portfolio will ordinarily be traded
on a stock exchange or other market in the country in which
the issuer is principally based, but also may be traded on
markets in other countries including, in many cases, the
United States securities exchanges and over-the-counter
markets.
To the extent that the Portfolio's assets are not otherwise
invested as described above, the assets may be held in cash,
in any currency, or invested in U.S., as well as foreign,
high quality money market instruments and their equivalents.
Emerging Growth Portfolio
Goal - The Emerging Growth Portfolio's goal is to provide
capital appreciation.
Investment Policies - The Emerging Growth Portfolio will
seek to invest at least 65% of its total assets in common
stocks of small and medium sized companies, both domestic
and foreign, in the early stages of their life cycle, that
its investment adviser believes have the potential to become
major enterprises. Investments in such companies may offer
greater opportunities for growth of capital than larger,
more established companies, but also may involve certain
special risks. Emerging growth companies often have limited
product lines, markets or financial resources, and they may
be dependent upon one or a few key people for management.
The securities of such companies may be subject to more
abrupt or erratic market movements than securities of
larger, more established companies or the market averages in
general. While the Portfolio will invest primarily in common
stocks, it may invest, to a limited extent, in other
securities such as preferred stocks, convertible securities
and warrants.
The Portfolio will not limit its investments to any single
group or type of security. The Portfolio also may invest in
special situations involving new management, special
products and techniques, unusual developments, mergers or
liquidations. Investments in unseasoned companies and
special situations often involve much greater risks than are
inherent in ordinary investments, because securities of such
companies may be more likely to experience unexpected
fluctuations
in price.
The Portfolio's primary approach is to seek what its
investment adviser believes to be unusually attractive
growth investments on an individual company basis. The
Portfolio may invest in securities that have above average
volatility of price movement. Because prices of common
stocks and other securities fluctuate, the value of an
investment in the Portfolio will vary based upon its
investment performance. The Portfolio attempts to reduce
overall exposure to risk from declines in securities prices
by spreading its investments over many different companies
in a variety of industries. There is, however, no assurance
that the Portfolio will be successful in achieving its
objective.
The Portfolio may invest up to 20% of its total assets in
securities of foreign issuers. Additionally, the Portfolio
may invest up to 15% of the value of its total assets in
restricted securities (i.e., securities which may not be
sold without registration under the Securities Act of 1933)
and in other securities not having readily available market
quotations. The Portfolio may enter into repurchase
agreements with domestic banks and broker-dealers, which
involve certain risks.
Additional Investments
Money Market Instruments
The Money Market Portfolio will invest exclusively in money
market instruments. Each of the remaining Portfolios may, as
a cash management tool, hold up to 20%, except that each of
the Total Return, Emerging Growth and International Equity
Portfolios may invest up to 35%, of the value of its total
assets in cash and invest in short-term instruments and, for
temporary defensive purposes, may hold cash and invest in
short-term instruments without limitation. Short-term
instruments in which the Portfolios may invest include: U.S.
government securities; obligations of banks having at least
$1 billion in assets (including certificates of deposit,
time deposits and bankers' acceptances of U.S. or foreign
banks, U.S. savings and loan associations and similar
institutions); commercial paper rated no lower than A-2 by
S&P or Prime-2 by Moody's or the equivalent from another
NRSRO or, if unrated, of an issuer having an outstanding,
unsecured debt issue then rated within the two highest
rating categories; and repurchase agreements with respect to
any of the foregoing entered into with banks and non-bank
dealers approved by the Fund's Board of Trustees.
The Money Market Portfolio will limit its portfolio
investments to securities that the Fund's Board of Trustees
determines present minimal credit risks and which are
"Eligible Securities" at the time of acquisition by the
Portfolio. The term Eligible Securities includes securities
rated by the "Requisite NRSROs" in one of the two highest
short-term rating categories, securities of issuers that
have received such ratings with respect to other short-term
debt securities and comparable unrated securities.
"Requisite NRSROs" means (a) any two NRSROs that have issued
a rating with respect to a security or class of debt
obligations of an issuer, or (b) one NRSRO, if only one
NRSRO has issued such a rating at the time that the
Portfolio acquires the security. Currently, there are six
NRSROs: S&P, Moody's, Fitch Investors Services, Inc., Duff
and Phelps Credit Rating Co., IBCA Limited and its
affiliate, IBCA, Inc. and Thomson Bankwatch. A discussion of
the ratings categories of the NRSROs is contained in the
Appendix to the Statement of Additional Information.
The Money Market Portfolio generally may not invest more
than 5% of its total assets in the securities of any one
issuer, except for U.S. government securities. In addition,
the Portfolio may not invest more than 5% of its total
assets in Eligible Securities that have not received the
highest rating from the Requisite NRSROs and comparable
unrated securities ("Second Tier Securities") and may not
invest more than 1% of its total assets in the Second Tier
Securities of any one issuer. The Portfolio may invest more
than 5% (but no more than 25%) of the then-current value of
the Portfolio's total assets in the securities of a single
issuer for a period of up to three business days, provided
that (a) the securities either are rated by the Requisite
NRSROs in the highest short-term rating category or are
securities of issuers that have received such rating with
respect to other short-term debt securities or are
comparable unrated securities, and (b) the Portfolio does
not make more than one such investment at any one time.
U.S. Government Securities
The U.S. government securities in which the Portfolios may
invest include: direct obligations of the United States
Treasury (such as Treasury Bills, Treasury Notes and
Treasury Bonds), and obligations issued by U.S. government
agencies and instrumentalities, including securities that
are supported by the full faith and credit of the United
States (such as certificates issued by GNMA); securities
that are supported by the right of the issuer to borrow from
the U.S. Treasury (such as securities of Federal Home Loan
Banks); and securities that are supported only by the credit
of the instrumentality (such as bonds issued by FNMA and
FHLMC). Treasury Bills have maturities of less than one
year, Treasury Notes have maturities of one to ten years and
Treasury Bonds generally have maturities of greater than ten
years at the date of issuance.
The Portfolios may invest up to 5% of their net assets in
U.S. government securities for which the principal repayment
at maturity, while paid in U.S. dollars, is determined by
reference to the exchange rate between the U.S. dollar and
the currency of one or more foreign countries ("Exchange
Rate-Related Securities"). Exchange Rate-Related Securities
are issued in a variety of forms, depending on the structure
of the principal repayment formula. The principal repayment
formula may be structured so that the securityholder will
benefit if a particular foreign currency to which the
security is linked is stable or appreciates against the U.S.
dollar. In the alternative, the principal repayment formula
may be structured so that the securityholder benefits if the
U.S. dollar is stable or appreciates against the linked
foreign currency. Finally, the principal repayment formula
can be a function of more than one currency and, therefore,
be designed in either of the aforementioned forms or a
combination of those forms.
Investments in Exchange Rate-Related Securities entail
special risks. There is the possibility of significant
changes in rates of exchange between the U.S. dollar and any
foreign currency to which an Exchange Rate-Related Security
is linked. If currency exchange rates do not move in the
direction or to the extent anticipated at the time of
purchase of the security, the amount of principal repaid at
maturity might be significantly below the par value of the
security, which might not be offset by the interest earned
by the Portfolios over the term of the security. The rate of
exchange between the U.S. dollar and other currencies is
determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the
international balance of payments and other economic and
financial conditions, government intervention, speculation
and other factors. The imposition or modification of foreign
exchange controls by the United States or foreign
governments or intervention by central banks also could
affect exchange rates. Finally, there is no assurance that
sufficient trading interest to create a liquid secondary
market will exist for particular Exchange
Rate-Related Securities due to conditions in the debt and
foreign currency markets. Illiquidity in the forward foreign
exchange market and the high volatility of the foreign
exchange market may from time to time combine to make it
difficult to sell an Exchange Rate-Related Security prior to
maturity without incurring a significant price loss.
Certain Investment Guidelines
Up to 10% (15% in the case of the International Equity,
Emerging Growth and Total Return Portfolios) of the total
assets of any Portfolio may be invested in securities with
contractual or other restrictions on resale and other
instruments that are not readily marketable, including (a)
repurchase agreements with maturities greater than seven
days, (b) futures contracts and related options for which a
liquid secondary market does not exist and (c) time deposits
maturing in more than seven calendar days. Each Portfolio
may borrow from banks for temporary or emergency purposes,
but not for leverage, in an amount up to 30% of its assets,
and may pledge its assets to the same extent in connection
with such borrowings. Whenever borrowings from banks exceed
5% of the value of the assets of a Portfolio, the Portfolio
will not make any additional investments. The International
Equity Portfolio may borrow for investment purposes,
provided that any transactions constituting borrowing by the
Portfolio may not exceed one-third of its assets. Except for
the limitations on borrowing, the investment guidelines set
forth in this paragraph may be changed at any time without
shareholder consent by vote of the Board of Trustees of the
Fund. A complete list of investment restrictions that
identifies additional restrictions that cannot be changed
without the approval of a majority of an affected
Portfolio's outstanding shares is contained in the Statement
of Additional Information.
Special Considerations and Risk Factors
This section describes certain investments of one or more
Portfolios and related risks. Further information concerning
investments of the Portfolios and related risks may be found
in the Appendix to this Prospectus and in the Statement of
Additional Information.
Fixed-Income Securities
The market value of fixed-income obligations of the
Portfolios will be affected by general changes in interest
rates, which will result in increases or decreases in the
value of fixed-income obligations held by the Portfolios.
The market value of the Portfolios' fixed-income obligations
can be expected to vary inversely in relation to changes in
prevailing interest rates. Investors also should recognize
that in periods of declining interest rates the yield of
income-oriented Portfolios will tend to be somewhat higher
than prevailing market rates, and in periods of rising
interest rates these Portfolios' yield will tend to be
somewhat lower. Also, when interest rates are falling, the
inflow of net new money to these Portfolios from the
continuous sale of their shares probably will be invested in
instruments producing lower yields than the balance of their
holdings, thereby reducing the Portfolios' current yield. In
periods of rising interest rates the opposite can be
expected to occur. In addition, fixed-income securities in
which certain Portfolios may invest may not yield as high a
level of current income as might be achieved by investing in
securities with less liquidity and safety and longer
maturities.
Non-Publicly Traded and Illiquid Securities
Each Portfolio may purchase securities that are not publicly
traded. The sale of securities that are not publicly traded
is typically restricted under federal securities laws. As a
result, a Portfolio may be forced to sell these securities
at less than fair market value or may not be able to sell
them when its investment adviser believes it desirable to do
so. The Portfolios' investments in illiquid securities are
subject to the risk that should a Portfolio desire to sell
any of these securities when a ready buyer is not available
at a price that the Portfolio deems representative of their
value, the value of the Portfolio's net assets could be
adversely affected.
Mortgage-Related Securities
To the extent that a Portfolio purchases mortgage-related
securities at a premium, mortgage foreclosures and
prepayments of principal by mortgagors (which may be made at
any time without penalty) may result in some loss of the
Portfolio's principal investment to the extent of the
premium paid. The yield of a Portfolio that invests in
mortgage-related securities may be affected by reinvestment
of prepayments at higher or lower rates than the original
investment. In addition, like other debt securities, the
values of mortgage-related securities, including government
and government-related mortgage pools, generally will
fluctuate in relation to interest rates.
Government Stripped Mortgage-Backed Securities
The Intermediate High Grade Portfolio may invest up to 10%
of its total assets in government stripped mortgage-backed
securities issued and guaranteed by GNMA, FNMA or FHLMC.
These securities represent beneficial ownership interests in
either periodic principal distributions ("principal-only")
or interest distributions ("interest-only") on mortgage-
backed certificates issued by GNMA, FNMA or FHLMC, as the
case may be. The certificates underlying government stripped
mortgage-backed securities represent all or part of the
beneficial interest in pools of mortgage loans.
Investing in government stripped mortgage-backed securities
involves the risks normally associated with investing in
mortgage-backed securities issued by government or
government-related entities. See "Mortgage-Related
Securities" above. In addition, the yields on government
stripped mortgage-backed securities are extremely sensitive
to the prepayment experience on the mortgage loans
underlying the certificates collateralizing the securities.
If a decline in the level of prevailing interest rates
results in a rate of principal prepayments higher than
anticipated, distributions of principal will be accelerated,
thereby reducing the yield to maturity on interest-only
government stripped mortgage-backed securities and
increasing the yield to maturity on principal-only
government stripped mortgage-backed securities. Sufficiently
high prepayment rates could result in the Portfolio not
fully recovering its initial investment in an interest-only
government stripped mortgage-backed security. Government
stripped mortgage-backed securities are currently traded in
an over-the-counter market maintained by several large
investment banking firms. There can be no assurance that the
Portfolio will be able to effect a trade of a government
stripped mortgage-backed security at a time when it wishes
to do so, although the Portfolio will acquire government
stripped mortgage-backed securities only if a secondary
market for the securities exists at the time of acquisition.
Foreign Securities
Each Portfolio may invest in obligations of companies and
governments of foreign nations, which involve certain risks
in addition to the usual risks inherent in U.S. investments.
These risks include those resulting from revaluation of
currencies, future adverse political and economic
developments and the possible imposition of currency
exchange blockages or other foreign governmental laws or
restrictions, reduced availability of public information
concerning issuers and the lack of uniform accounting,
auditing and financial reporting standards or of other
regulatory practices and requirements comparable to those
applicable to U.S. companies. The performance of a Portfolio
investing in foreign securities may be adversely affected by
fluctuations in value of one or more foreign currencies
relative to the U.S. dollar. Moreover, securities of many
foreign companies may be less liquid and their prices more
volatile than those of securities of comparable U.S.
companies. In addition, with respect to certain foreign
countries, there is the possibility of expropriation,
nationalization, confiscatory taxation and limitations on
the use or removal of funds or other assets of a Portfolio,
including the withholding of dividends. Foreign securities
may be subject to foreign government taxes that could reduce
the return on such securities. Changes in foreign currency
exchange rates may affect the value of portfolio securities
and the appreciation or depreciation of investments.
Investment in foreign securities also may result in higher
expenses due to the cost of converting foreign currency to
U.S. dollars, the payment of fixed brokerage commissions on
foreign exchanges, which generally are higher than
commissions on U.S. exchanges, and the expense of
maintaining securities with foreign custodians.
In addition, the Diversified Strategic Income Portfolio may
invest up to 5% of its total assets in securities traded in
markets of developing countries. A developing country
generally is considered to be a country that is in the
initial stages of its industrialization cycle. Investing in
the equity and fixed-income markets of developing countries
involves exposure to economic structures that are generally
less diverse and mature, and to political systems that can
be expected to have less stability, than those of developed
countries. Historical experience indicates that the markets
of developing countries have been more volatile than the
markets of the more mature economies of developed countries;
however, such markets often have provided higher rates of
return to investors.
Medium-, Lower- and Unrated Securities
The Intermediate High Grade, Diversified Strategic Income,
Equity Income, Growth & Income and Total Return Portfolios
may invest in medium- or lower-rated securities and unrated
securities of comparable quality. Generally, these
securities offer a higher current yield than is offered by
higher-rated securities, but also will likely have some
quality and protective characteristics that, in the judgment
of the rating organizations, are outweighed by large
uncertainties or major risk exposures to adverse conditions
and are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. The market
values of certain of these securities also tend to be more
sensitive to individual corporate developments and changes
in economic conditions than higher-quality securities. In
addition, medium- and lower-rated securities and comparable
unrated securities generally present a higher degree of
credit risk. Issuers of medium-, lower-rated and comparable
unrated securities are often highly leveraged and may not
have more traditional methods of financing available to them
so that their ability to service their debt obligations
during a major economic downturn or during sustained periods
of rising interest rates may be impaired. The risk of loss
due to default by such issuers is significantly greater
because medium- and lower-rated securities and unrated
securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. In
light of these risks, each Portfolio's investment adviser,
in evaluating the creditworthiness of an issue, whether
rated or unrated, will take various factors established by
the Fund's Board of Trustees into consideration, which may
include, as applicable, the issuer's financial resources,
its sensitivity to economic conditions and trends, the
operating history of and the community support for the
facility financed by the issue, the ability of the issuer's
management and regulatory matters.
The markets in which medium- and lower-rated or comparable
unrated securities are traded generally are more limited
than those in which higher-rated securities are traded. The
existence of limited markets for these securities may
restrict the availability of securities for a Portfolio to
purchase and also may have the effect of limiting the
ability of the Portfolio to (a) obtain accurate market
quotations for purposes of valuing securities and
calculating net asset value and (b) sell securities at their
fair value either to meet redemption requests or to respond
to changes in the economy or the financial markets. The
market for medium-, lower-rated and comparable unrated
securities is relatively new and has not fully weathered a
major economic recession. Any such recession, however, would
disrupt severely the market for such securities and
adversely affect the value of such securities, and could
adversely affect the ability of the issuers of such
securities to repay principal and pay interest thereon.
Fixed-income securities, including medium-, lower-rated and
comparable unrated securities, frequently have call or buy-
back features that permit their issuers to call or
repurchase the securities from their holders, such as a
Portfolio. If an issuer exercises these rights during
periods of declining interest rates, the Portfolio may have
to replace the security with a lower yielding security
resulting in a decreased return to the Portfolio.
The market value of securities in lower rating categories is
more volatile than that of higher quality securities, and
the markets in which medium- and lower-rated or comparable
unrated securities are traded are more limited than those in
which higher-rated securities are traded. Adverse publicity
and investor perceptions also may have a negative impact on
the value and liquidity of lower-rated, high yield
securities, especially in a limited trading market.
Subsequent to its purchase by 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. Neither event will require sale of such
securities by the Portfolio involved, but the Portfolio's
investment adviser will consider such event in its
determination of whether the Portfolio should continue to
hold the securities.
Securities that are rated Ba by Moody's or BB by S&P have
speculative characteristics with respect to their capacity
to pay interest and repay principal. Securities that are
rated B generally lack characteristics of the desirable
investment and assurance of interest and principal payments
over any long period of time may be small. Securities that
are rated Caa or CCC are of poor standing. These issues may
be in default or present elements of danger with respect to
principal or interest.
The Diversified Strategic Income Portfolio's holdings (as
rated by S&P) for the fiscal year ended December 31, 1994,
were composed as follows: 0.26% rated BBB; 6.22% rated BB;
20.55% rated B; and 0.83% rated CCC. The percentages were
calculated on a dollar weighted average basis by determining
monthly the percentage of the Portfolio's net assets
invested in each rating category and do not necessarily
indicate what the composition of the Portfolio's holdings
will be in subsequent years.
Concentration
The Money Market Portfolio will concentrate at least 25% of
its assets in the banking industry and the Equity Income
Portfolio will concentrate at least 25% of its assets in the
utility industry, provided that, if, at some future date,
adverse economic conditions prevail in either of those
industries, the relevant Portfolio may temporarily, for
defensive purposes, invest less than 25% of its assets in
the affected industry. Because of its concentration policy,
either of these Portfolios may be subject to greater risk
and market fluctuation than a fund that had securities
representing a broader range of investment alternatives. The
Money Market and Equity Income Portfolios' concentration
policies are fundamental policies that cannot be changed
without the approval of a majority of the relevant
Portfolio's outstanding voting securities.
Securities of Unseasoned Issuers
The Diversified Strategic Income, Total Return,
International Equity and Emerging Growth Portfolios may
invest in securities of unseasoned issuers, which may have
limited marketability and, therefore, may be subject to wide
fluctuations in market value. In addition, certain
securities may lack a significant operating history and may
be dependent on products or services without an established
market share.
Floating and Variable Rate Demand Notes
The Money Market Portfolio may acquire floating and variable
rate demand notes of corporate issuers. Although floating
and variable rate demand notes are frequently not rated by
credit rating agencies, unrated notes purchased by the
Portfolio will be determined by the Portfolio's investment
adviser to be of comparable quality at the time of purchase
to instruments rated "high quality" (i.e., within the two
highest rating categories) by any NRSRO. Moreover, while
there may be no active secondary market with respect to a
particular floating or variable rate demand note purchased
by the Portfolio, the Portfolio may, upon the notice
specified in the note, demand payment of the principal of
and accrued interest on the note at any time and may resell
the note at any time to a third party. The absence of such
an active secondary market, however, could make it difficult
for the Portfolio to dispose of a particular floating or
variable rate demand note in the event the issuer of the
note defaulted on its payment obligations, and the Portfolio
could, for this or other reasons, suffer a loss to the
extent of the default.
Leverage
The International Equity Portfolio may borrow from banks, on
a secured or unsecured basis, up to one-third of the value
of its assets. If the Portfolio borrows and uses the
proceeds to make additional investments, income and
appreciation from such investments will improve its
performance if they exceed the associated borrowing costs
but impair its performance if they are less than such
borrowing costs. This speculative factor is known as
"leverage."
Leverage creates an opportunity for increased returns to
shareholders of the Portfolio but, at the same time, creates
special risk considerations. For example, leverage may
exaggerate changes in the net asset value of the Portfolio's
shares and in the Portfolio's yield. Although the principal
or stated value of such borrowings will be fixed, the
Portfolio's assets may change in value during the time the
borrowing is outstanding. Leverage will create interest or
dividend expenses for the Portfolio which can exceed the
income from the assets retained. To the extent the income or
other gain derived from securities purchased with borrowed
funds exceed the interest or dividends the Portfolio will
have to pay in respect thereof, the Portfolio's net income
or other gain will be greater than if leverage had not been
used. Conversely, if the income or other gain from the
incremental assets is not sufficient to cover the cost of
leverage, the net income or other gain of the Portfolio will
be less than if leverage had not been used. If the amount of
income from the incremental securities is insufficient to
cover the cost of borrowing, securities might have to be
liquidated to obtain required funds. Depending on market or
other conditions, such liquidations could be disadvantageous
to the Portfolio.
Portfolio Transactions
All orders for transactions in securities, options, futures
contracts and options on futures contracts on behalf of the
Portfolios will be placed by their respective investment
advisers with broker-dealers that those advisers select,
including Smith Barney and other affiliated brokers. A
Portfolio may utilize Smith Barney or a Smith Barney-
affiliated broker in connection with a purchase or sale of
securities when the Portfolio's investment adviser believes
that the broker's charge for the transaction does not exceed
usual and customary levels. The same standard applies to the
use of Smith Barney or a Smith Barney-affiliated broker as a
commodities broker in connection with entering into futures
contracts and options on futures contracts.
Net Asset Value
The value of an individual share of a Portfolio is the net
asset value of that share. The net asset value per share of
each Portfolio will be calculated separately on each day,
Monday through Friday, except on days when the New York
Stock Exchange, Inc. (the "NYSE") is closed. The NYSE is
currently scheduled to be closed on New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas, and on the
preceding Friday or subsequent Monday when one of these
holidays falls on a Saturday or Sunday, respectively. Net
asset value per share of each Portfolio is determined as of
the close of regular trading on the NYSE (currently 4:00
p.m., New York time). The Money Market Portfolio seeks to
maintain its net asset value at $1.00 per share.
Net asset value per share is computed by dividing the value
of a Portfolio's net assets by the total number of its
shares outstanding. Generally, a Portfolio's investments are
valued at market value or, in the absence of a market value
with respect to any portfolio securities, at fair value as
determined by or under the direction of the Fund's Board of
Trustees. A security that is primarily traded on a U.S. or
foreign exchange (including securities traded through the
National Market System) is valued at the last sale price on
that exchange or, if there were no sales during the day, at
the current quoted bid price. Portfolio securities that are
primarily traded on foreign exchanges are generally valued
at the preceding closing values of such securities on their
respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely
to have changed the value, then the fair value of those
securities will be determined by consideration of other
factors by or under the direction of the Fund's Board of
Trustees or its delegates. Over-the-counter securities that
are not traded through the National Market System and
securities listed or traded on certain foreign exchanges
whose operations are similar to the U.S. over-the-counter
market are valued on the basis of the bid price at the close
of business on each day. An option is generally valued at
the last sale price or, in the absence of a last sale price,
the last offer price. Investments in U.S. government
securities (other than short-term securities) are valued at
the average of the quoted bid and asked prices in the over-
the-counter market. Short-term investments that mature in 60
days or less are valued at amortized cost when the Fund's
Board of Trustees determines that this constitutes fair
value; assets of the Money Market Portfolio also are valued
at amortized cost. The value of a futures contract equals
the unrealized gain or loss on the contract, which is
determined by marking the contract to the current settlement
price for a like contract acquired on the day on which the
futures contract is being valued. A settlement price may not
be used if the market makes a limit move with respect to the
security, index or currency underlying the futures contract.
In such event, the futures contract will be valued at a fair
market price to be determined by or under the direction of
the Fund's Board of Trustees. Further information regarding
the Fund's valuation policies is contained in the Statement
of
Additional Information.
How to Use the Fund
Investing in the Fund
Shares of the Fund are currently offered exclusively to
Contract owners. To find out which insurance companies offer
Contracts that are eligible to invest in the Fund, call the
Fund at (212) 723-9217. For further information, see the
description provided in the Contract prospectus.
Sales Charges and Surrender Charges
The Fund does not assess any sales charge, either when it
sells or when it redeems shares of a Portfolio. However,
surrender charges that may be assessed under the Contract
are described in the Contract prospectus. Mortality and
expense risk fees and other charges are also described in
the Contract prospectus.
Redeeming and Exchanging Shares
The Fund will redeem shares in response to full or partial
surrenders of a Contract or a transfer of money from one
Portfolio to another. Information on how to transfer funds
is described in the Contract prospectus. Generally, payment
upon redemption will be made within seven days after
receiving a valid redemption request (unless redemption is
suspended or payment is delayed as permitted in accordance
with SEC regulations). The Fund anticipates that, in
accordance with regulatory changes, beginning on or about
June 1, 1995, payment will be made on the third business day
after receipt of proper tender. The Fund will use the net
asset value at the close of trading on the NYSE on the day
the notice of surrender or transfer is received. If the
request is received after the close of trading on the NYSE,
the shares will be redeemed at the net asset value at the
close of the next business day. The value of any redeemed
shares may be more or less than their original purchase
price.
A detailed description of how to surrender the Contract and
transfer money among Portfolios is included in the Contract
prospectus.
Dividends and Taxes
Dividends
Net Investment Income. Dividends and distributions will be
automatically reinvested, without a sales charge, in the
shareholder's account at net asset value in additional
shares of the Portfolio that paid the dividend or
distribution, unless the shareholder instructs the Portfolio
to pay all dividends and distributions in cash. Net
investment income, including dividends on stocks and
interest on bonds or other securities the Fund holds, is
distributed to the shareholders of the Portfolios as
follows:
- - monthly for the Money Market (declared daily), Intermediate
High Grade, Diversified Strategic Income, Total Return and
Equity Income Portfolios;
- - quarterly for the Growth & Income Portfolio; and
- - annually for the Appreciation, Emerging Growth,
International Equity and Equity Index Portfolios.
Capital Gains. Distributions of any net realized capital
gains of the Portfolios will be paid annually shortly after
the close of the fiscal year in which they are earned.
Taxes
In the opinion of counsel to the Fund, each Portfolio will
be treated as a separate taxpayer with the result that, for
federal income tax purposes, the amounts of investment
income and capital gains earned will be determined on a
Portfolio-by-Portfolio (rather than on a Fund-wide) basis.
The Fund intends that each Portfolio will separately meet
the requirements for qualification each year as a "regulated
investment company" within the meaning of the Internal
Revenue Code of 1986, as amended (the "Code"). In order to
qualify as a regulated investment company, each Portfolio
must meet certain income and diversification tests,
including the requirement that it derive less than 30% of
its gross income in each taxable year from the sale or other
disposition of (a) stock or securities held for less than
three months, (b) options, futures or forward contracts
(other than options, futures or forward contracts on foreign
currencies) held for less than three months and (c) foreign
currencies (or options, futures or forward contracts on such
foreign currencies) held for less than three months but only
if such currencies (or options, futures or forward
contracts) are not directly related to the Portfolio's
principal business of investing in stock or securities (or
options or futures with respect to stock or securities). As
a regulated investment company and provided certain
distribution requirements are met, a Portfolio will not be
subject to federal income tax on its net investment income
and net capital gains that it distributes to its
shareholders.
Dividends paid by a Portfolio from taxable investment income
and distributions of short-term capital gains will be
treated as ordinary income in the hands of the shareholders
for federal income tax purposes, whether received in cash or
reinvested in additional shares. Distributions of net long-
term capital gains will be treated as long-term capital
gains in the hands of the shareholders, if certain notice
and designation requirements are satisfied, whether paid in
cash or reinvested in additional shares, regardless of the
length of time the investor has held shares of the
Portfolio. The Fund has been informed that the separate
accounts represented by the Contracts should, for federal
income tax purposes, be considered the shareholders of each
of the Portfolios.
To comply with regulations under Section 817(h) of the Code,
each Portfolio will be required to diversify its investments
so that on the last day of each calendar quarter no more
than 55% of the value of their assets is represented by any
one investment, no more than 70% is represented by any two
investments, no more than 80% is represented by any three
investments and no more than 90% is represented by any four
investments. Generally, all securities of the same issuer
are treated as a single investment. For the purposes of
Section 817(h) of the Code, obligations of the United States
Treasury and each U.S. government agency or instrumentality
are treated as securities of separate issuers. Compliance
with these diversification rules will limit the ability of
the Money Market and Intermediate High Grade Portfolios, in
particular, to invest more than 55% of their assets in
direct obligations of the United States Treasury or to
invest primarily in securities issued by a single agency or
instrumentality of the United States government.
The Treasury Department has indicated that it may issue
future pronouncements addressing the circumstances in which
a variable contract owner's control of the investments of a
separate account may cause the variable contract owner,
rather than the insurance company, to be treated as the
owner of the assets held by the separate account. If the
variable contract owner is considered the owner of the
securities underlying the separate account, income and gains
produced by those securities would be included currently in
the variable contract owner's gross income. It is not known
what standards will be set forth in such pronouncements or
when, if at all, these pronouncements may be issued.
In the event that rules or regulations are adopted, there
can be no assurance that the Portfolios will be able to
operate
as currently described in this Prospectus, or that the Fund
will not have to change the investment goal or investment
policies of a Portfolio. While a Portfolio's investment goal
is fundamental and may be changed only by a vote of a
majority of the Portfolio's outstanding shares, the Fund's
Board of Trustees reserves the right to modify the
investment policies of a Portfolio as necessary to prevent
any such prospective rules and regulations from causing a
Contract owner to be considered the owner of the shares of
the Portfolio.
Reference is made to the Annuity prospectus for information
regarding the federal income tax treatment of distributions.
Management of the Fund
Board of Trustees
Overall responsibility for management and supervision of the
Fund and the Portfolios rests with the Fund's Board of
Trustees. The Trustees approve all significant agreements
between the Fund and the persons or companies that furnish
services to the Fund and its Portfolios, including
agreements with the investment advisers and sub-investment
advisers, administrator and/or sub-administrator of the
Portfolios and with the Fund's custodian, transfer agent and
distributor. The day-to-day operations of the Portfolios are
delegated to the investment advisers and sub-investment
advisers and/or administrator of the Portfolios. The
identities and backgrounds of the Trustees and officers of
the Fund, together with certain additional information about
them, are contained in the Statement of Additional
Information. By virtue of the responsibilities assumed by
the investment advisers, the sub-investment advisers and the
administrator of the Portfolios, the Fund requires no
employees other than its executive officers, none of whom
devotes full time to the affairs of the Fund.
Investment Advisers and Administrator
Each Portfolio's assets are managed separately. Subject to
the supervision and direction of the Fund's Board of
Trustees, the investment adviser of each Portfolio manages
the Portfolio in accordance with the Portfolio's goal or
goals and stated investment policies, makes investment
decisions for the Portfolio, places orders to purchase and
sell securities on behalf of the Portfolio and employs
professional portfolio managers and securities analysts who
provide research services to the Portfolio.
SBMFM, located at 388 Greenwich Street, New York, New York
10013, provides investment advisory and management services
to investment companies affiliated with Smith Barney
holdings Inc. ("Holdings"). Holdings is a wholly owned
subsidiary of The Travelers Inc. ("Travelers"), a
diversified financial services holding company engaged
through its subsidiaries principally in four business
segments: Investment Services, Consumer Finance Services,
Life Insurance Services and Property & Casualty Insurance
Services. SBMFM renders investment advice to investment
companies that had aggregate assets under management as of
March 31, 1995, in excess of $53 billion.
TIMCO, located at One Tower Square, Hartford, CT 06183-2030,
provides investment advisory and management services to
investment companies affiliated with Holdings. TIMCO renders
investment advice to investment companies that had aggregate
assets under management as of March 31, 1995, of
approximately of $935 million.
Global Capital Management, located at 10 Piccadilly, London,
W1V 9LA England, is a wholly owned subsidiary of Holdings.
Global Capital Management is responsible for and selects the
Portfolios' investments in foreign securities and selects
brokers and dealers that execute the Portfolios' investments
in foreign securities. Global Capital Management renders
investment advice to institutional clients and investment
companies with aggregate assets under management, as of
March 31, 1995, in excess of $190 million.
Boston Advisors, located at One Boston Place, Boston,
Massachusetts, 02108, is an indirect wholly owned subsidiary
of Mellon Bank Corporation ("Mellon") and serves as sub-
administrator to each Portfolio. As sub-administrator,
Boston Advisors calculates the net asset values of all
Portfolios and generally assists in all aspects of the
administration and operation of the Portfolios. Boston
Advisors provides investment management, investment advisory
and/or administrative services to investment companies with
aggregate assets under management, as of March 31, 1995, in
excess of $16 billion.
American Capital, located at 2800 Post Oak Boulevard,
Houston, Texas, 77056, is a wholly owned subsidiary of
American Capital Management & Research, Inc., an indirect
wholly owned subsidiary of Van Kampen/American Capital, Inc.
American Capital, together with its predecessors, has been
in the investment advisory business since 1926. As of
February 28, 1995, American Capital provides investment
advice to investment companies with aggregate assets under
management as of March 31, 1995, in excess of approximately
$16 billion.
Portfolio Management
Appreciation Portfolio - Harry D. Cohen is a Vice President
and Investment Officer of the Portfolio and a Managing
Director of Smith Barney. Prior to July 1993, Mr. Cohen
served as Executive Vice President of Shearson Lehman
Brothers Inc. ("Shearson Lehman Brothers").
Diversified Strategic Income Portfolio - James C. Conroy is
a Vice President and Investment Officer of the Portfolio.
Mr. Conroy has served as a Managing Director of SBMFM (and
its predecessors) since October 1989. Prior to that time,
Mr. Conroy served as a Senior Vice President of Bernstein-
Macaulay. John C. Bianchi is a Vice President and Investment
Officer of the Portfolio.
Emerging Growth Portfolio - Gary Lewis has served as a
Portfolio Manager at American Capital Management for over
five years, and as Portfolio Manager for the American
Capital Emerging Growth Fund since April 1989.
Equity Income Portfolio - Jack S. Levande is a Vice
President and Investment Officer of the Fund, and a Managing
Director of SBMFM. Prior to October 1989, Mr. Levande was a
Senior Vice President of E.F. Hutton & Company Inc.
Equity Index Portfolio - Kent A. Kelley is an Investment
Officer of the Portfolio. Mr. Kelley is Chief Executive
Officer and has been with TIMCO since 1986. Mr. Sandip A.
Bhagat is an Investment Officer of the Portfolio and is
President of TIMCO. Mr. Bhagat joined TIMCO in 1987.
Growth & Income Portfolio - R. Jay Gerken has served as a
Managing Director of SBMFM (and its predecessors) since
October 1989. Prior to that time, Mr. Gerken served as a
Senior Vice President of E.F. Hutton & Company Inc. George
V. Novello has served as a Managing Director of SBMFM (and
its predicessors) since September 1990. From January 1990
until September 1990, Mr. Novello served as a Senior Vice
President of Gruntal Financial Corp. Prior to that time, he
served as a Senior Vice President of McKinley Allsopp & Co.
Intermediate High Grade Portfolio - John C. Bianchi is a
Vice President and Investment Officer of the Portfolio. Mr.
Bianchi has served as a Managing Director of SBMFM (and its
predecessors) since October 1989. Prior to that time, Mr.
Bianchi served as Senior Vice President of Bernstein-
Macaulay. G. Ruppert Vernon, Jr. has served as a Vice
President of SBMFM (and its predecessors) since October
1989. Prior to that time, Mr. Vernon served as an Assistant
Vice President of E.F. Hutton & Company Inc.
International Equity Portfolio - Jeffrey Russell has been a
Managing Director at Smith Barney since July 1993. From 1990
until July 1993, Mr. Russell was employed at Smith Barney,
Harris Upham & Co. Incorporated, where he served as Managing
Director from 1991 until July 1993. Prior to 1990, Mr.
Russell served as Corporate Vice President of Drexel Burnham
Lambert Inc.
Total Return Portfolio - John G. Goode has been President
and Chief Executive Officer of what is now the Davis Skaggs
Investment Management Division of SBMFM since 1989. Since
November 1990, Mr. Goode has also been the Portfolio Manager
of the Smith Barney Fundamental Value Fund Inc.
Money Market Portfolio - Phyllis C. Zahorodny is the
Managing Director of Taxable Money Markets at Greenwich St.
Advisors. She joined the Firm in 1980 from Bache Securities.
Portfolio Management
The Fund's management discussion and analysis, and
additional performance information regarding the Portfolios
of the Fund during the fiscal year ended December 31, 1994,
is included in the Annual Report dated December 31, 1994. A
copy of the Annual Report may be obtained upon request
without charge from a Smith Barney Financial Consultant or
by writing or calling the Fund at the address or phone
number listed on page one of this Prospectus.
Custodian and Transfer Agent
Boston Safe, located at One Boston Place, Boston,
Massachusetts, 02108, acts as custodian of the Fund's
investments generally. Boston Safe is a wholly owned
subsidiary of The Boston Company, Inc.
TSSG is located at Exchange Place, Boston, Massachusetts,
02109, and acts as the Fund's transfer and dividend
paying agent.
Distributor
Smith Barney, a subsidiary of Holdings, located at 388
Greenwich Street, New York, New York, 10013, serves as
distributor of the Fund's shares, for which it receives no
separate fee from the Fund. Insurance companies offering the
Contracts pay Smith Barney for the services it provides and
the expenses it bears in distributing the Contracts,
including payment of commissions for sales. Insurance
companies offering the Contracts will bear certain
additional costs in connection with the offering of the
Fund's shares, including the costs of printing and
distributing prospectuses, statements of additional
information and sales literature.
Additional Information
Formation
The Fund was organized on May 13, 1991, under the laws of
the Commonwealth of Massachusetts and is a business entity
commonly known as a "Massachusetts business trust." The Fund
is registered with the SEC as a diversified, open-end
management investment company, as defined in the 1940 Act.
The Fund commenced operations on October 16, 1991, under the
name Shearson Series Fund. On October 14, 1994, the Fund
changed its name to its current name, Smith Barney Series
Fund.
Shares of Beneficial Interest
The Fund offers shares of beneficial interest of separate
series with a par value of $.001 per share. Shares of ten
series have been authorized, which represent the interests
in the ten Portfolios described in this Prospectus. When
matters are submitted for shareholder vote, shareholders of
each Portfolio will have one vote for each full share owned
and proportionate, fractional votes for fractional shares
held.
For a discussion of the rights of Contract owners concerning
the voting of shares, please refer to the Contract
prospectus.
Generally, shares of the Fund vote by individual Portfolio
on all matters except (a) matters affecting only the
interests of one or more of the Portfolios, in which case
only shares of the affected Portfolio or Portfolios would be
entitled to vote, or (b) when the 1940 Act requires that
shares of the Portfolios be voted in the aggregate. All
shares of the Fund vote together as one series for the
election of Trustees. There will normally be no meetings of
shareholders for the purpose of electing Trustees unless
less than a majority of the Trustees holding office have
been elected by shareholders, at which time the Trustees
then in office will call a shareholders' meeting for the
election of Trustees. Any Trustee may be removed from office
upon the vote of shareholders holding at least two-thirds of
the Fund's outstanding shares at a meeting called for that
purpose. The Trustees are required to call such a meeting
upon the written request of shareholders holding at least
10% of the Fund's outstanding shares. In addition,
shareholders who meet certain criteria will be assisted by
the Fund in communicating with other shareholders in seeking
the holding of such a meeting.
The Fund sends to each owner of a Contract a semi-annual
report and an audited annual report, each of which includes
a list of the investment securities held by the Portfolios
at the end of the period covered. Contract owners may make
inquiries regarding the Fund and its Portfolios, including
the current performance of the Portfolios, from a Smith
Barney Financial Consultant.
The Portfolios' Performance
Yield
The Money Market Portfolio may, from time to time, include
the yield and effective yield in advertisements or reports
to shareholders or prospective investors. Current yield for
the Money Market Portfolio will be based on income received
by a hypothetical investment over a given seven-day period
(less expenses accrued during the period), and then
"annualized" (i.e., assuming that the seven-day yield would
be received for fifty-two weeks, stated in terms of an
annual percentage return on the investment). "Effective
yield" for the Money Market Portfolio will be calculated in
a manner similar to that used to calculate yield, but will
reflect the compounding effect of earnings on reinvested
dividends.
For the Diversified Strategic Income Portfolio and the
Intermediate High Grade Portfolio, from time to time, the
Fund may advertise the thirty-day yield. The yield of a
Portfolio refers to the income generated by an investment in
such Portfolio over the thirty-day period identified in the
advertisement and is computed by dividing the net investment
income per share earned by the Portfolio during the period
by the net asset value per share on the last day of the
period. This income is "annualized" by assuming that the
amount of income is generated each month over a one-year
period and is compounded semi-annually. The annualized
income is then shown as a percentage of the net asset value.
Total Return
From time to time, a Portfolio other than the Money Market
Portfolio may advertise its "average annual total return"
over various periods of time. Such total return figure shows
the average percentage change in value of an investment in
the Portfolio from the beginning date of the measuring
period to the end of the measuring period. These figures
reflect changes in the price of the Portfolio's shares and
assume that any income dividends and/or capital gains
distributions made by the Portfolio during the period were
reinvested in shares of the Portfolio. Figures will be given
for recent one-, five- and ten-year periods (if applicable),
and may be given for other periods as well (such as from
commencement of the Portfolio's operations, or on a year-by-
year basis). When considering average annual total return
figures for periods longer than one year, it is important to
note that the relevant Portfolio's annual total return for
any one year in the period might have been greater or less
than the average for the entire period. A Portfolio also may
use "aggregate" total return figures for various periods,
representing the cumulative change in value of an investment
in the Portfolio for the specific period (again reflecting
changes in a Portfolio's share prices and assuming
reinvestment of dividends and distributions). Aggregate
total returns may be shown by means of schedules, charts or
graphs and may indicate subtotals of the various components
of total return (i.e., change in value of initial
investment, income dividends and capital gains
distributions).
It is important to note that yield and total return figures
are based on historical earnings and are not intended to
indicate future performance. The Statement of Additional
Information describes the method used to determine the
Portfolios' yield and total return. Shareholders may make
inquiries regarding a Portfolio, including current yield
quotations or total return figures, to a Smith Barney
Financial Consultant.
In reports or other communications to shareholders or in
advertising material, a Portfolio may compare its
performance with that of other mutual funds as listed in the
rankings prepared by Lipper Analytical Services, Inc. or
similar independent services that monitor the performance of
mutual funds or with other appropriate indices of investment
securities, such as the S&P 500, Salomon Brothers World
Government Bond Index, Lehman Brothers Government Bond Index
and Lehman Brothers Mortgage-Backed Securities Index, with
the Consumer Price Index, Dow Jones Industrial Average or
NASDAQ, or with investment or savings vehicles. The
performance information also may include evaluations of the
Portfolios published by nationally recognized ranking
services and by financial publications that are nationally
recognized, such as Barron's, Business Week, Forbes,
Fortune, Institutional Investor, Investor's Business Daily,
Kiplinger's Personal Finance Magazine, Money, Morningstar
Mutual Fund Values, Mutual Fund Forecaster, The New York
Times, Stranger's Investment Advisor, USA Today, U.S. News &
World Report and The Wall Street Journal. Such comparative
performance information will be stated in the same terms in
which the comparative data or indices are stated. Any such
advertisement also would include the standard performance
information required by the SEC as described above. For
these purposes, the performance of the Portfolios, as well
as the performance of other mutual funds or indices, do not
reflect sales charges, the inclusion of which would reduce a
Portfolio's performance.
A Portfolio may also utilize performance information in
hypothetical illustrations provided in narrative form. These
hypotheticals will be accompanied by the standard
performance information required by the SEC as described
above.
Appendix
Certain Investment Strategies
In attempting to achieve its investment goal or goals, a
Portfolio may employ, among others, one or more of the
strategies set forth below. More detailed information
concerning these strategies and their related risks is
contained in the Statement of Additional Information.
In the future, the Fund may desire to employ additional
investment strategies, including, in the case of Portfolios
not currently authorized to engage in futures activity, such
hedging strategies as entering into futures contracts and
related options. The Fund will do so only upon 60 days'
notice to shareholders of the Portfolios involved and in
conformity with its investment restrictions.
Repurchase Agreements. The Money Market Portfolio will enter
into repurchase agreements with respect to U.S. government
securities and each other Portfolio may engage in repurchase
agreement transactions on portfolio securities, in each case
with banks which are the issuers of instruments acceptable
for purchase by the Portfolio and with certain dealers
listed on the Federal Reserve Bank of New York's list of
reporting dealers. Under the terms of a typical repurchase
agreement, a Portfolio would acquire an underlying debt
obligation for a relatively short period (usually not more
than one week) subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the obligation at
an agreed-upon price and time, thereby determining the yield
during the Portfolio's holding period. This arrangement
results in a fixed rate of return that is not subject to
market fluctuations during the Portfolio's holding period.
The value of the underlying securities will be monitored by
the relevant Portfolio's investment adviser to ensure that
it at least equals at all times the total amount of the
repurchase obligation, including interest. A Portfolio bears
a risk of loss in the event that the other party to a
repurchase agreement defaults on its obligations and the
Portfolio is delayed or prevented from exercising its rights
to dispose of the collateral securities, including the risk
of a possible decline in the value of the underlying
securities during the period while the Portfolio seeks to
assert these rights. Each Portfolio's investment adviser,
acting under the supervision of the Fund's Board of
Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those banks and
dealers with which the Portfolio enters into repurchase
agreements to evaluate potential risks. A repurchase
agreement is considered to be a loan collateralized by the
underlying securities under the 1940 Act.
Lending of Securities. Each Portfolio, other than the Money
Market Portfolio, may lend its portfolio securities to
brokers, dealers and other financial organizations. By
lending its 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. Loans of portfolio securities, if and
when made, by a Portfolio may not exceed 33 1/3% of the
Portfolio's total assets, taken at value. Loans of portfolio
securities will be collateralized by cash, letters of credit
or U.S. government securities, which are maintained at all
times in an amount equal to the current market value of the
loaned securities. Any gain or loss in the market price of
the securities loaned that might occur during the term of
the loan would be for the account of the Portfolio involved.
Futures and Options on Futures. When deemed advisable by
their respective investment advisers, the Intermediate High
Grade, Diversified Strategic Income, Equity Income, Emerging
Growth, International Equity, Total Return and Growth &
Income Portfolios may enter into interest rate futures
contracts; the Equity Index, Emerging Growth, International
Equity, Total Return and Growth & Income Portfolios may
enter into stock index futures contracts; the Diversified
Strategic Income, International Equity and Emerging Growth
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. These transactions will be made solely for the
purpose of hedging against the effects of changes in the
value of portfolio securities due to anticipated changes in
interest rates, market conditions and currency values, as
the case may be. The Equity Index, Emerging Growth,
International Equity and Total Return Portfolios will enter
into futures and options on futures to purchase stock
indices in anticipation of future purchases of securities
("long positions"). All futures and options contracts will
be entered into only when the transactions are economically
appropriate to the reduction of risks inherent in the
management of the Portfolio involved.
An interest rate futures contract provides for the future
sale by one party and the purchase by the other party of a
specified amount of a particular financial instrument (debt
security) at a specified price, date, time and place.
Similarly, a foreign currency futures contract provides for
the future sale by one party and the purchase by another
party of a certain amount of a particular currency at a
specified price, date, time and place. Stock index futures
contracts are based on indices that reflect the market value
of common stock of the firms included in the indices. An
index futures contract is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash
equal to the difference between the value of the index at
the close of the last trading day of the contract and the
price at which the index contract was originally entered
into. An option on an interest rate, stock index or currency
futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a
short position if the option is a put) at a specified
exercise price at any time prior to the expiration date of
the option.
The use of futures contracts and options on futures
contracts as a hedging device involves several risks. There
can be no assurance that there will be a correlation between
price movements in the underlying securities, index or
currency, on the one hand, and price movements in the
securities that are the subject of the hedge, on the other
hand. Positions in futures contracts and options on futures
contracts may be closed out only on the exchange or board of
trade on which they were entered into, and there can be no
assurance that an active market will exist for a particular
contract or option at any particular time.
A Portfolio may not enter into futures and options contracts
for which aggregate initial margin deposits and premiums
paid for unexpired options to establish such positions that
are not bona fide hedging positions (as defined by the
Commodity Futures Trading Commission) exceed 5% of the fair
market value of the Portfolio's assets, after taking into
account unrealized profits and unrealized losses on futures
contracts into which it has entered. With respect to long
positions in futures or options on futures, a Portfolio will
"cover" the position in a manner consistent with SEC
guidance.
When-Issued Securities and Delayed Delivery Transactions.
The Intermediate High Grade, Diversified Strategic Income,
Equity Income, Growth & Income, Total Return, Emerging
Growth and International Equity Portfolios may purchase and
sell securities on a when-issued basis, which calls for the
purchase (or sale) of securities at an agreed-upon price on
a specified future date. A Portfolio will enter into a when-
issued transaction for the purpose of acquiring portfolio
securities and not for the purpose of leverage. In such
transactions, delivery of the securities occurs beyond the
normal settlement periods, but no payment or delivery is
made by, and no interest accrues to, a Portfolio prior to
the actual delivery or payment by the other party to the
transaction. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed delivery
basis, the returns obtained on such securities may be higher
or lower than the returns available in the market on the
dates when the investments are actually delivered to the
buyers. A Portfolio will establish a segregated account
consisting of cash, U.S. government securities or other high-
grade debt obligations in an amount equal to the amount of
its when-issued and delayed delivery commitments. Placing
securities rather than cash in the segregated account may
have a leveraging effect on the Portfolio's net assets. A
Portfolio will not accrue income with respect to a when-
issued security prior to its stated delivery date.
Purchasing Options on Securities and Stock Indices. The
Intermediate High Grade, Diversified Strategic Income, Total
Return, Emerging Growth, International Equity and Equity
Income Portfolios may purchase put and call options that are
traded on a U.S. securities exchange, and the Total Return,
Emerging Growth, International Equity and Diversified
Strategic Income Portfolios also may purchase such options
on foreign exchanges and in the over-the-counter market. The
Portfolios may utilize up to 10% of their respective assets
to purchase put options on portfolio securities and may do
so at or about the same time that they purchase the
underlying security or at a later time. By buying a put, a
Portfolio limits its risk of loss from a decline in the
market value of the underlying security until the put
expires. Any appreciation in the value of and yield
otherwise available from the underlying security, however,
will be partially offset by the amount of the premium paid
for the put option and any related transaction costs. The
Portfolios may utilize up to 10% of their respective assets
to purchase call options on portfolio securities. Call
options may be purchased by a Portfolio in order to acquire
the underlying securities for the Portfolio at a price that
avoids any additional cost that would result from a
substantial increase in the market value of a security. A
Portfolio also may purchase call options to increase its
return to investors at a time when the call is expected to
increase in value due to anticipated appreciation of the
underlying security.
Prior to their expirations, put and call options may be sold
in closing sale transactions (sales by a Portfolio, prior to
the exercise of options that it has purchased, of options of
the same series), and profit or loss from the sale will
depend on whether the amount received is more or less than
the premium paid for the option plus the related transaction
costs.
The Equity Index, Total Return, Emerging Growth and
International Equity Portfolios may purchase call options on
stock indices. The Total Return Portfolio may also write
call options and buy put options on stock indices. Options
on stock indices are similar to options on securities.
However, options on stock indices do not involve the
delivery of an underlying security; rather, the options
represent the holder's right to obtain from the writer in
cash a fixed multiple of the amount by which the exercise
price 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 exercise date.
A stock index measures the movement of a certain group of
stocks by assigning relative values to the common stocks
included in the index. In purchasing put options on a stock
index, the Total Return Portfolio seeks to benefit from a
decline in the value of the stocks underlying the index or
seeks to hedge against the risk of loss on securities that
it holds. In purchasing call options on a stock index, the
Portfolio seeks to participate in an advancing market in
anticipation of becoming more fully invested in equity
securities.
The advisability of using stock index options to hedge
against the risk of marketwide movements will depend on the
extent of diversification of the stock investments of the
Fund and the sensitivity of its stock investments to factors
influencing the underlying index. The effectiveness of
purchasing or writing stock index options as a hedging
technique will depend upon the extent to which price
movements in the Portfolio's securities investments
correlate with price movements in the stock index selected.
Covered Option Writing. The Intermediate High Grade,
Diversified Strategic Income, Equity Income, Equity Index,
Total Return, International Equity, Emerging Growth and
Growth & Income Portfolios may write put and call options on
securities. Each Portfolio realizes fees (referred to as
"premiums") for granting the rights evidenced by the
options. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option
holder an underlying security at a specified price at any
time during the option period. In contrast, a call option
embodies the right of its purchaser to compel the writer of
the option to sell to the option holder an underlying
security at a specified price at any time during the option
period. Thus, the purchaser of a put option written by a
Portfolio has the right to compel the Portfolio to purchase
from it the underlying security at the agreed-upon price for
a specified time period, while the purchaser of a call
option written by a Portfolio has the right to purchase from
the Portfolio the underlying security owned by the Portfolio
at the agreed-upon price for a specified time period.
Upon the exercise of a put option written by a Portfolio,
the Portfolio may suffer a loss equal to the difference
between the price at which the Portfolio is required to
purchase the underlying security plus the premium received
for writing the option and its market value at the time of
the option exercise. Upon the exercise of a call option
written by a Portfolio, the Portfolio may suffer a loss
equal to the difference between the security's market value
at the time of the option exercise less the premium received
for writing the option and the Portfolio's acquisition cost
of the security.
The Portfolios with option-writing authority will write only
covered options. Accordingly, whenever a Portfolio writes a
call option, it will continue to own or have the present
right to acquire the underlying security for as long as it
remains obligated as the writer of the option. To support
its obligation to purchase the underlying security if a put
option is exercised, a Portfolio that has written a put
option will either (a) deposit with Boston Safe in a
segregated account cash, U.S. government securities or other
high grade debt obligations having a value at least equal to
the exercise price of the underlying securities or (b)
continue to own an equivalent number of puts of the same
"series" (that is, puts on the same underlying security
having the same exercise prices and expiration dates as
those written by the Portfolio) or an equivalent number of
puts of the same "class" (that is, puts on the same
underlying security) with exercise prices greater than those
that it has written (or, if the exercise prices of the puts
that it holds are less than the exercise prices of those
that it has written, it will deposit the difference with
Boston Safe in a segregated account).
A Portfolio may engage in a closing purchase transaction to
realize a profit, to prevent an underlying security from
being called or put or, in the case of a call option, to
unfreeze an underlying security (thereby permitting its sale
or the writing of a new option on the security prior to the
outstanding option's expiration). To effect a closing
purchase transaction, a Portfolio would purchase, prior to
the holder's exercise of an option that the Portfolio has
written, an option of the same series as that on which the
Portfolio desires to terminate its obligation. The
obligation of a Portfolio under an option that it has
written would be terminated by a closing purchase
transaction, but the Portfolio would not be deemed to own an
option as the result of the transaction. There can be no
assurance that a Portfolio will be able to effect closing
purchase transactions at a time when it wishes to do so. To
facilitate closing purchase transactions, however, the
Portfolios with option-writing authority ordinarily will
write options only if a secondary market for the options
exists on a U.S. securities exchange or in the over-the-
counter market. The staff of the SEC considers most over-the-
counter options to be illiquid. The ability to terminate
options positions established in the over-the-counter market
may be more limited than in the case of exchange-traded
options and also may involve the risk that securities
dealers participating in such transactions would fail to
meet their obligations to the Portfolio involved.
Short Sales Against the Box. The Equity Income, Total
Return, International Equity and Emerging Growth Portfolios
may make short sales of common stock if, at all times when a
short position is open, the Portfolio owns the stock or owns
preferred stocks or debt securities convertible or
exchangeable into the shares of common stock sold short.
Short sales of this kind are referred to as short sales
"against the box." The broker-dealer that executes a short
sale generally invests cash proceeds of the sale until they
are paid to the Portfolio. Arrangements may be made with the
broker-dealer to obtain a portion of the interest earned by
the broker on the investment of short sale proceeds. The
Portfolio will segregate the common stock or convertible or
exchangeable preferred stock or debt securities in a special
account with Boston Safe.
Forward Roll Transactions. In order to enhance current
income, the Intermediate High Grade and Diversified
Strategic Income Portfolios may enter into forward roll
transactions with respect to mortgage-related securities
issued by GNMA, FNMA and FHLMC. In a forward roll
transaction, a Portfolio sells a mortgage security to a
financial institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase a similar security from
the institution at a later date at an agreed-upon price. The
mortgage securities that are repurchased will bear the same
interest rate as those sold, but generally will be
collateralized by different pools of mortgages with
different prepayment histories than those sold. During the
period between the sale and repurchase, the Portfolio will
not be entitled to receive interest and principal payments
on the securities sold. Proceeds of the sale will be
invested in short-term instruments, particularly repurchase
agreements, and the income from these investments, together
with any additional fee income received on the sale, will
generate income for the Portfolio exceeding the yield on the
securities sold. Forward roll transactions involve the risk
that the market value of the securities sold by a Portfolio
may decline below the repurchase price of those securities.
At the time a Portfolio enters into a forward roll
transaction, it will place in a segregated custodial account
cash, U.S. government securities or high grade debt
obligations having a value equal to the repurchase price
(including accrued interest) and will subsequently monitor
the account to insure that such equivalent value is
maintained. Forward roll transactions are considered to be
borrowings by a Portfolio.
Currency Exchange Transactions and Options on Foreign
Currencies. The Diversified Strategic Income, International
Equity and Emerging Growth Portfolios may engage in currency
exchange transactions and purchase exchange-traded put and
call options on foreign currencies in order to protect
against uncertainty in the level of future currency exchange
rates. The Portfolio will conduct its currency exchange
transactions either on a spot (i.e., cash) basis at the rate
prevailing in the currency exchange market or through
entering into forward contracts to purchase or sell
currencies. The Portfolio's dealings in forward currency
exchange and options on foreign currencies are limited to
hedging involving either specific transactions or portfolio
positions. A forward currency contract involves an
obligation to purchase or sell a specific currency for an
agreed-upon price at a future date, which may be any fixed
number of days from the date of the contract agreed upon by
the parties. These contracts are entered into in the
interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. An
option on a foreign currency gives the purchaser, in return
for a premium, the right to sell, in the case of a put, and
buy, in the case of a call, the underlying currency at a
specified price during the term of the option.
Reverse Repurchase Agreements. The Intermediate High Grade,
Diversified Strategic Income, Equity Income and
International Equity Portfolios may enter into reverse
repurchase agreement transactions with member banks of the
Federal Reserve System or with certain dealers listed on the
Federal Reserve Bank of New York's list of reporting
dealers. A reverse repurchase agreement, which is considered
a borrowing by the Portfolio, involves a sale by the
Portfolio of securities that it holds concurrently with an
agreement by the Portfolio to repurchase the same securities
at an agreed-upon price and date. The Portfolio typically
will invest the proceeds of a reverse repurchase agreement
in money market instruments or repurchase agreements
maturing not later than the expiration of the reverse
repurchase agreement. This use of the proceeds is known as
leverage. The Portfolio will enter into a reverse repurchase
agreement for leverage purposes only when the interest
income to be earned from the investment of the proceeds is
greater than the interest expense of the transaction. The
Portfolio also may use the proceeds of reverse repurchase
agreements to provide liquidity to meet redemption requests
when the sale of the Portfolio's securities is considered to
be disadvantageous. At the time a Portfolio enters into a
reverse repurchase agreement with a broker-dealer (but not a
bank), it will place in a segregated custodial account cash,
U.S. government securities or high grade debt obligations
having a value equal to its obligations under the reverse
repurchase agreements.
Index Strategy. The Equity Index Portfolio will invest in
the common stocks of the companies represented in the S&P
500 with the goal of matching, before deduction of operating
expenses, the price and yield performance of the S&P 500.
The S&P 500 is composed of 500 selected common stocks, most
of which are listed on the NYSE. S&P chooses the stocks to
be included in the S&P 500 solely on a statistical basis.
The S&P 500 is a trademark of S&P and inclusion of a stock
in the S&P 500 in no way implies an opinion by S&P as to its
attractiveness as an investment. S&P is neither a sponsor
nor in any way affiliated with the Portfolio.
The weightings of stocks in the S&P 500 are based on each
stock's relative total market value; that is, its market
price per share times the number of shares outstanding. The
Portfolio's investment adviser generally will select stocks
for the Portfolio in the order of their weightings in the
S&P 500, beginning with the heaviest weighted stocks.
The Portfolio's investment adviser expects that, once the
Portfolio's assets reach $25 million, the correlation
between
the performance of the Index Portfolio and that of the S&P
500 will be above 0.95, with a figure of 1.00 indicating
perfect correlation. Perfect correlation would be achieved
when the Portfolio's net asset value per share increases and
decreases in exact proportion to changes in the S&P 500. The
Portfolio's ability to replicate the performance of the S&P
500 will depend to some extent on the size of cash flows
into and out of the Portfolio. Investment changes to
accommodate these cash flows will be made to maintain the
similarity of the Portfolios' assets to the S&P 500 to the
maximum extent practicable.
Investment in Utility Securities. The Equity Income
Portfolio is subject to risks that are inherent in the
utility industry, including difficulty in obtaining an
adequate return on invested capital, difficulty in financing
large construction programs during an inflationary period,
restrictions on operations and increased cost and delays
attributable to environmental considerations and regulation,
difficulty in raising capital in adequate amounts on
reasonable terms in periods of high inflation and unsettled
capital markets, increased costs and reduced availability of
certain types of fuel, occasionally reduced availability and
high costs of natural gas for resales, the effects of energy
conservation, the effects of a national energy policy and
lengthy delays and greatly increased costs and other
problems associated with the design, construction,
licensing, regulation and operation of nuclear facilities
for electric generation, including, among other
considerations, the problems associated with the use of
radioactive materials and the disposal of radioactive
wastes. Costs incurred by utilities, such as fuel costs, are
subject to immediate market action resulting from political
or military forces operating in geographic regions, such as
the Persian Gulf, where oil production is concentrated,
while the rates of return of utility companies generally are
subject to review and limitation by state public utility
commissions, which results ordinarily in a lag between costs
and return. There are substantial differences between the
regulatory practices and policies of various jurisdictions,
and any given regulatory agency may make major shifts in
policy from time to time. There is no assurance that
regulatory authorities will grant rate increases in the
future or that such increases will be adequate to permit the
payment of dividends on common stocks. Additionally,
existing and possible future regulatory legislation may make
it even more difficult for these utilities to obtain
adequate relief. Certain of the issuers of securities in the
Portfolio may own or operate nuclear generating facilities.
Governmental authorities may from time to time review
existing policies and impose additional requirements
governing the licensing, construction and operation of
nuclear power plants.
Each of the risks referred to above could adversely affect
the ability and inclination of public utilities to declare
or pay dividends and the ability of holders of common stock
to realize any value from the assets of the issuer upon
liquidation or bankruptcy. Many, if not all, of the
utilities that are issuers of the securities expected to be
included in the Portfolio have been experiencing one or more
of these problems in varying degrees. Moreover, price
disparities within selected utility groups and discrepancies
in relation to averages and indices have occurred frequently
for reasons not directly related to the general movements or
price trends of utility common stocks. Causes of these
discrepancies include changes in the overall demand for and
supply of various securities (including the potentially
depressing effect of new stock offerings) and changes in
investment objectives, market expectations or cash
requirements of other purchasers and sellers of securities.
No person has been authorized to give any information or to
make any representations other than those contained in this
Prospectus, the Statement of Additional Information or the
Fund's official sales literature in connection with the
offering of the Fund's shares, and, if given or made, such
other information or representations must not be relied upon
as having been authorized by the Fund. This Prospectus does
not constitute an offer in any state in which, or to any
person to whom, the offer may not lawfully be made.
SMITH BARNEY SERIES FUND
388 Greenwich Street, New York, New York 10013 (212) 723
9218
STATEMENT OF ADDITIONAL INFORMATION
April 29, 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 April 29, 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.
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.
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") 35
Net Asset Value 35
Performance Data (See in the Prospectus "The
Portfolios' Performance") 36
Taxes (See in the Prospectus "Dividends and Taxes") 42
Custodian and Transfer Agent 44
Financial Statements 44
Appendix 45
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-themoney
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-thecounter 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-thecounter 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 Boston Safe Deposit and Trust
Company ("Boston Safe"), 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
adjustablerate 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 Depository
Receipts ("ADRs") and European Depository Receipts
("EDRs"). These securities may not necessarily be
denominated in the same currency as the securities into
which they may be converted. ADRs are receipts
typically issued by a U.S. bank or trust company that
evidence ownership of underlying securities issued by a
foreign corporation. EDRs, which sometimes are referred
to as Continental Depository Receipts ("CDRs"), are
receipts issued in Europe, typically by foreign banks
and trust companies, that evidence ownership of either
foreign or 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 300% 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 onethird of the Portfolio's assets.
In the event that the asset coverage for a
Portfolio's borrowings falls below 300%, 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. dollardenominated 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 subinvestment 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:
Fiscal Year Fiscal Year
Portfolio Ended Ended
December 31, December 31,
1994 1993
Intermediate High Grade 90% 139%
Portfolio
Diversified Strategic 54% 94%
Income Portfolio
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 12% *
Portfolio
_____________________
* Portfolio was not in existence during this period.
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
overthe-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-thecounter 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.
Fiscal Year Ended
December 31, 1994
Brokerage Total Brokerage
Commissions
Portfolio Commissions Paid Paid to
Smith
Barney
Diversified Strategic Income $ 2,515 ------
Portfolio
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 144,755 ------
Portfolio
Fiscal Year Ended
December 31, 1993
Brokerage
Commissions
Paid to
Total Shearson
Lehman
Portfolio Brokerage Brothers Inc.
Commissions and/or Smith
Paid 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 $ 7,413 $
416
Portfolio
Fiscal Year Ended
December 31, 1992
Brokerage
Commission
s
Total Paid to
Portfolio Brokerage Shearson
Commissions Lehman
Paid 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
Equity Growth
Fiscal Year Ended Income & Apprecia
December 31, 1994 Portfoli Income tion
o Portfol Portfoli
io o
% of Total Brokerage
Commission paid to 15.4% 7.8% 5.9%
Smith Barney Inc.
% of Total
Transactions
involving Commissions 13.4% 7.8% 6.0%
paid to Smith Barney
Inc.
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 brokerdealer 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:
Name Service
American Capital Asset
Investment
Adviser to Emerging
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 Portfolios
and International
Equity
Portfolio; Administrator
to each Portfolio
Global Capital Management Sub-
Investment
Adviser to
Diversified
Strategic
Income
Portfolio
The Boston Company Advisors,
Inc. ("Boston Advisors") Sub-Administrator
to
each Portfolio
Smith Barney Inc. Distributor
Boston Safe Custodian
The Shareholder Services Group, Transfer
and Dividend Paying
Inc. ("TSSG"), a subsidiary Agent
of First Data Corporation
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.
Herbert Barg, Trustee (Age 71). Private Investor.
His address is 273 Montgomery Avenue, Bala Cynwyd,
Pennsylvania 19004.
*Alfred J. Bianchetti, Trustee (Age 72).
Retired; formerly Senior Consultant to Dean Witter
Reynolds.
His
address is 19 Circle End Drive, Ramsey, New Jersey 17466.
Martin Brody, Trustee (Age 73). Vice Chairman of
the Board
of Restaurant Associates Industries Corp. and a
Director of Jaclyn, Inc. His address is c/o HNK
Associates, Three ADP Boulevard, Roseland, New Jersey
07068.
Dwight B. Crane, Trustee (Age 57). Professor,
Graduate School of Business Administration, Harvard
University and a Director of Peer Review Analysis, Inc.
His address is c/o Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163.
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.
Stephen E. Kaufman, Trustee (Age 62). Attorney.
His
address is 277 Park Avenue, New York, New York 10172.
Joseph J. McCann, Trustee (Age 64).
Financial Consultant; formerly Vice President of Ryan
Homes, Inc. His address is 200 Oak Park Place, Suite
One, Pittsburgh, PA 15243.
* 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.; 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.
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 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.
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). Portfolio Manager at American Capital
Management. 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.
Alan T. Sachtleben, Vice President and
Investment Officer (Age 52). Senior Vice President -
Chief Investment Officer/Equity and Director of American
Capital. Executive
Vice President and Director, American Capital Management
& Research, Inc. 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 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-ofpocket
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:
Aggregate
Aggregate Compensation
Compensation from the
Trustee from the Fund Smith Barney
Mutual Funds
Burt N. Dorsett (12)* $7,500 $ 34,300
Elliot S. Jaffe (12)* 7,500 33,300
Cornelius C. Rose, Jr. (12)* 7,500 33,300
____________________
* Number of director/trusteeships held with other
mutual
funds in the Smith Barney Mutual Fund family.
Advisers, Sub-Investment Adviser, Administrator and
SubAdministrator
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") and Boston Advisors serves as
sub-administrator to each Portfolio pursuant to a
written agreement ("SubAdministration Agreement")
between the Fund, SBMFM and Boston Advisors. The
Administration Agreement and SubAdministration
Agreement were most recently approved by the Fund's
Board of Trustees, including a majority of the
disinterested Trustees, on July 20, 1994. Prior to May
4, 1994, Boston Advisors served as administrator for
each Portfolio. 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, Boston Advisors under its Sub-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.
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
Boston Advisors are described in the Prospectus under
"Management of the Fund." In addition to those
services, Boston Advisors 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. Boston Advisors 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:
Fiscal Year Fiscal Year Fiscal
Year Portfolio Ended
Ended Ended
December December December
31, 1994 31, 1993 31, 1992
Money Market Portfolio $ 19,592 $
$
7,643
6,123
Intermediate High Grade 49,279
Portfolio 25,734
8,818
Diversified Strategic 238,422 133,663
36,728
Income Portfolio
Equity Income Portfolio 223,055 206,623
62,981
Equity Index Portfolio 38,236
25,538 13,325
Growth & Income 127,450
Portfolio 79,917 28,401
Appreciation Portfolio 444,244 364,632
196,339
Total Return Portfolio 78,167
n/a
419
Emerging Growth 68,528
n/a
Portfolio 431
International Equity 193,164
n/a
Portfolio 1,422
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 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:
Fiscal Year Fiscal Year Fiscal
Year Portfolio Ended Ended Ended
December 31, December 31, December
31, 1994 1993 1992
Money Market Portfolio $ 13,062 $ 5,096 $ 4,082
Intermediate High Grade 24,639 12,867 4,409
Portfolio
Diversified Strategic 105,966 59,406 24,485
Income Portfolio
Equity Income Portfolio 99,135 91,832 27,991
Equity Index Portfolio 19,119 12,769 6,662
Growth & Income 56,644 35,519 12,623
Portfolio
Appreciation Portfolio 161,543 132,593 71,396
Total Return Portfolio 28,424 ------
152
Emerging Growth 18,274 ------
Portfolio 115
International Equity 45,450 ------
Portfolio 335
For the year ended December 31, 1994, the
investment adviser and administrator waived fees to the
Portfolios as follows:
Investment Boston
Portfolio Adviser Advisors
Money Market Portfolio $ 6,198 $ 4,132
Intermediate High Grade 6,939 3,470
Portfolio
Equity Index Portfolio 9,185 4,592
Total Return Portfolio 4,652 1,692
Emerging Growth Portfolio 10,509 2,802
International Equity 14,886 3,503
Portfolio
For the year ended December 31, 1994, IDS
Life reimbursed expenses to the Portfolios as follows:
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:
Investment Boston
Portfolio Adviser Advisors
Money Market Portfolio $ 5,078 $ 3,385
Intermediate High Grade 8,383 4,191
Portfolio
Diversified Strategic 1,544 685
Income Portfolio
Equity Index Portfolio 8,795 4,397
Growth & Income Portfolio 630 280
Total Return Portfolio 419 152
Emerging Growth Portfolio 308 82
International Equity 1,048 246
Portfolio
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:
Money Market Portfolio $17,889
Intermediate High Grade Portfolio 16,459
Diversified Strategic Income 2,816
Portfolio
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
For the year ended December 31, 1992, the
investment advisers and sub-investment adviser waived
fees to the Portfolios then in existence as follows:
Investment Boston
Portfolio Advisers Advisors
Money Market Portfolio $ 4,280 $ 2,853
Intermediate High Grade 5,928 2,964
Portfolio
Diversified Strategic 8,816 5,877
Income Portfolio
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
For the year ended December 31, 1992, IDS
Life reimbursed expenses to the Portfolios then in
existence as follows:
Money Market Portfolio $14,624
Intermediate High Grade Portfolio 15,865
Diversified Strategic Income 25,396
Portfolio
Equity Income Portfolio
19,510
Equity Index Portfolio
31,633
Growth & Income Portfolio
20,683
Appreciation Portfolio
29,950
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, Boston Advisors 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, SBMFM
and Boston Advisors 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, SBMFM and Boston
Advisors, 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. Boston Safe 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 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 offered
by certain insurance companies designated by the Fund
(the "Contract"), 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 a
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 April 29, 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 Contract
prospectus.
Payment upon redemption of shares of a Portfolio
is normally made within seven days of receipt of such
request. The Fund anticipates that, in accordance with
regulatory changes, beginning on or about June 1, 1995,
payment will be made on the third business day after
receipt of proper tender. 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, Boston Advisors as
sub-administrator, 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 Boston Advisors, 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):
Per annum for
the period
from
For the one-year commencement
of Portfolio period ended operations
December 31, through
1994 December 31,
1994
Intermediate High Grade (3.05) % 3.85 % *
Portfolio
Diversified Strategic (2.81) % 3.74 % *
Income Portfolio
Equity Income Portfolio (10.20) % 3.88 % *
Equity Index Portfolio 0.85 % 6.99 % *
Growth & Income (3.20) % 4.77 % *
Portfolio
Appreciation Portfolio (1.12) % 5.27 % *
Total Return Portfolio 7.40 % 9.82 % **
Emerging Growth (7.48) % (3.43) % **
Portfolio
International Equity (8.36) % (7.35) % **
Portfolio
__________________
* Portfolio commenced operations on October 16, 1991.
** Portfolio commenced operations on December 3, 1993.
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):
For the
period
from
For the one-year commencement
of Portfolio period ended operations
December 31, through
1994 December 31,
1994
Intermediate High Grade (3.24) % 2.59 % *
Portfolio
Diversified Strategic (2.81) % 3.52 % *
Income Portfolio
Equity Income Portfolio (10.20)% 3.72 % *
Equity Index Portfolio 0.35 % 5.84 % *
Growth & Income (3.20)% 4.34 % *
Portfolio
Appreciation Portfolio (1.12)% 5.21 % *
Total Return Portfolio 7.30 % 9.53 % **
Emerging Growth (7.55) % (4.06) % **
Portfolio
International Equity (8.36) % (7.53) %
**
Portfolio
_________________________
* Portfolio commenced operations on October 16, 1991.
** Portfolio commenced operations on December 3, 1993.
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):
Per annum for
the period
from
For the one-year commencement
of Portfolio period ended
operations
December 31, through
1994 December 31,
1994
Intermediate High Grade (3.05) % 12.87 % *
Portfolio
Diversified Strategic (2.81) % 12.51 % *
Income Portfolio
Equity Income Portfolio (10.20) % 13.00 % *
Equity Index Portfolio 0.85 % 24.21 % *
Growth & Income (3.20) % 16.11 % *
Portfolio
Appreciation Portfolio (1.12) % 17.92 % *
Total Return Portfolio 7.40 % 10.62 % **
Emerging Growth (7.48) % (3.69) %**
Portfolio
International Equity (8.36) % (7.90) %**
Portfolio
_______________________________
* Portfolio commenced operations on October 16, 1991.
** Portfolio commenced operations on December 3, 1993.
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):
For the period
from
For the one- commencement
of
Portfolio year period operations
ended December through
31, 1994 December
31,
1994
Intermediate High Grade (3.24) % 8.56 % *
Portfolio
Diversified Strategic (2.81) % 11.75 % *
Income Portfolio
Equity Income Portfolio (10.20) % 12.43 % *
Equity Index Portfolio 0.35 % 19.98 % *
Growth & Income Portfolio (3.20) % 14.60 % *
Appreciation Portfolio (1.12) % 17.72 % *
Total Return Portfolio 7.30 % 10.31 %
**
Emerging Growth Portfolio (7.55) % (4.36) %
**
International Equity (8.36) % (8.10) %
**
Portfolio
_________________________________________
* Portfolio commenced operations on October 16,
1991.
** Portfolio commenced operations on December 3,
1993.
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
Boston Safe, a wholly owned subsidiary of TBC, is
located at One Boston Place, Boston, Massachusetts 02108,
and serves as the custodian of the Fund pursuant to a
custodian agreement. Under the custodian agreement, Boston
Safe holds the Fund's portfolio securities and keeps all
necessary accounts and records. For its services, Boston
Safe 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 A2
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.
SMITH BARNEY SHEARSON SERIES FUND
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Report for the fiscal year
ened December 31, 1994 and the
Report of Independent Accountants dated February
10, 1995 are incorporated by
reference to the Definitive 30D filed on March 8,
1995.
Included in Part C:
Consent of Independent Accountants
(b) Exhibits
Exhibit No. Description of Exhibit
All references are to the Registrant's
registration statement on Form N-1A (the
"Registration Statement") as filed with the SEC
on May 16, 1991. (File Nos. 33-40603 and 811-
6310).
(1) Registrant's Master Trust Agreement and Amendment
Nos. 1 and 2 are incorporated by reference to the
Registrant's Registration Statement as filed with
the SEC on December 1, 1993 ("Post-Effective
Amendment No. 6").
(2) By-Laws are incorporated by reference to the
Registration Statement.
(3) Not applicable.
(4)(a) Specimen certificate for shares of beneficial
interest in the Money Market Portfolio is
incorporated by reference to Pre-Effective
Amendment No. 1 to the Registrant's Registration
Statement as filed with the SEC on July 10, 1991
("Pre-Effective Amendment No. 1").
(b) Specimen certificates for shares of beneficial
interest in the Intermediate High Grade Portfolio,
Diversified Strategic Income Portfolio, Equity
Income Portfolio, Equity Index Portfolio, Growth &
Income Portfolio and Appreciation Portfolio is
incorporated by reference to Pre-Effective
Amendment No. 1.
(5)(a) Investment Advisory Agreement dated April 1, 1995
between the Registrant and Travelers Investment
Management Company relating to Equity Index
Portfolio, is filed herein.
(b) Investment Advisory Agreements dated July 30, 1993
between the Registrant and Greenwich Street
Advisors relating to Money Market, Intermediate
High Grade, Diversified Strategic Income, Equity
Income and Growth and Income Portfolios and
between the Registrant and Smith Barney Shearson
Asset Management relating to Appreciation
Portfolio dated July 30, 1993, are incorporated by
reference to Post-Effective Amendment No. 4 to the
Registrant's Registration Statement as filed with
the SEC on October 22, 1993 ("Post Effective
Amendment No. 4").
(b) Investment Advisory Agreement with Smith Barney
Shearson Asset Management relating to Total Return
Portfolio, dated November 23, 1993, is
incorporated by reference to Post-Effective
Amendment No. 6.
(c) Investment Advisory Agreement with Smith, Barney
Advisers, Inc. relating to International Equity
Portfolio, dated November 23, 1993, is
incorporated by reference to Post-Effective
Amendment No. 6.
(d) Investment Advisory Agreement with American
Capital Asset Management, Inc. relating to
Emerging Growth Portfolio, is filed herein.
(e) Form of Investment Advisory Agreement with
Greenwich Street Advisors relating to Diversified
Strategic Income Portfolio dated March 21, 1994 is
incorporated by reference to Post-Effective
Amendment No. 9 to the Registration Statement as
filed with the SEC on May 1, 1994 ("Post-Effective
Amendment No. 9").
(f) Form of Sub-Investment Advisory Agreement with
Smith Barney Global Capital Management Inc.
relating to Diversified Strategic Income Portfolio
dated March 21, 1994 is incorporated by reference
to Post-Effective Amendment No. 9.
(6)(a) Distribution Agreement with Smith Barney
Shearson Inc., dated July 30, 1993, is
incorporated by reference to Post-Effective
Amendment No. 4.
(7) Not Applicable.
(8)(a) Custody Agreement is incorporated by
reference to Post-Effective Amendment No. 1 as
filed with the SEC on February 29, 1992 ("Post-
Effective Amendment No. 1").
(b) Form of Subcustodian Agreement is incorporated by
reference to Pre-Effective Amendment No. 2 to the
Registrant's Registration Statement as filed with
the SEC on September 24, 1991 ("Pre-Effective
Amendment No. 2").
(9)(a) Administration Agreements dated June 4, 1994 with
Smith Barney Mutual Funds Management Inc. relating
to Money Market, Intermediate High Grade,
Diversified Strategic Income, Equity Income,
Equity Index, Growth and Income, Appreciation,
Total Return, Emerging Growth and International
Equity Portfolios are filed herein.
(b) Sub-Administration Agreements dated June 4, 1994
with The Boston Company Advisors, Inc. relating to
Money Market, Intermediate High Grade, Diversified
Strategic Income, Equity Income, Equity Index,
Growth and Income, Appreciation, Total Return,
Emerging Growth and International Equity
Portfolios are filed herein.
(c) Transfer Agency Agreement between the Registrant
and The Shareholder Services Group, Inc. dated
August 2, 1993 is incorporated by reference to
Post-Effective Amendment No. 7 to the Registrant's
Registration Statement as filed with the SEC on
March 1, 1994 ("Post-Effective Amendment No. 7").
(10) Not applicable
(11) Consent of Independent Accountants is filed
herein.
(12) Not Applicable.
(13) Purchase Agreement is incorporated by reference to
Pre-Effective Amendment No. 3.
(14) Not Applicable.
(15) Not Applicable.
(16) Performance Data is incorporated by reference to
Post-Effective Amendment No. 1.
Item 25. Persons Controlled by or under Common Control with
Registrant
Shares of Registrant will be offered to IDS Life
Insurance Company ("IDS Life") and IDS Life Insurance
Company of New York ("IDS Life of New York"),
corporations organized under the laws of the State of
Minnesota, for allocation to one or more separate
subaccounts of the IDS Life Account SBS. IDS Life and
IDS Life of New York are wholly owned subsidiaries of
IDS Financial Corporation, a corporation organized
under the laws of the State of Delaware.
IDS Financial Corporation is a direct wholly owned
subsidiary of American Express Company, a New York
corporation.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record Holders
by Class
Title of Class as of
February 23, 1994
Shares of beneficial interest,
par value $.001 per share
Money Market Portfolio 3
Intermediate High Grade Portfolio
4
Diversified Strategic Income Portfolio
4
Equity Income Portfolio 4
Equity Index Portfolio 5
Growth & Income Portfolio 4
Appreciation Portfolio 4
Total Return Portfolio 3
Emerging Growth Portfolio 2
International Equity Portfolio
4
Item 27. Indemnification
The response to this item is incorporated by reference
to Pre-Effective Amendment No. 3.
Item 28(a.) Business and Other Connections of Investment
Adviser
Investment Adviser - - Smith Barney Mutual Funds Management
Inc. (formerly known as Smith, Barney Advisers, Inc.)
SBMFM was incorporated in 1968 under the laws of the state
of Delaware. SBMFM is a wholly owned subsidiary of Smith
Barney Holdings Inc., which in turn is a wholly owned
subsidiary of The Travelers Inc. (formerly know as Primerica
Corporation) ("Travelers").
The list required by this Item 28 of officers and directors
of SBMFM, together with information as to any other
business, profession, vocation or employment of a
substantial nature engaged in by such officers and directors
during the past two fiscal years, is incorporated by
reference to Schedules A and D of FORM ADV filed by SBMFM
pursuant to the Advisers Act (SEC File No. 801-8314).
Prior to the close of business on July 30, 1993 (the
"Closing"), Smith Barney Asset Management "("Asset
Management") was a member of the Asset Management Group of
Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"),
and served as the Registrant's investment adviser. On the
Closing, Travelers and Smith Barney Shearson Inc. (now known
as Smith Barney Inc.) acquired the domestic retail brokerage
and asset management business of Shearson Lehman Brothers,
which included the business of the Registrant's prior
investment adviser. Shearson Lehman Brothers was a wholly
owned subsidiary of Shearson Lehman Brothers Holdings Inc.
("Shearson Holdings"). All of the issued and outstanding
common stock of Shearson Holdings (representing 92% of the
voting stock) was held by American Express Company.
Information as to any past business vocation or employment
of a substantial nature engaged in by officers and directors
of Asset Management can be located in Schedules A and D of
FORM ADV filed by Shearson Lehman Brothers on behalf of
Asset Management prior to July 30, 1993 (SEC FILE NO. 801-
3701).
01/01/95
Item 28(a). Business and Other Connections of Investment
Adviser
Investment Adviser - - Smith Barney Global Capital
Management, Inc.
Investment Adviser - - Smith Barney Global Capital
Management, Inc. ("SBGCM") was incorporated on January 22,
1988 under the laws of the State of Delaware. SBGCM is an
indirect wholly owned subsidiary of Smith Barney Holdings
Inc., which in turn is a wholly owned subsidiary of
Travelers. SBGCM is an investment adviser registered with
the Securities and Exchange Commission in the United States
and with the Investment Management Regulatory Organization
Limited in the United Kingdom. SBGCM conducts its
operations primarily in the United Kingdom.
The list required by this Item 28 of officers and directors
of SBGCM, together with information as to any other
business, profession, vocation or employment of a
substantial nature engaged in by such officers and directors
during the past two years, is incorporated by reference to
Schedules A and D of FORM ADV filed by SBGCM pursuant to the
Advisers Act (SEC File No. 801-31824).
3/15/94
Item 28(a). Business and Other Connections of Investment
Adviser
Investment Adviser - - American Capital Asset Management,
Inc.
American Capital Asset Management Inc. ("American Capital"),
is located at 2800 Post Oak Boulevard, Houston, Texas 77056,
and through its predecessors, has been in the investment
counseling business since 1926. American Capital is a
wholly owned subsidiary of The Van Kampen Merritt Companies,
Inc.
The list required by this Item 28 of officers and directors
of American Capital, together with information as to any
other business, profession, vocation or employment of a
substantial nature engaged in by such officers and directors
during the past two fiscal years, is incorporated by
reference to Schedules A and D of FORM ADV filed by American
Capital pursuant to the Investment Advisers Act of 1940 (SEC
File No. 801-1169).
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") currently acts as
distributor for Smith Barney Managed Municipals Fund Inc.,
Smith Barney New York Municipals Fund Inc., Smith Barney
California Municipals Fund Inc., Smith Barney
Massachusetts Municipals Fund, Smith Barney Global
Opportunities Fund, Smith Barney Aggressive Growth Fund
Inc., Smith Barney Appreciation Fund Inc., Smith Barney
Worldwide Prime Assets Fund, Smith Barney Principal Return
Fund, Smith Barney Municipal Money Market Fund Inc., Smith
Barney Daily Dividend Fund Inc., Smith Barney Government
and Agencies Fund Inc., Smith Barney Managed Governments
Fund Inc., Smith Barney New York Municipal Money Market
Fund, Smith Barney California Municipal Money Market Fund,
Smith Barney Income Funds, Smith Barney Equity Funds,
Smith Barney Investment Funds Inc., Smith Barney Precious
Metals and Minerals Fund Inc., Smith Barney
Telecommunications Trust, Smith Barney Arizona Municipals
Fund Inc., Smith Barney New Jersey Municipals Fund Inc.,
The USA High Yield Fund N.V., Garzarelli Sector Analysis
Portfolio N.V., The Advisors Fund L.P., Smith Barney
Fundamental Value Fund Inc., Smith Barney Series Fund,
Consulting Group Capital Markets Funds, Smith Barney
Income Trust, Smith Barney FMA R Trust, Smith Barney
Adjustable Rate Government Income Fund, Smith Barney
Florida Municipals Fund, Smith Barney Funds, Inc., Smith
Barney Muni Funds, Smith Barney World Funds, Inc., Smith
Barney Money Funds, Inc., Smith Barney Tax Free Money
Fund, Inc., Smith Barney Variable Account Funds, Smith
Barney U.S. Dollar Reserve Fund (Cayman), Worldwide
Special Fund, N.V., Worldwide Securities Limited,
(Bermuda), and various series of unit investment trusts.
Smith Barney is a wholly owned subsidiary of Smith Barney
Holdings Inc., which in turn is a wholly owned subsidiary
of The Travelers, Inc. (formerly Primerica Corporation).
The information required by this Item 29 with respect to
each director, officer and partner of Smith Barney is
incorporated by reference to Schedule A of FORM BD filed
by Smith Barney pursuant to the Securities Exchange Act of
1934 (SEC File No. 812-8510).
Item 30. Location of Accounts and Records
(1) Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
(Records relating to its function as Investment
Adviser and Administrator)
(2) American Capital Asset Management, Inc.
2800 Post Oak Boulevard
Houston, Texas 77056
(Records relating to its function as Investment
Adviser)
(3) Smith Barney Global Capital Management Inc.
388 Greenwich Street
New York, New York 10048
(Records relating to its function as Sub-
Investment Adviser)
(4) Travelers Investment Management Company
One Tower Square
Hartford, CT 06183-2030
(Records relating to its function as Sub-
Investment Adviser)
(4) The Boston Company Advisors, Inc.
Exchange Place
53 State Street
Boston, Massachusetts 02109
(Records relating to its function as Sub-
Administrator)
(5) Boston Safe Deposit and Trust Company
Wellington Business Center
One Cabot Road
Medford, Massachusetts 02155
(Records relating to its function as Custodian)
(6) The Shareholders Services Group, Inc.
One Exchange Place
53 State Street
Boston, Massachusetts 02109
(Records relating to its function as Transfer
Agent and
Dividend Paying Agent)
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
None
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933, as amended, and the Investment Company Act of 1940, as
amended, the Registrant, SMITH BARNEY SERIES FUND, certifies
that it meets all of the requirements for effectiveness of
this Registration Statement pursuant to Rule 485(b) under
the Securities and Exchange Act of 1933, has duly caused
this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized,
all in the City of New York, State of New York on the 28th
day of April, 1995.
SMITH BARNEY SERIES FUND
By:/s/ Heath B.
McLendon*
Heath B. McLendon, Chairman
of the Board
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933,
as amended, this Amendment to the Registration Statement has been
signed below by the following persons in the capacities and on
the dates indicated.*
Signature Title Date
/s/ Heath B. McLendon
Heath B. McLendon Trustee and Chairman of
the Board (Chief Executive
04/28/95
Officer)
/s/ Lewis E. Daidone
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer)
04/28/95
/s/ Herbert Barg Trustee
04/28/95
Herbert Barg
/s/ Alfred Bianchetti Trustee
04/28/95
Alfred Bianchetti
/s/ Martin Brody Trustee
04/28/95
Martin Brody
/s/ Burt N. Dorsett Trustee
04/28/95
Burt N. Dorsett
/s/ Eliott S. Jaffe Trustee
04/28/95
Eliott S. Jaffe
/s/ Stephen Kaufman Trustee
04/28/95
Stephen Kaufman
/s/ Joseph J. McCann Trustee
04/28/95
Joseph J. McCann
/s/ Cornelius C. Rose*
Cornelius C. Rose Trustee
04/28/95
