Registration No. 3340603
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. 13
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940
Amendment No. 16
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 April 29, 1997 pursuant to Rule 485(b)
[ ] 60 days after filing pursuant to Rule 485(a)
[ ] on ____________ pursuant to Rule 485(a)
____________________________________________________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Share
Title of Amount
Securities being being
Registered Registered
<S> <C>
Appreciation 183,635
Portfolio
Diversified 508,506
Strategic Income
Portfolio
Emerging Growth 75,517
Portfolio
Equity Income 740,373
Portfolio
Growth & Income 217,310
Portfolio
Intermediate 146,929
High Grade
Portfolio
International 142,862
Equity Portfolio
Total Return 52,652
Portfolio
</TABLE>
Appreciation Portfolio
During its fiscal year ended December 31, 1996, the Fund
redeemed 1,094,435 shares of the Appreciation Portfolio.
During its current fiscal year, the Fund used 910,800
shares of the Portfolio it redeemed during the fiscal
year ended December 31, 1996 for a reduction pursuant to
Rule 24f2(c).
The Fund currently is registering 142,862 shares for the
Appreciation Portfolio, which is equal to the remaining
142,862 shares redeemed during its fiscal year ended
December 31, 1996.
Diversified Strategic Income Portfolio
During its fiscal year ended December 31, 1996, the Fund
redeemed 790,515 shares of the Diversified Strategic
Income Portfolio. During its current fiscal year, the
Fund used 282,009 shares of the Portfolio it redeemed
during the fiscal year ended December 31, 1996 for a
reduction pursuant to Rule 24f-2(c).
The Fund currently is registering 508,506 shares for the
Diversified Strategic Income Portfolio, which is equal
to the remaining 508,506 shares redeemed during its fiscal
year ended December 31, 1996.
Emerging Growth Portfolio
During its fiscal year ended December 31, 1996, the Fund
redeemed 243,541 shares of the Equity Income Portfolio.
During its current fiscal year, the Fund used 168,026
shares of the Portfolio it redeemed during the fiscal
year ended December 31, 1996 for a reduction pursuant to
Rule 24f2(c).
The Fund currently is registering 75,515 shares for the
Equity Income Portfolio, which is equal to the remaining
75,515 shares redeemed during its fiscal year ended
December 31, 1996, plus 24,555 shares.
Equity Income Portfolio
During its fiscal year ended December 31, 1996, the Fund
redeemed 797,407 shares of the Equity Income Portfolio.
During its current fiscal year, the Fund used 57,034
shares of the Portfolio it redeemed during the fiscal
year ended December 31, 1996 for a reduction pursuant to
Rule 24f2(c).
The Fund currently is registering 740,373 shares for the
Equity Income Portfolio, which is equal to the remaining
740,373 shares redeemed during its fiscal year ended
December 31, 1996.
Growth & Income Portfolio
During its fiscal year ended December 31, 1996, the Fund
redeemed 352,087 shares of the Growth & Income
Portfolio. During its current fiscal year, the Fund used
134,777 shares of the Portfolio it redeemed during the
fiscal year ended December 31, 1996 for a reduction
pursuant to Rule 24f2(c).
The Fund currently is registering 217,310 shares for
the Growth & Income Portfolio, which is equal to the
remaining 217,310 shares redeemed during its fiscal year
ended December 31, 1996.
Intermediate High Grade Portfolio
During its fiscal year ended December 31, 1996, the Fund
redeemed 260,275 shares of the International Equity
Portfolio. During its current fiscal year, the Fund used
113,346 shares of the Portfolio it redeemed during the
fiscal year ended December 31, 1996 for a reduction
pursuant to Rule 24f-2(c).
The Fund currently is registering 146,929 shares for
the International Equity Portfolio, which is equal to the
remaining 146,929 shares redeemed during its fiscal year
ended December 31, 1996.
International Equity Portfolio
During its fiscal year ended December 31, 1996, the Fund
redeemed 401,765 shares of the International Equity
Portfolio. During its current fiscal year, the Fund used
258,903 shares of the Portfolio it redeemed during the
fiscal year ended December 31, 1996 for a reduction
pursuant to Rule 24f-2(c).
The Fund currently is registering 142,862 shares for
the International Equity Portfolio, which is equal to the
remaining 142,862 shares redeemed during its fiscal year
ended December 31, 1996.
Total Return Portfolio
During its fiscal year ended December 31, 1996, the Fund
redeemed 390,187 shares of the Total Return
Portfolio. During its current fiscal year, the Fund used
337,535 shares of the Portfolio it redeemed during the
fiscal year ended December 31, 1996 for a reduction
pursuant to Rule 24f-2(c).
The Fund currently is registering 52,652 shares for
the Total Return Portfolio, which is equal to the
remaining 52,652 shares redeemed during its fiscal year
ended December 31, 1996.
The Registrant has previously filed a declaration of
indefinite registration of its shares pursuant to Rule
24f2 under the Investment Company Act of 1940, as
amended. Registrant's Rule 24f-2 Notice for the fiscal
year ended December 31, 1996 was filed on February 27,
1996 as Accession Number 0000091155-97-000106.
SMITH BARNEY SERIES FUND
FORM N-1A
CROSS-REFERENCE SHEET
PURSUANT TO RULE 495(b)
Part A Item No. Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Summary
3. Condensed Financial Financial Highlights; The
Information Portfolio's Performance
4. General Description of Cover Page; Investment
Registrant Goals and Policies of the
Portfolio; Additional
Investments; Certain
Investment Guidelines;
Special Considerations
and Risk Factors;
Additional Information
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 Proceedings Not Applicable
Part B. Item No. Statement of Additional
Information
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 and Investment Goals and
Other Practices Policies; Portfolio
Transactions
18. Capital Stock and Other Net Asset Value;
Securities Performance Data
19. Purchase, Redemption and Purchase of Shares;
Pricing of Securities Being Redemptions
Offered
20. Tax Status Taxes
21. Underwriters Management of the Fund
22. Calculations of Performance Data
Performance Data
23. Financial Statements Financial Statements
Part C of Form N-1A
Information required to be included in Part C is set forth under the
appropriate item, so numbered in Part C of this Registration Statement
This Registration Statement contains ten Portfolios of Smith Barney Series
Fund (the "Fund"). Three other versions of Prospectuses will be created from
this Registration Statement. The distribution system for each version of the
Prospectus is different. One version of the Prospectus contains the
Intermediate High Grade Portfolio of the Fund (Version I). The second version
of the Prospectus will contain the Total Return Portfolio of the Fund (Version
II). The third version of the Prospectus will contain the Appreciation
Portfolio of the Fund (Version III). These Prospectuses will be filed
pursuant to Rule 497.
Smith Barney
Series Fund
Prospectus dated April 29, 1997
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-related securities, foreign government bonds and
corporate bonds rated below investment grade.
The Emerging Growth Portfolio's goal is to provide capital appreciation. This
Portfolio invests primarily in common stocks of small and medium-sized
companies, both domestic and foreign, 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 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 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 primarily 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 a
diversified portfolio of 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 because
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 certain information that you should know about the
Fund and each of the Portfolios 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,
1997, 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 contracts (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 SEC OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SEC 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: (800) 451-2010
Contents
Synopsis
3
Expenses of the
Portfolios
5
Investment Goals and Policies of the
Portfolios
11
Additional
Investments
17
Certain Investment
Guidelines
19
Special Considerations and Risk
Factors
19
Portfolio
Transactions
24
Net Asset
Value
24
How to Use the
Fund
25
Dividends and
Taxes
25
Management of the
Fund
27
Portfolio
Management
28
Custodian and Transfer
Agent
29
Distributor
29
Additional
Information
29
The Portfolios'
Performance
30
Appendix
31
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
Smith Barney Mutual Funds
Management Inc.
("SBMFM")
Investment Adviser to the Money Market
Portfolio, the 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
Davis Skaggs Investment Management,
a division of SBMFM ("Davis
Skaggs")
Investment Adviser to the Total Return
Portfolio
Smith Barney Global Capital
Management, Inc.
("Global Capital Management")
Sub-Investment Adviser to the
Diversified Strategic Income Portfolio
Travelers Investment Management
Company
("TIMCO")
Investment Adviser to the Equity Index
Portfolio
Van Kampen American Capital Asset
Management, Inc. ("VKAC")
Investment Adviser to the Emerging
Growth Portfolio
Smith Barney Inc. ("Smith Barney")
Distributor
PNC Bank, National Association
("PNC")
Custodian to all Portfolios except
International Equity Portfolio and
Diversified Strategic Income Portfolio
The Chase Manhattan Bank ("Chase")
Custodian to International Equity
Portfolio and Diversified Strategic
Income Portfolio
First Data Investor Services Group,
Inc.
(the "Transfer Agent")
Transfer and Dividend Paying Agent
The Portfolios pay their respective Investment Advisers an aggregate fee at an
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 - 0.15% ; 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 , except with respect to the Equity
Index Portfolio, for which it is paid a fee at an annual percentage of
0.06% of the value of the Portfolio's average net assets . The 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 unrated, medium- and lower-rated 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 Risk Factors" 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 and 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 for the fiscal years ended December 31, 1996 and
1995 has been audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon appears in the Fund's Annual Report dated December 31, 1996.
The information with respect to the fiscal years ended December 31, 1994,
1993, 1992 and 1991, respectively, has been audited by other auditors, whose
report thereon appears in the Fund's Annual Report dated December 31, 1994.
The information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report to
Shareholders, which is incorporated by reference into the Statement of
Additional Information.
Financial Highlights
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
MONEY MARKET
PORTFOLIO 1996 1995 1994 1993 1992 1991(1)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Income From Operations:
Net investment income(2) 0.047 0.052 0.035 0.023 0.027 0.005
Dividends from net investment
income (0.047) (0.052) (0.035) (0.023) (0.027) (0.005)
Net Asset Value, End of
Year $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Total Return 4.80% 5.31% 3.56% 2.37% 2.75% 0.53%
Net Assets, End of Year
(000's) $5,888 $5,653 $7,141 $3,703 $2,108 $803
Ratios to Average Net Assets:
Expenses(2) 0.75% 0.75% 0.75% 0.75% 0.75% 0.65%
Net investment income 4.70 5.19 3.65 2.34 2.79 3.35
INTERMEDIATE HIGH GRADE
PORTFOLIO 1996 1995 1994 1993 1992 1991(1)
Net Asset Value,
Beginning of Year $10.60 $9.66 $10.69 $10.29 $10.24 $10.00
Income (Loss) From Operations:
Net investment income(2) 0.71 0.66 0.61 0.55 0.45 0.03
Net realized and
unrealized gain (loss) (0.53) 1.00 (0.94) 0.26 0.08 0.21
Total Income (Loss)
From Operations 0.18 1.66 (0.33) 0.81 0.53 0.24
Less Distributions From:
Net investment income (0.08) (0.72) (0.61) (0.36) (0.48)
Net realized gains on
security transactions (0.09) (0.05)
Total Distributions (0.08) (0.72) (0.70) (0.41) (0.48)
Net Asset Value, End of
Year $10.70 $10.60 $9.66 $10.69 $10.29 $10.24
Total Return 1.69% 17.76% (3.05)% 8.00% 5.28% 2.40%
Net Assets, End of Year
(000's) $14,736 $16,152 $13,280 $9,859 $3,621 $697
Ratios to Average Net Assets:
Expenses(2) 0.90% 0.86% 0.85% 0.85% 0.85% 0.80%
Net investment income 6.35 6.63 6.57 5.25 4.75 4.49
Portfolio turnover rate 116% 121% 90% 139% 124%
(1) For the period from October 16, 1991 (commencement of operations) to
December 31, 1991.
(2) For the Money Market Portfolio, the Investment Adviser waived all or
part of its fees for the five-year period ended December 31, 1996 and the
period ended December 31, 1991. In addition, for the Intermediate High
Grade Portfolio, the Investment Adviser waived all or part of its fees for
the five-year period ended December 31, 1996 and the period ended December
31, 1991. For the Money Market Portfolio, IDS Life also reimbursed
expenses of $16,616, $17,889, $14,624 and $5,862 for the three-year period
ended December 31, 1994 and the period ended December 31, 1991. In
addition, for the Intermediate High Grade Portfolio, IDS Life reimbursed
expenses of $3,006, $12,616, $16,459, $15,865 and $5,726 for the four-year
period ended December 31, 1995 and the period ended December 31, 1991. If
such fees had not been waived and expenses reimbursed, the per share effect
on net investment income and the expense ratios would have been as follows:
Per Share Decreases to
Net Investment Income
Portfolio 1996 1995 1994 1993 1992 1991
Money Market $0.005 $0.005 $0.005 $0.014 $0.014 $0.034
Intermediate
High Grade 0.02 0.01 0.02 0.05 0.13 0.17
Expense Ratios Without
Waivers and Reimbursements
1996 1995 1994 1993 1992 1991
Money Market 1.25% 1.21% 1.26% 2.15% 2.18% 21.47%
Intermediate
High Grade 1.07 0.94 1.05 1.36 2.28 26.28
Total return is not annualized, as it may not be representative of the
total return for the year
Annualized
Financial Highlights (continued)
For a share of beneficial interest outstanding throughout each period:
DIVERSIFIED STRATEGIC INCOME
PORTFOLIO 1996 1995 1994 1993 1992 1991(1)
Net Asset Value,
Beginning of Year $10.01 $9.18 $10.07 $9.61 $10.14 $10.00
Income (Loss) From Operations:
Net investment
income(2)(3) 0.88 0.74 0.58 0.70 0.67 0.02
Net realized and
unrealized gain (loss) 0.24 0.70 (0.86) 0.47 (0.53) 0.12
Total Income (Loss) From
Operations 1.12 1.44 (0.28) 1.17 0.14 0.14
Less Distributions From:
Net investment income (0.15) (0.61) (0.58) (0.61) (0.67)
Net realized gains on
security transactions (0.04)
Overdistribution of net
realized gains (0.05)
Capital (0.03) (0.01)
Total Distributions (0.15) (0.061) (0.61) (0.71) (0.67)
Net Asset Value, End of
Year $10.98 $10.01 $9.18 $10.07 $9.61 $10.14
Total Return 11.16% 16.18% (2.81)% 12.56% 1.42% 1.40%
Net Assets, End of Year
(000's) $59,515 $59,316 $55,260 $43,244 $19,991 $3,914
Ratios to Average Net Assets:
Expenses(2) 0.84% 0.90% 0.95% 1.00% 1.00% 0.94%
Net investment income 7.94 7.73 7.31 7.14 7.70 4.57
Portfolio turnover rate 106% 46% 54% 94% 65%
EQUITY INCOME
PORTFOLIO 1996 1995 1994 1993 1992 1991(2)
Net Asset Value,
Beginning of Year $12.35 $9.87 $11.55 $10.90 $10.20 $10.00
Income (Loss) From Operations:
Net investment income(2) 0.63 0.54 0.58 0.53 0.45 0.02
Net realized and
unrealized gain (loss) 0.11 2.56 (1.75) 0.60 0.72 0.18
Total Income (Loss) From
Operations 0.74 3.10 (1.17) 1.13 1.17 0.20
Less Distributions From:
Net investment income (0.08) (0.62) (0.49) (0.47) (0.47)
Net realized gains (0.02) (0.01)
Total Distributions (0.08) (0.62) (0.51) (0.48) (0.47)
Net Asset Value,
End of Year $13.01 $12.35 $9.87 $11.55 $10.90 $10.20
Total Return 5.99% 32.47% (10.20)%10.41% 11.74% 2.00%
Net Assets, End of Year
(000's) $45,616 $52,444 $44,417 $60,160 $25,985 $3,900
Ratios to Average Net Assets:
Expenses(2) 0.77% 0.95% 0.84% 0.87% 1.00% 0.93%
Net investment income 4.53 4.95 5.51 4.54 4.93 4.14
Portfolio turnover rate 28% 33% 21% 4% 4%
Average commissions paid
on equity transactions(4) $0.06 $0.06
(1) For the period from October 16, 1991 (commencement of operations) to
December 31, 1991.
(2) For the Diversified Strategic Income Portfolio, the Investment Adviser
waived all or part of its fees and the two-year period ended December 31,
1993 and the period ended December 31, 1991. In addition, for the Equity
Income Portfolio, the Investment Adviser waived all or part of its fees and
year ended December 31, 1992 and the period ended December 31, 1991. For
the Diversified Strategic Income Portfolio, IDS Life reimbursed expenses of
$2,816, $25,396 and $5,927 for the two-year period ended December 31, 1993
and the period ended December 31, 1991. In addition, for the Equity Income
Portfolio, IDS Life reimbursed expenses of $19,510 and $5,825 for the year
ended December 31, 1992 and the period ended December 31, 1991. If such
fees had not been waived and expenses reimbursed, the per share effect on
net investment income and the expense ratios would have been as follows:
Per Share Decreases to
Net Investment Income
Portfolio 1996 1995 1994 1993 1992 1991
Diversified
Strategic Income N/A N/A N/A $0.00 $0.03 $0.03
Equity Income N/A N/A N/A N/A 0.02 0.03
Expense Ratios Without
Waivers and Reimbursements
1996 1995 1994 1993 1992 1991
Diversified
Strategic Income N/A N/A N/A 1.02% 1.41% 7.76%
Equity Index N/A N/A N/A N/A 1.27 8.34
(3) Includes realized gains and losses from foreign currency transactions
for the four years ended December 31, 1995.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per year.
Amount represents less than $0.01.
Total return is not annualized, as it may not be representative of the
total return for the year
Annualized
Financial Highlights (continued)
For a share of beneficial interest outstanding throughout each period:
EQUITY INDEX
PORTFOLIO 1996 1995 1994 1993 1992 1991(1)
Net Asset Value,
Beginning of Year $15.58 $11.69 $11.90 $11.27 $10.62 $10.00
Income From Operations:
Net investment
income(2) 0.22 0.25 0.23 0.20 0.17 0.04
Net realized and unrealized
gain (loss) 3.17 3.88 (0.14) 0.71 0.55 0.58
Total Income From
Operations 3.39 4.13 0.09 0.91 0.72 0.62
Less Distributions From:
Net investment income (0.23) (0.23) (0.15) (0.16) (0.02)
Net realized gains (0.38) (0.01) (0.15) (0.12) (0.05)
Total Distributions (0.61) (0.24) (0.30) (0.28) (0.07)
Net Asset Value, End of
Year $18.36 $15.58 $11.69 $11.90 $11.27 $10.62
Total Return 21.68% 35.81% 0.85% 8.66% 6.74% 6.20%
Net Assets, End of Year
(000's) $19,258 $15,230 $10,225 $8,842 $4,178 $1,733
Ratios to Average Net Assets:
Expenses(2) 1.06% 1.00% 1.00% 1.00% 1.00% 0.98
Net investment income 1.37% 1.84% 2.10% 1.77% 2.10% 2.91%
Portfolio turnover rate 7% 5% 1% 1% 8%
Average commissions paid
on equity transactions (3) $0.04 $0.05
GROWTH & INCOME
PORTFOLIO 1996 1995 1994 1993 1992 1991(1)
Net Asset Value,
Beginning of Year $13.73 $10.75 $11.37 $10.68 $10.15 $10.00
Income (Loss) From Operations:
Net investment income(2) 0.27 0.26 0.27 0.30 0.27 0.02
Net realized and unrealized
gain (loss) 2.45 2.99 (0.63) 0.67 0.55 0.13
Total Income (Loss) From
Operations 2.72 3.25 (0.36) 0.97 0.82 0.15
Less Distributions From:
Net investment income (0.02) (0.27) (0.26) (0.26) (0.29)
Overdistribution of net
realized gains (0.02)
Capital (0.00)
Total Distributions (0.02) (0.27) (0.26) (0.28) (0.29)
Net Asset Value, End of
Year $16.43 $13.73 $10.75 $11.37 $10.68 $10.15
Total Return 19.83% 30.49% (3.20)% 9.09% 8.44% 1.40%
Net Assets, End of Year
(000's) $38,502 $35,158 $29,625 $25,549 $10,951 $1,904
Ratios to Average Net Assets:
Expenses(2) 0.83% 0.98% 0.93% 1.00% 1.00% 0.90%
Net investment income 1.67% 2.09% 2.52% 2.68% 3.06% 4.14
Portfolio turnover rate 22% 17% 77% 78% 78% 3%
Average commissions paid
on equity transactions (3) $0.06 $0.06
(1) For the period from October 16, 1991 (commencement of operations) to
December 31, 1991.
(2) For the Equity Index Portfolio, the Investment Adviser waived all or
part of its fees for the four-year period ended December 31, 1995 and the
period ended December 31, 1991. In addition, for the Growth & Income
Portfolio, the Investment Adviser waived all or part of its fees for the
two-year period ended December 31, 1993 and the period ended December 31,
1991. For the Equity Index Portfolio, IDS Life also reimbursed expenses of
$6,842, $25,496, $28,169, $31,633 and $7,408 for the four-year period ended
December 31, 1995 and the period ended December 31, 1991. In addition, for
the Growth & Income Portfolio, IDS Life reimbursed expenses of $1,085,
$20,683 and $6,497 for the two-year period ended December 31, 1993 and the
period ended December 31, 1991. If such fees had not been waived and
expenses reimbursed, the per share effect on net investment income and the
expense ratios would have been as follows:
Per Share Decreases to
Net Investment Income
Portfolio 1996 1995 1994 1993 1992 1991
Equity Index N/A $0.02 $0.06 $0.10 $0.15 $0.09
Growth &
Income N/A N/A N/A 0.01 0.06 0.07
Expense Ratios Without
Waivers and Reimbursements
1996 1995 1994 1993 1992 1991
Equity Index 1.17% 1.53% 1.88% 2.89% 7.60%
Growth &
Income N/A N/A N/A 1.01% 1.65% 20.02
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per year.
Amount represents less that $0.01.
Total return is not annualized, as it may not be representative of the
total return for the year.
Annualized
Financial Highlights (continued)
For a share of beneficial interest outstanding throughout each period:
APPRECIATION
PORTFOLIO 1996 1995 1994 1993 1992 1991(1)
Net Asset Value,
Beginning of Year $14.39 $11.54 $11.80 $11.13 $10.49 $10.00
Income (Loss) From Operations:
Net investment income(3) 0.27 0.23 0.20 0.15 0.11 0.01
Net realized and unrealized
gain (loss) 2.60 3.04 (0.32) 0.63 0.53 0.48
Total Income (Loss) From
Operations 2.87 3.27 (0.12) 0.78 0.64 0.49
Less Distributions From:
Net investment income (0.25) (0.21) (0.14) (0.11) 0.00
Net realized gains (1.15) (0.21)
Total Distributions (1.40) (0.42) (0.14) (0.11) (0.00)
Net Asset Value, End of
Year $15.86 $14.39 $11.54 $11.80 $11.13 $10.49
Total Return 19.77% 28.84% (1.12)% 7.03% 6.13% 4.90%
Net Assets, End of Year
(000's) $101,232$94,492 $80,823 $77,843 $53,450 $11,436
Ratios to Average Net Assets:
Expenses(3) 0.85% 0.97% 0.88% 1.01% 1.00% 0.94%
Net investment income 1.59 1.65 1.75 1.35 1.61 3.00
Portfolio turnover rate 39% 43% 61% 33% 14%
Average commissions paid
on equity transactions(4) $0.06 $0.06
EMERGING GROWTH
PORTFOLIO 1996 1995 1994 1993(2)
Net Asset Value,
Beginning of Year $13.76 $9.63 $10.41 $10.00
Income (Loss) From Operations:
Net investment income
(loss)(3) (0.10) (0.03) 0.00 0.01
Net realized and unrealized
gain (loss) 2.55 4.16 (0.78) 0.40
Total Income (Loss) From
Operations 2.45 4.13 (0.78) 0.41
Less Distributions From:
Net investment income 0.00
Net realized gains (0.38)
Total Distributions (0.38)
Net Asset Value, End of
Year 15.83 $13.76 $9.63 $10.41
Total Return 17.83% 42.89% (7.48)% 4.10%
Net Assets, End of Year
(000's) $18,901 $17,463 $11,539 $2,257
Ratios to Average Net Assets:
Expenses(3) 1.27% 1.20% 1.20% 1.05%
Net investment
income (0.64) (0.24) (0.17) 1.37
Portfolio turnover rate 84% 121% 66%
Average commissions paid
on equity transactions (4) $0.05 $0.06
(1) For the period from October 16, 1991 (commencement of operations) to
December 31, 1991.
(2) For the period from December 3, 1993 (commencement of operations) to
December 31, 1993.
(3) For the Appreciation Portfolio, the Investment Adviser waived all or
part of its fees for the year ended December 31, 1992 and the period ended
December 31, 1991. In addition, for the Emerging Growth Portfolio, the
Investment Adviser waived all or part of its fees for the two-year period
ended December 31, 1995 and the period ended December 31, 1993. For the
Appreciation Portfolio, IDS Life reimbursed expenses of $29,950 and $7,264
for the year ended December 31, 1992 and the period ended December 31,
1991. In addition, for the Emerging Growth Portfolio, IDS Life reimbursed
expenses of $5,265, $18,068 and $2,915 for the two-year period ended
December 31, 1995 and the period ended December 31, 1993. If such fees had
not been waived and expenses reimbursed, the per share effect on net
investment income and the expense ratios would have been as follows:
Per Share Decreases to
Net Investment Income
Portfolio 1996 1995 1994 1993 1992 1991
Appreciation N/A N/A N/A N/A $0.01 $0.01
Emerging
Growth N/A $0.02 $0.01 $0.06 N/A N/A
Expense Ratios Without
Waivers and Reimbursements
1996 1995 1994 1993 1992 1991
Appreciation N/A N/A N/A N/A 1.16% 3.64%
Emerging
Growth N/A 1.39% 1.59% 9.99% N/A N/A
(4) As of September 1995 the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
Amount represents less than $0.01.
Total return is not annualized, as it may not be representative of the
total return for the year.
Annualized.
Financial Highlights (continued)
For a share of beneficial interest outstanding throughout each period:
TOTAL RETURN
PORTFOLIO 1996 1995 1994 1993(1)
Net Asset Value,
Beginning of Year $12.75 $10.78 $10.30 $10.00
Income From Operations:
Net investment
income(2) 0.26 0.43 0.34 0.01
Net realized and unrealized
gain (loss) 2.97 2.19 0.42 0.29
Total Income (Loss) From
Operations 3.23 2.62 0.76 0.30
Less Distributions From:
Net investment income (0.07) (0.41) (0.28)
Net realized gains (0.18) (0.24)
Total Distributions (0.25) (0.65) (0.28)
Net Asset Value, End of
Year $15.73 $12.75 $10.78 $10.30
Total Return 25.33% 25.04% 7.40% 3.00%
Net Assets, End of Year
(000's) $171,503$78,042 $23,196 $2,777
Ratios to Average Net Assets:
Expenses(2) 0.83% 1.00% 1.00% 0.85%
Net investment income 3.06 3.80 3.84 1.93
Portfolio turnover rate 82% 81% 118%
Average commissions paid
on equity transactions(3) $0.06 $0.06
INTERNATIONAL EQUITY
PORTFOLIO 1996 1995 1994 1993(1)
Net Asset Value,
Beginning of Year $9.98 $9.21 $10.05 $10.00
Income (Loss) From Operations:
Net investment income
(Loss)(2) (0.02) 0.03 0.00 0.00
Net realized and unrealized
gain (loss) 2.15 0.78 (0.84) 0.05
Total Income (Loss) From
Operations 2.13 0.81 (0.84) 0.05
Less Distributions From:
Net investment income (0.04) (0.04)
Total Distributions (0.04) (0.04)
Net Asset Value, End of
Year $12.07 $9.98 $9.21 $10.05
Total Return 21.38% 8.80% (8.36)% 0.50%
Net Assets, End of Year
(000's) $33,337 $28,979 $28,413 $5,867
Ratios to Average Net Assets:
Expenses(2)(4) 1.35% 1.43% 1.30% 1.08%
Net investment income
(loss) (0.20) 0.35 0.31 (0.51)
Portfolio turnover rate 33% 34% 12%
Average commissions paid
on equity transactions(3) $0.03 $0.01
(1) For the period from December 3, 1993 (commencement of operations) to
December 31, 1993.
(2) For the Total Return Portfolio, the Investment Adviser waived all or
part of its fees for the year ended December 31, 1994 and the period ended
December 31, 1993. In addition, for the International Equity Portfolio,
the Investment Adviser waived all or part of its fees for the year ended
December 31, 1994 and the period ended December 31, 1993. For the Total
Return Portfolio, IDS Life reimbursed expenses of $7,873 and $1,472 for the
year ended December 31, 1994 and the period ended December 31, 1993. In
addition, for the International Equity Portfolio, IDS Life also reimbursed
expenses of $23,712 and $1,902 for the year ended December 31, 1994 and the
period ended December 31, 1993. If such fees had not been waived and
expenses reimbursed, the per share effect on net investment income and the
expense ratios would have been as follows:
Per Share Decreases to
Net Investment Income
Portfolio 1996 1995 1994 1993
Total Return N/A N/A $0.01 $0.02
International
Equity N/A N/A $0.00 $0.02
Expense Ratios Without
Waivers and Reimbursements
1996 1995 1994 1993
Total Return N/A N/A 1.11% 4.14%
International
Equity N/A N/A 1.51% 2.96%
(3) As of September 1995 the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(4) During the period ended December 31, 1995, the Portfolio has earned
credits from the custodian which reduce service fees incurred. If the
credits are taken into consideration, the ratios of expenses to average net
assets would be 1.37%.
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 withdrawals of shares in relation to the fluctuating market values of
the Portfolio.
Amount represents less than $0.01.
Includes realized gains and losses from foreign currency transactions
for the two years ended December 31, 1995 and the period ended December
31,1993
Total Return is not annualized, as it may not be representative of the
total return for the year.
Annualized.
</TABLE>
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 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 Ratings Group ("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 from three to 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 long- or 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 and 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 Adviser, 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 from four to in
excess of 12 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; 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 - The Equity Index Portfolio 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 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 20% 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 depository 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 income and equity securities
without such an emphasis. The Portfolio also may invest up to 10% of its
assets in securities rated less than investment grade by Moody's or S&P or
comparable 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., Hong Kong, Japan, Malaysia and Singapore), Western Europe (e.g.,
France, Germany, Italy, the Netherlands, Switzerland and the United Kingdom),
Central and South America (e.g., Chile, Mexico 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, U.S. 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 seeks 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 does 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 (the "1933
Act")) 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.
Eligible Securities include 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.
Eurodollar or Yankee Obligations
The Money Market Portfolio may invest in Eurodollar and Yankee obligations.
Eurodollar bank obligations are dollar denominated debt obligations issued
outside the U.S. capital markets by foreign branches of U.S. banks and by
foreign banks. Yankee obligations are dollar denominated obligations issued in
the U.S. capital markets by foreign issuers. Eurodollar (and to a limited
extent, Yankee) obligations are subject to certain sovereign risks. One such
risk is the possibility that a foreign government might prevent dollar
denominated funds from flowing across its borders. Other risks include:
adverse political and economic developments in a foreign country; the extent
and quality of government regulation of financial markets and institutions;
the imposition of foreign withholding taxes; and expropriation or
nationalization of foreign issuers.
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 day (or in the case of
the Money Market Portfolio, maturing from two business days through six
months). With respect to the Money Market Portfolio, the above restriction
does not apply to securities subject to Rule 144A of the 1933 Act if two or
more dealers make a market in such securities . 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, while 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 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 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 comparable 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, 1996, were composed as follows: .20% rated
BBB; 12.01% rated BB; 21.86% rated B; and .53% 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, President's 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 mean between the bid and asked prices 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 (800) 451-2010. 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 on the third business day after receiving
a valid redemption request (unless redemption is suspended or payment is
delayed as permitted in accordance with SEC regulations). The Fund will use
the net asset value at the close of trading on the NYSE on the day the notice
of surrender or transfer is received. If the request is received after the
close of trading on the NYSE, the shares will be redeemed at the net asset
value at the close of the next business day. The value of any redeemed shares
may be more or less than their original purchase price.
A detailed description of how to surrender 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 Portfolio;
annually for the Appreciation, Diversified Strategic Income, Emerging
Growth, Equity Income, Equity Index, Growth & Income, Intermediate High
Grade, International Equity, and Total Return 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 its assets is represented by
any one investment, no more than 70% is represented by any two investments, no
more than 80% is represented by any three investments and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For the purposes of Section 817(h)
of the Code, obligations of the United States Treasury and each U.S.
government agency or instrumentality are treated as securities of separate
issuers. 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 U.S. 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 Contract 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/or Sub-Investment Adviser and 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/or Sub-Investment Advisers and 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. 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 Travelers Group 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 1, 1997, in excess of $ 80 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 1, 1997, of approximately of
$1.4 billion.
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 Diversified Strategic Income Portfolio's
investments in foreign securities and selects brokers and dealers that execute
the Portfolio's investments in foreign securities. Global Capital Management
renders investment advice to institutional clients and investment companies
with aggregate assets under management, as of March 1, 1997, of approximately
$ 2.1 billion.
VKAC, located at One Parkview Plaza, Oakwood Terrace, Illinois, 60181, is a
wholly owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is a wholly
owned subsidiary of Morgan Stanley Group Inc.
On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover & Co.
announced that they had entered into an Agreement and Plan of Merger to form a
new company to be named Morgan Stanley, Dean Witter, Discover & Co.
Subsequent to certain conditions being met, it is currently anticipated that
the transaction will close in mid-1997. Thereafter, VKAC will be an indirect
subsidiary of Morgan Stanley Dean Witter, Discover & Co.
VKAC, together with its predecessors, has been in the investment advisory
business since 1926. VKAC provides investment advice to investment companies
and has aggregate assets under management or supervision as of March 1, 1997
in excess of approximately $57 billion.
Portfolio Management
Appreciation Portfolio - Harry D. Cohen is a Vice President and Investment
Officer of the Fund, 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 Fund, and a Managing Director of Smith Barney.
Prior to July 1993, Mr. Conroy served as Managing Director of Shearson Lehman
Brothers. Victor Filatov of Global Capital Management is a Vice President and
Investment Officer of the Fund. Prior to November 1993, Mr. Filatov was a
Vice President of J.P. Morgan Securities, Inc.
Emerging Growth Portfolio - Gary Lewis is a Vice President and Investment
Officer of the Fund, and Senior Vice President of VKAC. Mr. Lewis has been a
Portfolio Manager at VKAC since 1989.
Equity Income Portfolio - Jack S. Levande is a Vice President and Investment
Officer of the Fund, and a Managing Director of Smith Barney. Prior to July
1993, Mr. Levande served as Managing Director of Shearson Lehman Brothers
Equity Index Portfolio - Kent A. Kelley is Chief Executive Officer of TIMCO.
Mr. Kelley joined TIMCO in 1986. Mr. Sandip A. Bhagat is a Vice President and
Investment Officer of the Fund, and President of TIMCO. Mr. Bhagat joined
TIMCO in 1987.
Growth & Income Portfolio - R. Jay Gerken is a Vice President and Investment
Officer of the Fund, and a Managing Director of Smith Barney. Prior to July
1993, Mr. Gerken served as Managing Director of Shearson Lehman Brothers.
George V. Novello is a Vice President and Investment Officer of the Fund, and
a Managing Director of Smith Barney. Prior to July 1993, Mr. Novello served
as Managing Director of Shearson Lehman Brothers.
Intermediate High Grade Portfolio - George Rupert Vernon, Jr. is a Vice
President of Smith Barney. Mr. Vernon is a Fixed Income Portfolio Manager of
Greenwich Street Advisers, a division of SBMFM.
International Equity Portfolio - Jeffrey Russell is a Vice President and
Investment Officer of the Fund, and a Managing Director of Smith Barney.
Total Return Portfolio - John G. Goode is a Vice President and Investment
Officer of the Fund, and Chairman and Chief Investment Officer of Davis Skaggs
Investment Management, a division of SBMFM.
Money Market Portfolio - Phyllis Zahorodny is a Vice President and Investment
Officer of the Fund, and the Managing Director of Taxable Money Markets of
SBMFM.
The Fund's management discussion and analysis, and additional performance
information regarding the Portfolios of the Fund during the fiscal year ended
December 31, 1996, is included in the Annual Report dated December 31, 1996. 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
PNC, located at 17th and Chestnut Streets, Philadelphia, PA 19103, acts as
custodian of the Appreciation, Emerging Growth, Equity Income, Equity Index,
Growth & Income, Intermediate High Grade, Money Market and Total Return
Portfolios' investments generally.
Chase, located at MetroTech Center, Brooklyn, New York 11245, acts as the
custodian of the International Equity and Diversified Strategic Income
Portfolios' investments generally.
The adddress of the Transfer Agent, First Data Investor Services Group, Inc.,
is P.O. Box 5128, Westborough, Massachusetts 01581-5128.
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 July 30, 1993 and October 14, 1994, the Fund changed its name to Smith
Barney Shearson Series Fund and Smith Barney Series Fund, respectively.
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 more than one of the
Portfolios, in which case shares of the affected 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, of 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, of 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 Income, 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, debt obligations of any grade or equity securities in
an amount equal to or greater than the amount of its when-issued and delayed-
delivery commitments, provided such securities have been determined by the
Investment Adviser to be liquid and unencumbered, and are marked to market
daily pursuant to guidelines established by the Trustees. 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 may also 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 the Portfolio's
custodian in a segregated account cash, U.S. government securities, debt
obligations of any grade or equity securities having a value equal to or
greater than the exercise price of the underlying securities, provided such
securities have been determined by the Investment Adviser to be liquid and
unencumbered, and are marked to market daily pursuant to guidelines
established by the Trustees 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 the Portfolio's custodian 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-dealer 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 the
Portfolio's Custodian.
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, debt
obligations of any grade or equity securities having a value equal to or
greater than the repurchase price (including accrued interest) provided such
securities have been determined by the Investment Adviser to be liquid and
unencumbered, and are marked to market daily pursuant to guidelines
established by the Trustees , 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, debt obligations of any grade or equity
securities having a value equal to its obligations under the reverse repurchase
agreements, provided such securities have been determined by the Investment
Adviser to be liquid and unencumbered, and are marked to market daily pursuant
to guidelines established by the Trustees.
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 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 Portfolio's 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.
Symphony
IDS Life Insurance Company
IDS Tower 10
Minneapolis, Minnesota 55440-0010
42
8
SMITH BARNEY SERIES FUND
388 Greenwich Street, New York, New York 10013 (212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION
April 29, 1997
This Statement of Additional Information expands upon and supplements
the information contained in the current Prospectuses of Smith Barney Series
Fund (the "Fund"), relating to one or more of the ten investment portfolios
offered by the Fund (the "Portfolios"), dated April 29, 1997 , 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")
33
Redemption of Shares (See in the Prospectus "How to Use the Fund")
33
Net Asset Value
33
Performance Data (See in the Prospectus "The Portfolios' Performance")
35
Taxes (See in the Prospectus "Dividends and Taxes")
38
Custodian and Transfer Agent
39
Financial Statements
40
Appendix
41
INVESTMENT GOALS AND POLICIES OF THE PORTFOLIOS
The Fund's Prospectuses discuss the investment goals of the 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 ("GNMA"), General Services Administration, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal National
Mortgage Association ("FNMA"), 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 Portfolios' Advisers will
carefully evaluate such investments on a case-by-case basis.
The Money Market Portfolio will not purchase TDs maturing in more than
six months and will limit its investment in TDs maturing from two business
days through six months 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 (the "OTS") and is insured by the Savings
Association Insurance Fund (the "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 OTS 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 Ratings Group ("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 ( Diversified Strategic Income, Equity Income,
Intermediate High Grade and International Equity Portfolios )
The Fund does not currently intend to commit more than 5% of the
Portfolios' 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 (Appreciation, Diversified Strategic Income,
Emerging Growth, Equity Index, Equity Income, Growth & Income, Intermediate
High Grade, International Equity and Total Return Portfolios)
The 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 Prospectuses, 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 (Diversified Strategic Income, Emerging Growth, Equity
Income, Equity Index, Growth & Income, Intermediate High Grade, International
Equity, and Total Return Portfolios)
The Portfolios may engage in the writing of covered put and call options
and may enter into closing transactions. The Intermediate High Grade,
Diversified Strategic Income, Equity Income, Total Return, International
Equity and Emerging Growth Portfolios also may purchase put and call options.
The principal reason for writing covered call options on securities is
to attempt to realize, through the receipt of premiums, a greater return than
would be realized on the securities alone. In return for a premium, the
writer of a covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life of the
option (or until a closing purchase transaction can be effected).
Nevertheless, the call writer retains the risk of a decline in the price of
the underlying security. Similarly, the principal reason for writing covered
put options is to realize income in the form of premiums. The writer of a
covered put option accepts the risk of a decline in the price of the
underlying security. The size of the premiums that a Portfolio may receive
may be adversely affected as new or existing institutions, including other
investment companies, engage in or increase their option-writing activities.
Options written by a Portfolio normally will have expiration dates
between one and nine months from the date written. The exercise price of the
options may be below, equal to or above the market values of the underlying
securities at the times the options are written. In the case of call options,
these exercise prices are referred to as "in-the-money," "at-the-money" and
"out-of-the-money," respectively. A Portfolio may write (a) in-the-money call
options when its Adviser expects that the price of the underlying security
will remain flat or decline moderately during the option period, (b) at-the-
money call options when its Adviser expects that the price of the underlying
security will remain flat or advance moderately during the option period and
(c) out-of-the-money call options when its Adviser expects that the price of
the underlying security may increase but not above a price equal to the sum of
the exercise price plus the premiums received from writing the call option.
In any of the preceding situations, if the market price of the underlying
security declines and the security is sold at this lower price, the amount of
any realized loss will be offset wholly or in part by the premium received.
Out-of-the-money, at-the-money and in-the-money put options (the reverse of
call options as to the relation of exercise price to market price) may be
utilized in the same market environments that such call options are used in
equivalent transactions.
So long as the obligation of a Portfolio as the writer of an option
continues, the Portfolio may be assigned an exercise notice by the broker-
dealer through which the option was sold, requiring the Portfolio to deliver,
in the case of a call, or take delivery of, in the case of a put, the
underlying security against payment of the exercise price. This obligation
terminates when the option expires or the Portfolio effects a closing purchase
transaction. A Portfolio can no longer effect a closing purchase transaction
with respect to an option once it has been assigned an exercise notice. To
secure its obligation to deliver the underlying security when it writes a call
option, or to pay for the underling security when it writes a put option, a
Portfolio will be required to deposit in escrow the underlying security or
other assets in accordance with the rules of the Options Clearing Corporation
("Clearing Corporation") and of the securities exchange on which the option is
written.
An option position may be closed out only where there exists a secondary
market for an option of the same series on a recognized securities exchange or
in the over-the-counter market. In light of this fact and current trading
conditions, the Diversified Strategic Income, Total
Return, International Equity and Emerging Growth Portfolios
expect to purchase not only call or put options issued by the Clearing
Corporation, but also options in the domestic and foreign over-the-counter
markets. Portfolios with the authority to write options expect to do so only
if a secondary market exists on a U.S. securities exchange or in the over-the-
counter market.
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, Emerging Growth, International Equity and
Total Return Portfolios)
The Portfolios may purchase call options on stock indexes listed on U.S.
securities exchanges for the purpose of hedging their portfolios. 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 (Diversified Strategic Income, Emerging Growth, Equity
Income, Equity Index, Growth & Income, Intermediate High Grade, International
Equity and Total Return 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, Emerging Growth and International Equity
Portfolios may enter into foreign currency futures contracts. Each of the
above Portfolios 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. Additionally, if in such
situations the Portfolio has 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 (Diversified
Strategic Income, Emerging Growth, Equity Income, Growth & Income,
Intermediate High Grade, International Equity and Total Return Portfolios)
To secure an advantageous price or yield, these 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 the
Fund's custodian, PNC Bank, National Association ("PNC") (or, in the case of
the International Equity or Diversified Strategic Income Portfolios, The Chase
Manhattan Bank ("Chase," collectively with PNC referred to herein as the
"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 (Diversified Strategic Income, Growth & Income,
and Intermediate High Grade Portfolios)
The mortgage pass-through securities in which these Portfolios may
invest may be backed by adjustable-rate, as well as conventional, mortgages.
Those backed by adjustable-rate mortgages bear interest at a rate that is
adjusted monthly, quarterly or annually. The average maturity of pass-through
pools of mortgage-related securities varies with the maturities of the
underlying mortgage instruments. In addition, a pool's stated maturity may be
shortened by unscheduled payments on the underlying mortgages. Factors
affecting mortgage prepayments include the level of interest rates, general
economic and social conditions, the location of the mortgaged property and the
age of the mortgage. Because prepayment rates of individual mortgage pools
vary widely, it is not possible to accurately predict the average life of a
particular pool. Pools of mortgages with varying maturities or different
characteristics will have varying average life assumptions and the prepayment
experience of securities backed by adjustable-rate mortgages may vary from
those backed by fixed-rate mortgages.
Mortgage-related securities may be classified as private, governmental
or government-related, depending on the issuer or guarantor. Private
mortgage-related securities represent pass-through pools consisting
principally of conventional residential mortgage loans created by non-
governmental issuers, such as commercial banks, savings and loan associations
and private mortgage insurance companies. Government mortgage-related
securities are backed by the full faith and credit of the United States. 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
FNMA and FHLMC. FNMA is a government-sponsored corporation owned entirely by
private stockholders, which is subject to general regulation by the Secretary
of Housing and Urban Development. Pass-through securities issued by FNMA are
guaranteed as to timely payment of principal and interest by FNMA. FHLMC is a
corporate instrumentality of the 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 (Appreciation, Emerging
Growth, Equity Income, Growth & Income, International Equity and Total Return
Portfolios)
The Portfolios may invest in the securities of foreign and U.S. issuers
in the form of American Depositary Receipts ("ADRs") and European Depositary
Receipts ("EDRs"). These securities may not necessarily be denominated in the
same currency as the securities into which they may be converted. ADRs are
receipts typically issued by a U.S. bank or trust company that evidence
ownership of underlying securities issued by a foreign corporation. EDRs,
which sometimes are referred to as Continental Depositary Receipts ("CDRs"),
are receipts issued in Europe, typically by foreign banks and trust companies,
that evidence ownership of either foreign or U.S. securities. Generally, ADRs,
in registered form, are designed for use in U.S. securities markets and EDRs
and CDRs, in bearer form, are designed for use in European securities markets.
Currency Exchange Transactions (Diversified Strategic Income, Emerging Growth,
and International Equity Portfolios)
The 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 the Custodian 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, Emerging Growth and
International Equity Portfolios)
The 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- 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 (Appreciation, Emerging Growth, Equity Income, Growth &
Income, Intermediate High Grade, International Equity and Total Return
Portfolios)
The 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 (Appreciation, Diversified Strategic Income, Emerging Growth,
Equity Income, Intermediate High Grade, International Equity and Total Return
Portfolios)
The 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 (Appreciation, Emerging Growth, Equity Income, Growth & Income,
International Equity and Total Return Portfolios)
The 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 U.S. 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 (the
"1933 Act")) and in other securities that are not readily marketable, including
repurchase agreements maturing in more than seven days. With respect
to the Money Market Portfolio, the above restriction will not apply to
securities subject to Rule 144A if two or more dealers make a market in such
securities. 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 (Emerging Growth, Equity Income, International
Equity and Total Return Portfolios)
The 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. The extent to which
the Portfolio may make short sales of common stock may be limited by the
requirements contained in Section 401(a) of the Internal Revenue Code of 1986,
as amended (the "Code"), for qualification as a regulated investment company.
Investment Restrictions
The investment restrictions numbered 1 through 14 have been adopted by
the Fund with respect to the Portfolios as fundamental policies for the
protection of shareholders. Under the 1940 Act, a Portfolio's fundamental
policy may not be changed without the vote of a "majority" of the outstanding
voting securities of that Portfolio. "Majority" is defined in the 1940 Act as
the lesser of (a) 67% or more of the shares present at a Fund meeting, if the
holders of more than 50% of the outstanding shares of that Portfolio are
present or represented by proxy, or (b) more than 50% of the outstanding
shares. A fundamental policy affecting a particular Portfolio may not be
changed without the vote of a majority of the outstanding shares of that
Portfolio. Investment restrictions 15 through 21 are non-fundamental policies
and may be changed by vote of a majority of the Fund's Board of Trustees at
any time.
The investment policies adopted by the Fund prohibit a Portfolio from:
1. Purchasing the securities of any issuer (other than U.S. government
securities) if as a result more than 5% of the value of the Portfolio's total
assets would be invested in the securities of the issuer, except that, with
respect to each Portfolio other than the Money Market Portfolio, up to 25% of
the value of the Portfolio's total assets may be invested without regard to
this 5% limitation.
2. Purchasing more than 10% of the voting securities of any one issuer
or more than 10% of the securities of any class of any one issuer; provided
that this limitation shall not apply to investments in U.S. government
securities.
3. Purchasing securities on margin, except that the Portfolio may
obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or payment
of initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin.
4. Making short sales of securities or maintaining a short position,
except for short sales against the box.
5. Borrowing money or issuing senior securities, except that (a) the
Portfolio may borrow from banks for temporary or emergency (not leveraging)
purposes including the meeting of redemption requests that might otherwise
require the untimely disposition of securities in an amount not exceeding 30%
of the value of the Portfolio's total assets (including the amount borrowed),
valued at market less liabilities (not including the amount borrowed) at the
time the borrowing is made, (b) one or more of the Portfolios may enter into
futures contracts, reverse repurchase agreements and forward roll transactions
and (c) the International Equity Portfolio may borrow up to one-third of the
Portfolio's assets. In the event that the asset coverage for a Portfolio's
borrowings falls below 30%, the Portfolio would reduce, within three days
(excluding Saturdays, Sundays and holidays), the amount of its borrowings in
order to provide for 30% asset coverage. Whenever borrowings pursuant to (a)
above exceed 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 1933 Act, as amended, by
virtue of disposing of portfolio securities.
8. Purchasing or selling real estate or interests in real estate,
except that the Portfolio may purchase and sell securities that are secured,
directly or indirectly, by real estate and may purchase securities issued by
companies that invest or deal in real estate.
9. Investing in commodities, except that one or more of the Portfolios
may invest in futures contracts and options on futures contracts.
10. Investing in oil, gas or other mineral exploration or development
programs, except that the Portfolios may invest in the securities of companies
that invest in or sponsor these programs.
11. Making loans to others, except through the purchase of qualified
debt obligations, loans of portfolio securities and entry into repurchase
agreements.
12. Investing in securities of other investment companies registered or
required to be registered under the 1940 Act, except as they may be acquired
as part of a merger, consolidation, reorganization, acquisition of assets or
an offer of exchange or as otherwise permitted by law.
13. Purchasing any securities that would cause more than 25% of the
value of the Portfolio's total assets at the time of purchase to be invested
in the securities of issuers conducting their principal business activities in
the same industry; provided that this limitation shall not apply to the
purchase of (a) U.S. government securities or (b) with respect to the Money
Market Portfolio, U.S. dollar-denominated bank instruments such as CDs, TDs,
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. With
respect to the Money Market Portfolio, this restriction will not apply to
securities subject to Rule 144A of the 1933 Act if two or more dealers make
a market in such securities.
16. Investing more than 10% of its total assets in time deposits
maturing in more than seven calendar days (in the case of the Money
Market Portfolio, time deposits maturing from two business days through
six months) .
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.)
18. Making investments for the purpose of exercising control or
management.
19. Purchasing or retaining securities of any company if, to the
knowledge of the Fund, any of the Fund's officers or Trustees or any officer
or director of an Adviser or sub-investment adviser individually owns more
than 1/2 of 1% of the outstanding securities of such company and together they
own beneficially more than 5% of the securities.
20. Investing in warrants (except as permitted under the Portfolio's
investment goals and policies or other than warrants acquired by the Portfolio
as part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed
5% of the value of the Portfolio's net assets or if, as a result, more than 2%
(5% in the case of the International Equity Portfolio) of the Portfolio's net
assets would be invested in warrants not listed on a recognized U.S. or
foreign exchange to the extent permitted by applicable state securities laws.
21. With regard to the Equity Income Portfolio, purchase 10% or more of
the voting securities of a public utility or public utility holding company,
so as to become a public utility holding company as defined in the Public
Utility Holding Company Act of 1935, as amended.
The Fund may make commitments more restrictive than the restrictions
listed above with respect to a Portfolio, so as to permit the sale of shares
of the Portfolio in certain states. Should the Fund determine that any such
commitment is no longer in the best interests of the Portfolio and its
shareholders, the Fund will revoke the commitment by terminating the sale of
shares of the Portfolio in the state involved. Except for investment
restriction number 5, the percentage limitations contained in the restrictions
listed above apply at the time of purchases of securities.
Portfolio Turnover
The Money Market Portfolio may attempt to increase yields by trading to
take advantage of short-term market variations, which results in high
portfolio turnover. Because purchases and sales of money market instruments
are usually effected as principal transactions, this policy does not result in
high brokerage commissions to the Portfolio. The other Portfolios do not
intend to seek profits through short-term trading. Nevertheless, the
Portfolios will not consider portfolio turnover rate a limiting factor in
making investment decisions.
A Portfolio's turnover rate is calculated by dividing the lesser of
purchases or sales of its portfolio securities for the year by the monthly
average value of the portfolio's securities. Securities or options with
remaining maturities of one year or less on the date of acquisition are
excluded from the calculation. Under certain market conditions, a Portfolio
authorized to engage in transactions in options may experience increased
portfolio turnover as a result of its investment strategies. For instance,
the exercise of a substantial number of options written by a Portfolio (due to
appreciation of the underlying security in the case of call options or
depreciation of the underlying security in the case of put options) could
result in a turnover rate in excess of 100%. A portfolio turnover rate of
100% would occur if all of a Portfolio's securities that are included in the
computation of turnover were replaced once during a period of one year.
The Portfolios cannot accurately predict their portfolio turnover rates
but anticipate that annual turnover for each Portfolio will not exceed the
following percentages: Intermediate High Grade Portfolio - 100%; Diversified
Strategic Income Portfolio - 100%; Equity Income Portfolio - 100%; Equity
Index Portfolio - 20%; Growth & Income Portfolio - 50%; Appreciation
Portfolio - 50%; Total Return Portfolio - 100%; Emerging Growth Portfolio -
100%; and International Equity Portfolio - 100%. For regulatory purposes, the
portfolio turnover rate for the Money Market Portfolio will be considered 0%.
For the 1996 and 1995 fiscal years, the portfolio turnover rates for
Portfolios having operations during the stated periods were as follows:
<TABLE>
<CAPTION>
Portfolio December 31, 1996 December 31, 1995
<S> <C> <C>
Appreciation 39% 43%
Diversified Strategic Income 10 46
Emerging Growth 84 121
Equity Income 28 33
Equity Index 7 5
Growth & Income 22 17
Intermediate High Grade 116 121
International Equity 33 34
Total Return 82 81
</TABLE>
Certain other practices that may be employed by a Portfolio also could
result in high portfolio turnover. For example, portfolio securities may be
sold in anticipation of a rise in interest rates (market decline) or purchased
in anticipation of a decline in interest rates (market rise) and later sold.
In addition, a security may be sold and another of comparable quality
purchased at approximately the same time to take advantage of what an Adviser
believes to be a temporary disparity in the normal yield relationship between
the two securities. These yield disparities may occur for reasons not
directly related to the investment quality of particular issues or the general
movement of interest rates, such as changes in the overall demand for, or
supply of, various types of securities. Higher portfolio turnover rates can
result in corresponding increases in brokerage commissions. Short-term gains
realized from portfolio transactions are taxable to shareholders as ordinary
income. See "Dividends and Taxes."
Portfolio turnover rates may vary greatly from year to year as well as
within a particular year and may be affected by cash requirements for
redemptions of a Portfolio's shares as well as by requirements that enable the
Portfolio to receive favorable tax treatment.
The Fund's Board of Trustees will review periodically the commissions
paid by the Portfolios to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
inuring to the Portfolios.
Portfolio Transactions
Most of the purchases and sales of securities for a Portfolio, whether
effected on a securities exchange or over-the-counter, will be effected in the
primary trading market for the securities. Decisions to buy and sell
securities for a Portfolio are made by its Adviser, which also is responsible
for placing these transactions, subject to the overall review of the Fund's
Trustees. With respect to the Diversified Strategic Income Portfolio,
decisions to buy and sell U.S. securities for the Portfolio are made by Smith
Barney Mutual Funds Management Inc. ("SBMFM"), the Portfolio's Adviser, which
also is responsible for placing these transactions; however, the
responsibility to make investment decisions with respect to foreign securities
and to place these transactions rests with Smith Barney Global Capital
Management, Inc. ("Global Capital Management"), the Portfolio's sub-investment
adviser. Although investment decisions for each Portfolio are made
independently from those of the other accounts managed by its Adviser,
investments of the type the Portfolio may make also may be made by those other
accounts. When a Portfolio and one or more other accounts managed by its
Adviser are prepared to invest in, or desire to dispose of, the same security,
available investments or opportunities for sales will be allocated in a manner
believed by the Adviser to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by a Portfolio or
the size of the position obtained or disposed of by the Portfolio.
Transactions on U.S. stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On exchanges on
which commissions are negotiated, the cost of transactions may vary among
different brokers. Commissions generally are fixed on most foreign exchanges.
There is generally no stated commission in the case of securities traded in
U.S. or foreign over-the-counter markets, but the prices of those securities
include undisclosed commissions or mark-ups. The cost of securities purchased
from underwriters includes an underwriting commission or concession and the
prices at which securities are purchased from and sold to dealers include a
dealer's mark-up or mark-down. U.S. government securities generally are
purchased from underwriters or dealers, although certain newly issued U.S.
government securities may be purchased directly from the United States
Treasury or from the issuing agency or instrumentality.
The following table sets forth certain information regarding each
Portfolio's payment of brokerage commissions with the exception of the Money
Market Portfolio and Intermediate High Grade Portfolio, which did not pay any
brokerage commissions during these time periods.
Fiscal Year Ended
December 31, 1996
<TABLE>
<CAPTION>
Brokerage
Total Brokerage Commissions Paid
Portfolio Commissions Paid to Smith Barney
<S> <C> <C>
Appreciation $97,345 $ 0
Diversified Strategic Income 1,200 0
Emerging Growth 24,692 566
Equity Income 54,224 4,320
Equity Index 3,060 0
Growth & Income 6,360 60
International Equity 79,738 1,859
Total Return 338,129 6,000
</TABLE>
Fiscal Year Ended
December 31, 1995
<TABLE>
<CAPTION>
Brokerage
Total Brokerage Commissions Paid
Portfolio Commissions Paid to Smith Barney
<S> <C> <C>
Appreciation $73,446 $2,370
Diversified Strategic Income 800 -------
Emerging Growth 34,596 1,039
Equity Income 73,350 900
Equity Index 3,290 -------
Growth & Income 14,338 198
International Equity 95,068 3,578
Total Return 120,351 -------
</TABLE>
Fiscal Year Ended
December 31, 1994
<TABLE>
<CAPTION>
Brokerage
Total Brokerage Commissions Paid
Portfolio Commissions Paid to Smith Barney
<S> <C> <C>
Appreciation $100,831 $5,952
Diversified Strategic Income 2,515 -------
Emerging Growth 21,824 -------
Equity Income 54,816 8,442
Equity Index 1,377 -------
Growth & Income 55,941 4,380
International Equity 144,775 -------
Total Return 73,782 -------
</TABLE>
Fiscal Year Ended
December 31, 1996
<TABLE>
<CAPTION>
% of Aggregate Dollar
% of Aggregate Brokerage Amount of Transactions
Commissions Paid to Involving Commissions
Portfolio Smith Barney Paid to Smith Barney
<S> <C> <C>
Appreciation 0% 0%
Diversified Strategic Income 0 0
Emerging Growth 2.20 0.85
Equity Income 7.97 7.35
Equity Index 0 0
Growth & Income 6.12 3.90
International Equity 0.0233 0.06
Total Return 1.77 6.40
</TABLE>
In selecting brokers or dealers to execute securities transactions on
behalf of a Portfolio, its Adviser seeks the best overall terms available. In
assessing the best overall terms available for any transaction, each Adviser
will consider the factors that the Adviser deems relevant, including the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on
a continuing basis. In addition, each advisory agreement between the Fund and
an Adviser authorizes the Adviser, in selecting brokers or dealers to execute
a particular transaction and in evaluating the best overall terms available,
to consider the brokerage and research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund,
the other Portfolios and/or other accounts over which the Adviser or its
affiliates exercise investment discretion. The fees under the investment
advisory agreements and the sub-investment advisory and/or administration
agreements between the Fund and the Advisers and the sub-investment advisers
and/or administrator, respectively, are not reduced by reason of their
receiving such brokerage and research services. The Fund's Board of Trustees,
in its discretion, may authorize the Advisers to cause the Portfolios to pay a
broker that provides such brokerage and research services a brokerage
commission in excess of that which another broker might have charged for
effecting the same transaction, in recognition of the value of such brokerage
and research services. The Fund's Board of Trustees periodically will review
the commissions paid by the Portfolios to determine if the commissions paid
over representative periods of time were reasonable in relation to the
benefits inuring to the Fund.
To the extent consistent with applicable provisions of the 1940 Act and
the rules and exemptions adopted by the SEC thereunder, the Fund's Board of
Trustees has determined that portfolio transactions for a Portfolio may be
executed through Smith Barney and other affiliated broker-dealers if, in the
judgment of its Adviser, the use of such broker-dealer is likely to result in
price and execution at least as favorable as those of other qualified broker-
dealers, and if, in the transaction, such broker-dealer charges the Portfolio
a rate consistent with that charged to comparable unaffiliated customers in
similar transactions. In addition, under rules 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
SBMFM
Investment Adviser to Money Market,
Intermediate High Grade,
Diversified Strategic Income,
Equity Income, Growth & Income,
Appreciation and International
Equity Portfolios; Administrator to
each Portfolio
Davis Skaggs Investment Management,
a division of SBMFM
Investment Adviser to Total Return
Portfolio
Global Capital Management
Sub-Investment Adviser to
Diversified Strategic Income
Portfolio
Travelers Investment Management
Company ("TIMCO")
Investment Adviser to Equity Index
Portfolio
Van Kampen American Capital Asset
Management, Inc. ("VKAC")
Investment Adviser to Emerging
Growth Portfolio
Smith Barney
Distributor
PNC
Custodian for Appreciation,
Emerging Growth, Equity Income,
Equity Index, Growth & Income,
Intermediate High Grade, Money
Market and Total Return Portfolios
Chase
Custodian for Diversified Strategic
Income and International Equity
Portfolios
First Data Investor Services Group,
Inc. (the "Transfer Agent")
Transfer and Dividend Paying Agent
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, 1997 , Trustees and officers of the Fund as a group owned no
shares of the Fund.
Herbert Barg, Trustee (Age 73). Private Investor. His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
*Alfred J. Bianchetti, Trustee (Age 74). Retired; formerly Senior
Consultant to Dean Witter Reynolds Inc. His address is 19 Circle End Drive,
Ramsey, New Jersey 07466.
Martin Brody, Trustee (Age 75). Vice Chairman of the Board of Restaurant
Associates Corp. His address is HMK Associates, Three ADP Boulevard, Roseland,
New Jersey 07068.
Dwight B. Crane, Trustee (Age 59). Professor, Graduate School of Business
Administration, Harvard University; Business Consultant. His address is
Graduate School of Business Administration, Harvard University, Boston,
Massachusetts 02163.
Burt N. Dorsett, Trustee (Age 66). 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 70). Chairman of the Board and Chief
Executive Officer of The Dress Barn, Inc. His address is 30 Dunnigan Drive,
Suffern, New York 10901.
Stephen E. Kaufman, Trustee (Age 65). Attorney. His address is 277 Park
Avenue, New York, New York 10172.
Joseph J. McCann, Trustee (Age 66). Financial Consultant. His address is
200 Oak Park Place, Pittsburgh, Pennsylvania 15243.
*Heath B. McLendon, Chairman of the Board and Chief Executive Officer (Age
63). Managing Director of Smith Barney and Chairman of Smith Barney Strategy
Advisers Inc.; prior to July 1993, Senior Executive Vice President of Shearson
Lehman Brothers Inc. ("Shearson Lehman Brothers"), Vice Chairman of Shearson
Asset Management, a Director of PanAgora Asset Management, Inc. and PanAgora
Asset Management Limited. Mr. McLendon is Chairman of the Board and Chief
Executive Officer of 41 other Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Cornelius C. Rose, Jr., Trustee (Age 63). President, Cornelius C. Rose
Associates, Inc., Financial Consultants, and Chairman and Director of
Performance Learning Systems, an educational consultant. His address is P.O.
Box 355, Fair Oaks, Enfield, New Hampshire 03748.
Sandip A. Bhagat, Vice President and Investment Officer (Age 37). President
of TIMCO; prior to 1995, Senior Portfolio Manager for TIMCO's quantitative
active equity strategies. His address is One Tower Square, Hartford,
Connecticut 06183-2030.
John C. Bianchi, Vice President and Investment Officer (Age 41). Managing
Director of Smith Barney; prior to July 1993, Managing Director of Shearson
Lehman Advisors. Mr. Bianchi is Vice President and Investment Officer of six
other Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Harry D. Cohen, Vice President and Investment Officer (Age 56). President
and Director of Smith Barney Investment Advisors, a division of SBMFM;
Executive Vice President of Smith Barney; prior to July 1993, President of
Asset Management, a division of Shearson Lehman Brothers. Mr. Cohen is Vice
President and Investment Officer of two other Smith Barney Mutual Funds. His
address is 388 Greenwich Street, New York, New York 10013.
James C. Conroy, Vice President and Investment Officer (Age 42). Managing
Director of Smith Barney; prior to July 1993, Managing Director of Shearson
Lehman Advisors. Mr. Conroy is Vice President and Investment Officer of five
other Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Victor Filatov, Vice President and Investment Officer (Age 45). Managing
Director of Smith Barney, President and Director of Smith Barney Global
Capital Management Inc.; prior to 1993, Vice President of J.P. Morgan
Securities Inc. Mr. Filatov is Vice President and Investment Officer of four
other Smith Barney Mutual Funds. His address is 10 Piccadilly, London, WIV
9LA, U.K.
R. Jay Gerken, Vice President and Investment Officer (Age 46). Managing
Director of Smith Barney; prior to July 1993, Managing Director of Shearson
Lehman Advisors. Mr. Gerken is Vice President and Investment Officer of two
other Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Scott Glasser, Vice President and Investment Officer (Age 30). Vice
President of Smith Barney Investment Advisors; prior to October 1993, fixed
income analyst with Bear, Stearns & Co. Inc. Mr. Glasser is Investment
Officer of one other Smith Barney Mutual Fund. His address is 388 Greenwich
Street, New York, New York 10013.
John G. Goode, Vice President and Investment Officer (Age 52). Managing
Director of Smith Barney; Chairman and Chief Investment Officer of Davis
Skaggs Investment Management, a division of SBMFM. Mr. Goode is Vice President
and Investment Officer of four other Smith Barney Mutual Funds. His address is
One Sansome Street, San Francisco, California 94104.
Simon Hildreth, Vice President and Investment Officer (Age 45). Senior
Vice President of Smith Barney and Managing Director of Smith Barney Global
Capital Management Inc; prior to 1994, Director of Mercury Asset Management
Ltd. Mr. Hildreth is Vice President and Investment Officer of one other Smith
Barney Mutual Fund. His address is 10 Piccadilly, London, WIV 9LA, U.K.
Jack S. Levande, Vice President and Investment Officer (Age 50). Managing
Director of Smith Barney; prior to July 1993, Managing Director of Shearson
Lehman Advisors. Mr. Levande is Vice President and Investment Officer of one
other Smith Barney Mutual Fund. His address is 388 Greenwich Street, New York,
New York 10013.
Gary Lewis, Vice President and Investment Officer (Age 43). Senior Vice
President of Van Kampen American Capital Asset Management, Inc. His address
is 2800 Post Oak Boulevard, Houston, Texas 77056.
George Mueller, Vice President and Investment Officer (Age 56). Managing
Director of Smith Barney; prior to July 1993, Managing Director of Shearson
Lehman Advisors. Mr. Mueller is Vice President and Investment Officer of two
other Smith Barney Mutual Funds. His address is 388 Greenwich Street, New
York, New York 10013.
Jeffrey Russell, Vice President and Investment Officer (Age 39). Managing
Director of Smith Barney; Vice President and Assistant Secretary of Fenimore
International Management Corporation. Mr. Russell is Vice President and
Investment Officer of six other Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Jessica M. Bibliowicz, President (Age 37). Executive Vice President of
Smith Barney; prior to 1994, Director of Sales and Marketing for Prudential
Mutual Funds. Ms. Bibliowicz serves as President of 39 other Smith Barney
Mutual Funds. Her address is 388 Greenwich Street, New York, New York 10013.
Phyllis Zahorodny, Vice President and Investment Officer (Age 39).
Managing Director of Greenwich Street Advisors, a division of SBMFM; prior to
July 1993, Managing Director of Shearson Lehman Advisors. Ms. Zahorodny is
Vice President and Investment Officer of six other Smith Barney Mutual Funds.
Her address is 388 Greenwich Street, New York, New York 10013.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 39). Managing
Director of Smith Barney; Director and Senior Vice President of SBMFM. Mr.
Daidone 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 46). Managing Director of Smith Barney;
General Counsel and Secretary of SBMFM. Ms. Sydor 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, any of the Portfolios'
Adviser or sub-investment advisers 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 or any of their affiliates a fee of $5,000 per annum plus
$500 per in-person meeting and $100 per telephonic meeting. The Fund pays a
Trustee Emeritus who is not a director, officer or employee of Smith Barney,
the Advisers, or any of their affiliates a fee of $2,500 per annum plus $250
per in person meeting and $50 per telephonic meeting. Each Trustee is
reimbursed for travel and out-of-pocket expenses incurred to attend such
meetings.
For the calendar year ended December 31, 1996, the Trustees of the Fund
were paid the following compensation:
<TABLE>
<CAPTION>
Aggregate Compensation
Aggregate Compensation from the Smith Barney
Trustee (*) from the Fund Mutual Funds
<S> <C> <C>
Herbert Barg (18) $7,500 $105,175
Alfred Bianchetti (13) 7,500 51,500
Martin Brody (21) 7,500 124,286
Dwight B. Crane (24) 7,500 140,375
Burt N. Dorsett (13) 7,000 47,400
Elliot S. Jaffe (13) 7,500 51,100
Stephen E. Kaufman (15) 7,500 92,336
Joseph J. McCann (13) 7,500 52,700
Heath B. McLendon (41) ----- -----
Cornelius C. Rose (13) 7,500 51,400
</TABLE>
* Indicates number of funds within the Smith Barney Mutual Fund complex for
which each Trustee serves as Director/Trustee.
Pursuant to the Fund's deferred compensation plan, Mr. Dorsett elected to
defer the payment of all of the compensation due to him from the Fund.
Advisers, Sub-Investment Adviser and Administrator
Each Adviser serves as investment adviser to one or more Portfolios
pursuant to a separate written agreement with each Portfolio (an "Advisory
Agreement"). The Advisory Agreements for each of the Portfolios were most
recently approved by the Board of Trustees, including a majority of the
Trustees who are not interested persons, on July 17, 1996 . SBMFM serves
as administrator to each Portfolio pursuant to a separate written agreement
with each Portfolio (the "Administration Agreement"). The Administration
Agreement was most recently approved by the Fund's Board of Trustees,
including a majority of the disinterested Trustees, on July 17, 1996 .
Certain of the services provided by, and the fees paid by the Fund to, the
Advisers under the Advisory Agreements, SBMFM under its Administration
Agreement and Global Capital Management under its sub-investment advisory
agreement are described in the Prospectus.
SBMFM is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"), which, in turn, is a wholly owned subsidiary of Travelers Group
Inc. ("Travelers"). Travelers is a diversified financial services holding
company principally engaged in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services.
VKAC is a diversified asset management company with more than two
million retail investor accounts, capabilities for managing institutional
portfolios, and over $ 57 billion under management or supervision.
Smith Barney, the Fund's distributor, and Global Capital Management,
sub-investment adviser to Diversified Strategic Income Portfolio, are
subsidiaries of Holdings.
Certain of the services provided to the Fund by SBMFM as administrator
are described in the Prospectus under "Management of the Fund." In addition
to those services, SBMFM pays the salaries of all officers and employees who
are employed by both it and the Fund, maintains office facilities for the
Fund, furnishes the Fund with statistical and research data, clerical help and
accounting, data processing, bookkeeping, internal auditing and legal services
and certain other services required by the Fund, prepares reports to the
Fund's shareholders and prepares tax returns, reports to and filings with the
SEC and state blue sky authorities. SBMFM bears all expenses in connection
with the performance of its services.
Each Adviser and Global Capital Management pays the salaries of all
officers and employees who are employed by both them and the Fund, maintains
office facilities for the Fund and bears 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,
1996, 1995 and 1994 by their respective Adviser:
<TABLE>
<CAPTION>
Portfolio December 31, 1996 December 31, 1995 December 31, 1994
<S> <C> <C> <C>
Appreciation $536,120 $488,187 $444,244
Diversified Strategic
Income 266,327 252,838 238,422
Emerging Growth 142,425 108,035 68,528
Equity Income 215,308 216,900 223,055
Equity Index 69,030 50,171 38,236
Growth & Income 166,039 146,172 127,450
Intermediate High Grade 60,847 61,355 49,279
International Equity 278,118 235,739 193,164
Money Market 17,904 18,434 19,592
Total Return 665,417 247,410 78,167
</TABLE>
For the period from January 1, 1994 through March 22, 1994, the
Diversified Strategic Income Portfolio incurred $14,919 in sub-investment
advisory fees. For the period from March 23, 1994 through December 31, 1994,
the Diversified Strategic Income Portfolio incurred $64,555 in sub-investment
advisory fees.
For the year ended December 31, 1995, the Advisers, administrator,
Transfer Agent and Custodian waived fees to the Portfolios as follows:
<TABLE>
<CAPTION>
Total Fee Waivers Transfer
Portfolio and Reimbursements Adviser Administrator Agent Custodian*
<S> <C> <C> <C> <C> <C>
Money Market $28,195 $15,764 $10,510 $519 $1,402
Intermediate
High Grade 14,361 7,291 3,592 145 327
Equity Index 21,657 8,065 3,972 310 2,468
Emerging Growth 27,302 16,260 4,066 221 1,490
</TABLE>
* Boston Safe Deposit and Trust Company served as the Portfolio's custodian
prior to May 15, 1995.
For the year ended December 31, 1995, IDS Life Insurance Company ("IDS
Life") reimbursed expenses to the Portfolios as follows:
Emerging Growth
$5,265
Equity Index
6,842
Intermediate High Grade
3,006
For the year ended December 31, 1994, the Advisers and administrator
waived fees to the Portfolios as follows:
<TABLE>
<CAPTION>
Portfolio Adviser Boston Advisors
<S> <C> <C>
Emerging Growth $ 10,509 $ 2,802
Equity Index 9,185 4,592
Intermediate
High Grade 6,939 3,470
International Equity 14,886 3,503
Money Market 6,198 4,132
Total Return 4,652 1,692
</TABLE>
For the year ended December 31, 1994, IDS Life reimbursed expenses to
the Portfolios as follows:
Emerging Growth
$ 18,068
Equity Index
25,496
Intermediate High Grade
12,616
International Equity
23,712
Money Market
16,616
Total Return
7,873
The Fund bears expenses incurred in its operation, including taxes,
interest, brokerage fees and commissions, if any; fees of Trustees who are not
officers, directors, shareholders or employees of the Advisers, Global Capital
Management or Smith Barney; SEC fees and state blue sky qualification fees;
charges of custodians; transfer and dividend disbursing agents' fees; certain
insurance premiums; outside auditing and legal expenses; costs of maintenance
of corporate existence; investor services (including allocated telephone and
personnel expenses); and costs of preparation of corporate meetings and of
preparation and printing of prospectuses and shareholder reports for
regulatory purposes and for distribution to shareholders.
Each Adviser, Global Capital Management and SBMFM have agreed
that if in any fiscal year the aggregate expenses of any Portfolio that they
serve (including fees payable pursuant to their service agreements with the
Fund, but excluding interest, taxes, brokerage and, if permitted by the
relevant state securities commissions, extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Portfolio, the
relevant Adviser, Global Capital Management and SBMFM, as appropriate, will
reduce their fees to 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 ending
December 31, 1996 .
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the Fund. Stroock &
Stroock & Lavan LLP serves as counsel to the Trustees who are not
interested persons of the Fund.
KPMG Peat Marwick LLP ("Peat Marwick"), independent auditors, 345 Park
Avenue, New York, New York 10154, have been selected as the Fund's independent
auditors to examine and report on the Fund's financial statements and
highlights for the fiscal year ending December 31, 1997 .
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 July 30,
1993 and October 14, 1994, the Trust changed its name from Shearson Series
Fund to Smith Barney Shearson Series Fund and its current name, Smith Barney
Series Fund, respectively.
In the interest of economy and convenience, certificates representing
shares in the Fund are not physically issued. The Transfer Agent 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 a
variable annuity contract or a certificate evidencing interest in a variable
annuity (the "Contract"), offered by certain insurance companies designated by
the Fund, having a voting interest in the relevant subaccount (the
"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, 1997
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
three days of receipt of such request. The right of redemption of shares of a
Portfolio may be suspended or the date of payment postponed (a) for any
periods during which the New York Stock Exchange 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
Contract.
NET ASSET VALUE
As noted in the Prospectus, the Fund will not calculate the net asset
value of the Portfolios on certain holidays. On those days, securities held
by a Portfolio may nevertheless be actively traded, and the value of the
Portfolio's shares could be significantly affected.
Because of the need to obtain prices as of the close of trading on
various exchanges throughout the world, the calculation of the net asset
values of certain Portfolios may not take place contemporaneously with the
determination of the prices of some of their respective portfolio securities
used in such calculation. A security that is listed or traded on more than
one exchange is valued at the quotation on the exchange determined to be the
primary market for such security. All assets and liabilities initially
expressed in foreign currency values will be converted into U.S. dollar values
at the mean between the bid and offered quotations of such currencies against
U.S. dollars as last quoted by any recognized dealer. If such quotations are
not available, the rate of exchange will be determined in good faith by the
Fund's Board of Trustees. In carrying out the Board's valuation policies,
SBMFM, as 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 SBMFM, after consultation with the
Pricing Service. When, in the judgment of the Pricing Service, quoted bid
prices for investments are readily available and are representative of the bid
side of the market, these investments are valued at the mean between the
quoted bid prices and asked prices. Investments for which, in the judgment of
the Pricing Service, there are no readily obtainable market quotations are
carried at fair value as determined by the Pricing Service. The procedures of
the Pricing Service are reviewed periodically by the officers of the Fund
under the general supervision and responsibility of the Fund's Board of
Trustees.
The Money Market Portfolio
The valuation of the portfolio securities of the Money Market Portfolio
is based upon their amortized cost, which does not take into account
unrealized capital gains or losses. Amortized cost valuation involves
initially valuing an instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium regardless of the impact
of fluctuating interest rates on the market value of the instrument. While
this method provides certainty in valuation, it may result in periods during
which value, as determined by amortized cost, is higher or lower than the
price a Fund would receive if it sold the instrument.
The use by the Money Market Portfolio of the amortized cost method of
valuing its portfolio securities is permitted by a rule adopted by the SEC.
Under this rule, the Portfolio must maintain a dollar-weighted average
portfolio maturity of ninety days or less, purchase only instruments having
remaining maturities of thirteen months or less, and invest only in securities
determined by the Board of Trustees of the Fund to be "Eligible Securities,"
as determined by the SEC, with minimal credit risks. Pursuant to the rule,
the Fund's Board of Trustees also has established procedures designed to
stabilize, to the extent reasonably possible, the Portfolio's price per share
as computed for the purpose of sales and redemptions at $1.00. Such
procedures include review of the Portfolio's holdings by the Fund's Board of
Trustees, at such intervals as it may deem appropriate, to determine whether
the Portfolio's net asset value calculated by using available market
quotations or market equivalents deviates from $1.00 per share based on
amortized cost.
The rule also provides that the extent of any deviation between the
Portfolio's net asset value based upon available market quotations or market
equivalents and the $1.00 per share net asset value based on amortized cost
must be examined by the Fund's Board of Trustees. In the event that the
Fund's Board of Trustees determines that a deviation exists that may result in
material dilution or other unfair results to investors or existing
shareholders, pursuant to the rule the Fund's Board of Trustees must cause the
Portfolio to take such corrective action as the Fund's Board of Trustees
regards as necessary and appropriate, including: selling portfolio instruments
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturity; withholding dividends or paying distributions from capital
gains; redeeming shares in kind; or establishing a net asset value per share
by using available market quotations.
PERFORMANCE DATA
From time to time, the Fund may quote yield or total return in
advertisements or in reports and other communications to shareholders.
Average Annual Total Return
A Portfolio's "average annual total return" figure described in the
Prospectus and shown below is computed according to a formula prescribed by
the SEC. The formula can be expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
payment made at the beginning of the one-, five- or ten-year
(or other) period at the end of the one-, five- or ten-year
(or other) period (or fractional portion thereof).
The ERV assumes complete redemption of the hypothetical investment at
the end of the measuring period. A Portfolio's net investment income changes
in response to fluctuations in interest rates and the expenses of the
Portfolio.
The average annual total returns for the Portfolios then in existence
were as follows for the periods indicated (reflecting the waivers of
investment advisory and administration fees and reimbursement of expenses):
<TABLE>
<CAPTION>
Per annum for the
period from
Commencement of
For the one-year period operations through
Portfolio ended December 31, 1996 December 31, 1996
<S> <C> <C>
Appreciation 19.77% 12.17%
Diversified
Strategic Income 11.16 7.43
Emerging Growth 17.83 17.00
Equity Income 5.99 9.27
Equity Index 21.68 14.79
Growth & Income 19.83 12.12
Intermediate
High Grade 1.69 5.95
International Equity 21.38 6.56
Total Return 25.33 19.56
</TABLE>
* 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
(or other) 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 of investment
advisory and administration fees and reimbursement of expenses):
<TABLE>
<CAPTION>
Per annum for the
period from
For the one-year commencement of
period ended operations through
Portfolio December 31, 1996 December 31, 1996
<S> <C> <C>
Appreciation 19.77% 12.17%
Diversified Strategic
Income 11.16 7.43
Emerging Growth 17.83 17.00
Equity Income 5.99 9.27
Equity Index 21.68 14.79
Growth & Income 19.83 12.12
Intermediate High Grade 1.69 5.95
International Equity 21.38 6.56
Total Return 25.33 19.56
</TABLE>
* Portfolio commenced operations on October 16, 1991.
** Portfolio commenced operations on December 3, 1993.
It is important to note that the 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 a 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.
(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, Bear Stearns & Co.,
Inc., Morgan Stanley, and Ibbottson Associates may be used, as well as
information provided by the Federal Reserve Board and 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.
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. Each 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
offering Contracts intend to qualify each of the Subaccounts as a "segregated
asset account" within the meaning of the Code. For a Subaccount to qualify as
a segregated asset account, the Portfolio in which such Subaccount holds
shares must meet the diversification requirements of Section 817(h) of the
Code and the regulations promulgated thereunder. To meet those requirements,
a Portfolio may not invest more than certain specified percentages of its
assets in the securities of any one, two, three or four issuers. However,
certain increases are made to the percentage limitations to the extent of
investments in United States Treasury obligations. For these purposes, all
obligations of the United States Treasury and each instrumentality are treated
as securities of separate issuers.
Income on assets of a Subaccount qualified as a segregated asset account
whose underlying investments are adequately diversified will not be taxable to
Contract owners. However, in the event a Subaccount is not so qualified, all
annuities allocating any amount of premiums to such Subaccount will not
qualify as annuities for federal income tax purposes and the holders of such
annuities would be taxed on any income on the annuities during the period of
disqualification.
The Fund has undertaken to meet the diversification requirements of
Section 817(h) of the Code. This undertaking may limit the ability of a
particular Portfolio to make certain otherwise permitted investments. In
particular, the ability of the Money Market and Intermediate High Grade
Portfolios to invest in U.S. government securities other than direct United
States Treasury obligations may be materially limited by these diversification
requirements.
CUSTODIAN AND TRANSFER AGENT
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, serves as the custodian of the Fund with respect to all Portfolios
except Diversified Strategic Income and International Equity Portfolios
pursuant to a custodian agreement. Chase, located at Chase MetroTech Center,
Brooklyn, New York 11245 , serves as custodian of Diversified Strategic
Income Portfolio and International Equity Portfolio pursuant to a custodian
agreement. Under the custodian agreements, the respective Custodian holds the
Fund's portfolio securities and keeps all necessary accounts and records. For
its services, the Custodian 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.
The Transfer Agent, located at Exchange Place, Boston, Massachusetts
02109, serves as the Fund's transfer and dividend-paying agent. Under the
transfer agency agreement, the Transfer Agent 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, the Transfer Agent receives fees
from the Fund computed on the basis of the number of shareholder accounts that
the Transfer Agent 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, 1996 is
incorporated herein by reference in its entirety.
APPENDIX
DESCRIPTION OF S&P, MOODY'S AND OTHER RATINGS
Description of S&P Corporate Bond Ratings:
AAA - Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher-rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than for bonds in higher rated
categories.
BB, B and CCC - Bonds rated BB and B are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB represents a
lower degree of speculation than B, and CCC represents the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Descriptions of Moody's Corporate Bond Ratings:
Aaa - Bonds which are rated Aaa are judged to be the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt-edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as "high grade bonds." They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well.
Ba - Bonds which are Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds that are rated Caa are of poor standing. These issues may
be in default or present elements of danger may exist with respect to
principal or interest.
Moody's applies the numerical modifiers 1, 2 and 3 to each generic
rating classification from Aa through B. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.
Description of other Corporate Bond Ratings:
Bonds rated AAA by IBCA Limited or its affiliate IBCA Inc. (together,
"IBCA") are obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial, such that adverse changes in business, economic or financial
conditions are unlikely to increase investment risk significantly. Bonds
rated AA are obligations for which there is a very low expectation of
investment risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic or financial conditions
may increase investment risk, albeit not very significantly.
Bonds rated AAA by Fitch Investors Services, Inc. ("Fitch") are
considered to be investment grade and of the highest credit quality. The
obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.
Bonds rated AA are considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is very
strong, although not quite as strong as bonds rated AAA.
Bonds rated AAA by Duff & Phelps Inc. ("Duff & Phelps") are deemed to be
of the highest credit quality; the risk factors are negligible, being only
slightly more than for risk-free United States Treasury debt. AA indicates
high credit quality; protection factors are strong, and risk is modest but may
vary slightly from time to time because of economic conditions.
Description of S&P Commercial Paper Ratings:
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1.
Description of Moody's Commercial Paper Ratings:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
of issuers rated Prime-1, but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected
by external
conditions. Ample alternative liquidity is maintained.
Description of other Commercial Paper Ratings:
Short-term obligations, including commercial paper, rated A1+ by IBCA
are obligations supported by the highest capacity for timely repayment.
Obligations rated A1 have a very strong capacity for timely repayment.
Obligations rated A2 have a strong capacity for timely repayment, although
such capacity may be susceptible to adverse changes in business, economic or
financial conditions.
Fitch employs the rating F-1+ to indicate issues regarded as having the
strongest degree of assurance for timely payment. The rating F-1 reflects an
assurance of timely payment only slightly less in degree than issues rated F-
1+, while the rating F-2 indicates a satisfactory degree of assurance for
timely payment, although the margin of safety is not as great as indicated by
the F-1+ and F-1 categories.
Duff & Phelps employs the designation of Duff 1 with respect to top
grade commercial paper and bank money instruments. Duff 1+ indicates the
highest certainty of timely payment, short-term liquidity is clearly
outstanding and safety is just below risk-free United States Treasury short-
term obligations. Duff 1- indicates high certainty of timely payment. Duff 2
indicates good certainty of timely payment: liquidity factors and company
fundamentals are sound.
The Thomson BankWatch ("TBW") Short-Term Ratings apply to commercial
paper, other senior short-term obligations and deposit obligations of the
entities to which the rating has been assigned, and apply only to unsecured
instruments that have a maturity of one year or less.
The TBW Short-Term Ratings specifically assess the likelihood of an
untimely payment of principal or interest.
TBW-1 The highest category; indicates a very high degree of
likelihood that principal and interest will be paid on a timely basis.
TBW-2 The second highest category; while the degree of safety
regarding timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
Various of the NRSROs utilize rankings within rating categories
indicated by a + or -. The Fund, in accordance with industry practice,
recognizes such rankings within categories as gradations, viewing for example
S&P's rating of A-1+ and A-1 as being in S&P's highest rating category.
43
SMITH BARNEY SERIES FUND
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Financial Highlights
Included in Part B:
The Registrant's Annual Report for the fiscal year ended
December 31, 1996 and the Report of Independent Accountants are
incorporated by reference to the Definitive 30D filed on February 27, 1997
as Accession #0000091155-97-000106.
(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 Post-Effective Amendment No. 6 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) Specimen certificates for shares of beneficial interest in the
Money Market Portfolio, Intermediate High Grade Portfolio,
Diversified Strategic Income Portfolio, Equity Income Portfolio,
Equity Index Portfolio, Growth and Income Portfolio and
Appreciation 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").
(5)(a) Investment Advisory Agreement dated April 1, 1995 between the
Registrant and Travelers Investment Management Company relating to
Equity Index Portfolio, is incorporated by reference to Post-
Effective Amendment No. 10 to the Registrant's Registration
Statement as filed with the SEC on May 3, 1995 ("Post-Effective
Amendment No. 10").
(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").
(c) 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.
(d) 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.
(e) Investment Advisory Agreement with American Capital Asset
Management, Inc. relating to Emerging Growth Portfolio, is
incorporated by reference to Post-Effective Amendment No. 10.
(f) 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").
(g) 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) Form of Custody Agreement between the Registrant and PNC Bank,
National Association is incorporated by reference to Post-
Effective Amendment No. 11 to the Registration Statement as filed
with the SEC on September 6, 1995 ("Post-Effective Amendment No.
11").
(b) Form of Custody Agreement between the Registrant and The Chase
Manhattan Bank (filed herewith).
(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
incorporated by reference to Post-Effective Amendment No. 10.
(b) 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 (filed herewith).
(12) Not Applicable.
(13) Purchase Agreement is incorporated by reference to Pre-Effective
Amendment No. 3 to the Registration Statement filed with the SEC
on October 15, 1991.
(14) Not Applicable.
(15) Not Applicable.
(16) Performance Data is incorporated by reference to Post-Effective
Amendment No. 1.
(17) Financial Data Schedule (filed herewith).
(18) Not Applicable.
Item 25. Persons Controlled by or under Common Control with Registrant
Shares of the Registrant will be offered to The Travelers Insurance Company
("Travelers"), a corporation organized under the laws of the State of
Connecticut, for allocation to one or more separate subaccounts of the
Travelers Fund BD for Variable Annuities. Travelers is a wholly owned
subsidiary of Travelers Group Inc.
Item 26. Number of Holders of Securities
<TABLE>
<CAPTION
(1) (2)
Number of Record
Holders by Class as
Title of Class of March 31,1997
Shares of beneficial interest,
par value $.001 per share
<S> <C>
Appreciation Portfolio 5
Diversified Strategic Income
Portfolio 4
Emerging Growth Portfolio 3
Equity Income Portfolio 4
Equity Index Portfolio 5
Intermediate High Grade Portfolio 5
International Equity Portfolio 5
Growth & Income Portfolio 4
Money Market Portfolio 3
Total Return Portfolio 4
</TABLE>
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 Travelers Group 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 Investment Advisers Act of 1940(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 one of the Registrant's investment advisers. 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 Asset Management.
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).
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).
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Van Kampen American Capital Asset Management, Inc.
Van Kampen American Capital Asset Management Inc. ("VKAC"), is located at One
Parkview Plaza, Oakwood Terrace, Illinois 60181 and through its predecessors,
has been in the investment counseling business since 1926. VKAC is a wholly
owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is a wholly owned
subsidiary of Morgan Stanley Group, Inc.
The list required by this Item 28 of officers and directors of VKAC, 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 VKAC pursuant to the Advisers Act (SEC File No. 801-1169).
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser -- Travelers Investment Management Company
Travelers Investment Management Company ("TIMCO"), is located at One Tower
Square, Hartford, Connecticut 06183, and has been in the investment counseling
business since 1976. TIMCO is a wholly owned subsidiary of Travelers Group
Inc.
The list required by this Item 28 of officers and directors of TIMCO, 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 TIMCO pursuant to Advisers Act (SEC File No. 801-07212).
Item 29. Principal Underwriters
(a) Smith Barney Inc. ("Smith Barney") currently acts as a distributor for
Smith Barney Managed Municipals Fund Inc., Smith Barney California
Municipals Fund Inc., Smith Barney Massachusetts Municipals Fund, Smith
Barney Managed Government Fund Inc., Smith Barney Aggressive Growth Fund
Inc., Smith Barney Appreciation Fund Inc., Smith Barney Principal Return
Fund, Smith Barney Income Funds, Smith Barney Equity Funds, Smith Barney
Investment Funds Inc., Smith Barney Natural Resources 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.,
Travelers Series Fund , Smith Barney Fundamental Value
Fund Inc., Smith Barney Series Fund, Consulting Group Capital Markets
Funds, Smith Barney Investment Trust, Smith Barney Adjustable Rate
Government Income Fund, Smith Barney Oregon Municipals Fund, Smith
Barney Funds, Inc., Smith Barney Muni Funds, Smith Barney World Funds,
Inc., Smith Barney Money Funds, Inc., Smith Barney Municipal Money
Market Fund, Inc., Smith Barney Variable Account Funds, Global
Horizons Investment Series (Cayman) , Smith Barney Worldwide
Special Fund, N.V. (Netherlands Antilles) , Worldwide Securities
Limited (Bermuda), Smith Barney Institutional Cash Management
Fund, Inc., Smith Barney Concert Allocation Series Inc. and
various series of unit investment trusts.
(b) Smith Barney is a wholly owned subsidiary of Smith Barney Holdings
Inc., which in turn is a wholly owned subsidiary of Travelers Group
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).
(c) Not applicable.
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) Van Kampen American Capital Asset Management, Inc.
One Parkview Plaza,
Oakwood Terrace, Illinois 60181
(Records relating to its function as Investment Adviser)
(3) Smith Barney Global Capital Management Inc.
10 Piccadilly
London, U.K. W1V-9LA
(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 Investment Adviser)
(5) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, PA 19103
(Records relating to its function as Custodian)
(6) First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
(Records relating to its function as Transfer Agent and Dividend
Paying Agent)
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
None
485(b) Certification
The Registrant hereby certifies that it meets all the requirements for
effectiveness pursuant to Rule 485(b)(1)(ix) under the Securities Act of 1933,
as amended.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all
of the requirements for effectiveness of this Amendment to the Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has
duly caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, and where applicable, the true and lawful
attorney-in-fact, thereto duly authorized, in the City of New York and State
of New York on the 16th day of April, 1997.
SMITH BARNEY SERIES FUND
By: /s/Heath B. McLendon
Heath B. McLendon
Chairman of the Board
We, the undersigned, hereby severally constitute and appoint Heath B.
McLendon, Christina T. Sydor and Lewis E. Daidone and each of them
singly, our true and lawful attorneys, with full power to them and each of
them to sign for us, and in our hands and in the capacities indicated below,
any and all Amendments to this Registration Statement and to file the same,
with all exhibits thereto, and other documents therewith, with the
Securities and Exchange Commission, granting unto said attorneys and each of
them, acting alone, full authority and power to do and perform each and
every act and thing requisite or necessary to be done in the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys or any of them may lawfully
do or cause to be done by virtue thereof.
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 and the above Power of
Attorney has been signed below by the following persons in the capacities
and as of the dates indicated
/s/Heath B. McLendon
Heath B. McLendon
Chairman of the Board
and Chief Executive
Officer
April 16, 1997
/s/Lewis E. Daidone
Lewis E. Daidone
Senior Vice President
and Treasurer (Chief
Financial and
Accounting Officer)
April 16, 1997
/s/Herber Barg
Herbert Barg
Trustee
April 16, 1997
/s/Alfred J. Bianchetti
Alfred J. Bianchetti
Trustee
April 16, 1997
/s/Martin Brody
Martin Brody
Trustee
April 16, 1997
/s/Dwight B. Crane
Dwight B. Crane
Trustee
April 16, 1997
/s/Burt N. Dorsett
Burt N. Dorsett
Trustee
April 16, 1997
/s/Elliot S. Jaffe
Elliot S. Jaffe
Trustee
April 16, 1997
/s/Stephen E. Kaufman
Stephen E. Kaufman
Trustee
April 16, 1997
/s/Joseph J. McCann
Joseph J. McCann
Trustee
April 16, 1997
/s/Cornelius C. Rose, Jr.
Cornelius C. Rose, Jr.
Trustee
April 16, 1997
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective ___________________, 199_, and is between
THE CHASE MANHATTAN BANK ("Bank") and
("Customer").
1. Customer Accounts.
Bank shall establish and maintain the following accounts ("Accounts"):
(a) A custody account in the name of Customer ("Custody Account") for
any and all stocks, shares, bonds, debentures, notes, mortgages or other
obligations for the payment of money, bullion, coin and any certificates,
receipts, warrants or other instruments representing rights to receive,
purchase or subscribe for the same or evidencing or representing any other
rights or interests therein and other similar property whether certificated or
uncertificated as may be received by Bank or its Subcustodian (as defined in
Section 3) for the account of Customer ("Securities"); and
(b) A deposit account in the name of Customer ("Deposit Account") for
any and all cash in any currency received by Bank or its Subcustodian for the
account of Customer, which cash shall not be subject to withdrawal by draft or
check.
Customer warrants its authority to: 1) deposit the cash and Securities
("Assets") received in the Accounts and 2) give Instructions (as defined in
Section 11) concerning the Accounts. Bank may deliver securities of the same
class in place of those deposited in the Custody Account.
Upon written agreement between Bank and Customer, additional Accounts
may be established and separately accounted for as additional Accounts
hereunder.
2. Maintenance of Securities and Cash at Bank and Subcustodian Locations.
Unless Instructions specifically require another location acceptable to
Bank:
(a) Securities shall be held in the country or other jurisdiction in
which the principal trading market for such Securities is located, where such
Securities are to be presented for payment or where such Securities are
acquired; and
(b) Cash shall be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and Bank can comply with such
Instructions, Bank is authorized to maintain cash balances on deposit for
Customer with itself or one of its "Affiliates" at such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as Customer may direct, if acceptable to Bank. For purposes
hereof, the term "Affiliate" shall mean an entity controlling, controlled by,
or under common control with, Bank.
If Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians as defined in Section 3
(or their securities depositories), such arrangement must be authorized by a
written agreement, signed by Bank and Customer.
3. Subcustodians and Securities Depositories.
Bank may act hereunder through the subcustodians listed in Schedule A
hereof with which Bank has entered into subcustodial agreements
("Subcustodians"). Customer authorizes Bank to hold Assets in the Accounts in
accounts which Bank has established with one or more of its branches or
Subcustodians. Bank and Subcustodians are authorized to hold any of the
Securities in their account with any securities depository in which they
participate.
Bank reserves the right to add new, replace or remove Subcustodians.
Customer shall be given reasonable notice by Bank of any amendment to Schedule
A. Upon request by Customer, Bank shall identify the name, address and
principal place of business of any Subcustodian of Customer's Assets and the
name and address of the governmental agency or other regulatory authority that
supervises or regulates such Subcustodian.
4. Use of Subcustodian.
(a) Bank shall identify the Assets on its books as belonging to
Customer.
(b) A Subcustodian shall hold such Assets together with assets
belonging to other customers of Bank in accounts identified on such
Subcustodian's books as custody accounts for the exclusive benefit of
customers of Bank.
(c) Any Assets in the Accounts held by a Subcustodian shall be subject
only to the instructions of Bank or its agent. Any Securities held in a
securities depository for the account of a Subcustodian shall be subject only
to the instructions of such Subcustodian.
(d) Any agreement Bank enters into with a Subcustodian for holding
Bank's customers' assets shall provide that such assets shall not be subject
to any right, charge, security interest, lien or claim of any kind in favor of
such Subcustodian except for safe custody or administration, and that the
beneficial ownership of such assets shall be freely transferable without the
payment of money or value other than for safe custody or administration. The
foregoing shall not apply to the extent of any special agreement or
arrangement made by Customer with any particular Subcustodian.
5. Deposit Account Transactions.
(a) Bank or its Subcustodians shall make payments from the Deposit
Account upon receipt of Instructions which include all information required by
Bank.
(b) In the event that any payment to be made under this Section 5
exceeds the funds available in the Deposit Account, Bank, in its discretion,
may advance Customer such excess amount which shall be deemed a loan payable
on demand, bearing interest at the rate customarily charged by Bank on similar
loans.
(c) If Bank credits the Deposit Account on a payable date, or at any
time prior to actual collection and reconciliation to the Deposit Account,
with interest, dividends, redemptions or any other amount due, Customer shall
promptly return any such amount upon oral or written notification: (i) that
such amount has not been received in the ordinary course of business or (ii)
that such amount was incorrectly credited. If Customer does not promptly
return any amount upon such notification, Bank shall be entitled, upon oral or
written notification to Customer, to reverse such credit by debiting the
Deposit Account for the amount previously credited. Bank or its Subcustodian
shall have no duty or obligation to institute legal proceedings, file a claim
or a proof of claim in any insolvency proceeding or take any other action with
respect to the collection of such amount, but may act for Customer upon
Instructions after consultation with Customer.
6. Custody Account Transactions.
(a) Securities shall be transferred, exchanged or delivered by Bank or
its Subcustodian upon receipt by Bank of Instructions which include all
information required by Bank. Settlement and payment for Securities received
for, and delivery of Securities out of, the Custody Account may be made in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of Securities to a
purchaser, dealer or their agents against a receipt with the expectation of
receiving later payment and free delivery. Delivery of Securities out of the
Custody Account may also be made in any manner specifically required by
Instructions acceptable to Bank.
(b) Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect to any sale,
exchange or purchase of Securities. Otherwise, such transactions shall be
credited or debited to the Accounts on the date cash or Securities are
actually received by Bank and reconciled to the Account.
(i) Bank may reverse credits or debits made to the Accounts in
its discretion if the related transaction fails to settle within a
reasonable period, determined by Bank in its discretion, after the
contractual settlement date for the related transaction.
(ii) If any Securities delivered pursuant to this Section 6 are
returned by the recipient thereof, Bank may reverse the credits and
debits of the particular transaction at any time.
7. Actions of Bank.
Bank shall follow Instructions received regarding assets held in the
Accounts. However, until it receives Instructions to the contrary, Bank
shall:
(i) Present for payment any Securities which are called,
redeemed or retired or otherwise become payable and all coupons and
other income items which call for payment upon presentation, to the
extent that Bank or Subcustodian is actually aware of such
opportunities.
(ii) Execute in the name of Customer such ownership and other
certificates as may be required to obtain payments in respect of
Securities.
(iii) Exchange interim receipts or temporary Securities for
definitive Securities.
(iv) Appoint brokers and agents for any transaction involving the
Securities, including, without limitation, Affiliates of Bank or any
Subcustodian.
(v) Issue statements to Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
Bank shall send Customer an advice or notification of any transfers of
Assets to or from the Accounts. Such statements, advices or notifications
shall indicate the identity of the entity having custody of the Assets.
Unless Customer sends Bank a written exception or objection to any Bank
statement within sixty (60) days of receipt, Customer shall be deemed to have
approved such statement. In such event, or where Customer has otherwise
approved any such statement, Bank shall, to the extent permitted by law, be
released, relieved and discharged with respect to all matters set forth in
such statement or reasonably implied therefrom as though it had been settled
by the decree of a court of competent jurisdiction in an action where Customer
and all persons having or claiming an interest in Customer or Customer's
Accounts were parties.
All collections of funds or other property paid or distributed in
respect of Securities in the Custody Account shall be made at the risk of
Customer. Bank shall have no liability for any loss occasioned by delay in
the actual receipt of notice by Bank or by its Subcustodians of any payment,
redemption or other transaction regarding Securities in the Custody Account in
respect of which Bank has agreed to take any action hereunder.
8. Corporate Actions; Proxies; Tax Reclaims.
(a) Corporate Actions. Whenever Bank receives information concerning
the Securities which requires discretionary action by the beneficial owner of
the Securities (other than a proxy), such as subscription rights, bonus
issues, stock repurchase plans and rights offerings, or legal notices or other
material intended to be transmitted to securities holders ("Corporate
Actions"), Bank shall give Customer notice of such Corporate Actions to the
extent that Bank's central corporate actions department has actual knowledge
of a Corporate Action in time to notify its customers.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, Bank shall endeavor to obtain
Instructions from Customer or its Authorized Person, but if Instructions are
not received in time for Bank to take timely action, or actual notice of such
Corporate Action was received too late to seek Instructions, Bank is
authorized to sell such rights entitlement or fractional interest and to
credit the Deposit Account with the proceeds or take any other action it
deems, in good faith, to be appropriate in which case it shall be held
harmless for any such action.
(b) Proxy Voting. Bank shall provide proxy voting services, if elected
by Customer, in accordance with the terms of the proxy voting services rider
hereto. Proxy voting services may be provided by Bank or, in whole or in
part, by one or more third parties appointed by Bank (which may be Affiliates
of Bank).
(c) Tax Reclaims.
(i) Subject to the provisions hereof, Bank shall apply for a
reduction of withholding tax and any refund of any tax paid or tax
credits which apply in each applicable market in respect of income
payments on Securities for the benefit of Customer which Bank believes
may be available to such Customer.
(ii) The provision of tax reclaim services by Bank is conditional
upon Bank receiving from the beneficial owner of Securities (A) a
declaration of its identity and place of residence and (B) certain other
documentation (pro forma copies of which are available from Bank).
Customer acknowledges that, if Bank does not receive such declarations,
documentation and information, additional United Kingdom taxation shall
be deducted from all income received in respect of Securities issued
outside the United Kingdom and that U.S. non-resident alien tax or U.S.
backup withholding tax shall be deducted from U.S. source income.
Customer shall provide to Bank such documentation and information as it
may require in connection with taxation, and warrants that, when given,
this information shall be true and correct in every respect, not
misleading in any way, and contain all material information. Customer
undertakes to notify Bank immediately if any such information requires
updating or amendment.
(iii) Bank shall not be liable to Customer or any third party for
any tax, fines or penalties payable by Bank or Customer, and shall be
indemnified accordingly, whether these result from the inaccurate
completion of documents by Customer or any third party, or as a result
of the provision to Bank or any third party of inaccurate or misleading
information or the withholding of material information by Customer or
any other third party, or as a result of any delay of any revenue
authority or any other matter beyond the control of Bank.
(iv) Customer confirms that Bank is authorized to deduct from any
cash received or credited to the Deposit Account any taxes or levies
required by any revenue or governmental authority for whatever reason in
respect of the Securities or Cash Accounts.
(v) Bank shall perform tax reclaim services only with respect to
taxation levied by the revenue authorities of the countries notified to
Customer from time to time and Bank may, by notification in writing, at
its absolute discretion, supplement or amend the markets in which the
tax reclaim services are offered. Other than as expressly provided in
this sub-clause, Bank shall have no responsibility with regard to
Customer's tax position or status in any jurisdiction.
(vi) Customer confirms that Bank is authorized to disclose any
information requested by any revenue authority or any governmental body
in relation to Customer or the Securities and/or Cash held for Customer.
(vii) Tax reclaim services may be provided by Bank or, in whole or
in part, by one or more third parties appointed by Bank (which may be
Affiliates of Bank); provided that Bank shall be liable for the
performance of any such third party to the same extent as Bank would
have been if it performed such services itself.
9. Nominees.
Securities which are ordinarily held in registered form may be
registered in a nominee name of Bank, Subcustodian or securities depository,
as the case may be. Bank may without notice to Customer cause any such
Securities to cease to be registered in the name of any such nominee and to be
registered in the name of Customer. In the event that any Securities
registered in a nominee name are called for partial redemption by the issuer,
Bank may allot the called portion to the respective beneficial holders of such
class of security in any manner Bank deems to be fair and equitable. Customer
shall hold Bank, Subcustodians, and their respective nominees harmless from
any liability arising directly or indirectly from their status as a mere
record holder of Securities in the Custody Account.
10. Authorized Persons.
As used herein, the term "Authorized Person" means employees or agents
including investment managers as have been designated by written notice from
Customer or its designated agent to act on behalf of Customer hereunder. Such
persons shall continue to be Authorized Persons until such time as Bank
receives Instructions from Customer or its designated agent that any such
employee or agent is no longer an Authorized Person.
11. Instructions.
The term "Instructions" means instructions of any Authorized Person
received by Bank, via telephone, telex, facsimile transmission, bank wire or
other teleprocess or electronic instruction or trade information system
acceptable to Bank which Bank believes in good faith to have been given by
Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Bank may specify.
Unless otherwise expressly provided, all Instructions shall continue in full
force and effect until canceled or superseded.
Any Instructions delivered to Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which confirmation
may bear the facsimile signature of such Person), but Customer shall hold Bank
harmless for the failure of an Authorized Person to send such confirmation in
writing, the failure of such confirmation to conform to the telephone
instructions received or Bank's failure to produce such confirmation at any
subsequent time. Bank may electronically record any Instructions given by
telephone, and any other telephone discussions with respect to the Custody
Account. Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which Bank shall make available
to Customer or its Authorized Persons.
12. Standard of Care; Liabilities.
(a) Bank shall be responsible for the performance of only such duties
as are set forth herein or expressly contained in Instructions which are
consistent with the provisions hereof as follows:
(i) Bank shall use reasonable care with respect to its
obligations hereunder and the safekeeping of Assets. Bank shall be
liable to Customer for any loss which shall occur as the result of the
failure of a Subcustodian to exercise reasonable care with respect to
the safekeeping of such Assets to the same extent that Bank would be
liable to Customer if Bank were holding such Assets in New York. In the
event of any loss to Customer by reason of the failure of Bank or its
Subcustodian to utilize reasonable care, Bank shall be liable to
Customer only to the extent of Customer's direct damages, to be
determined based on the market value of the property which is the
subject of the loss at the date of discovery of such loss and without
reference to any special conditions or circumstances. Bank shall have
no liability whatsoever for any consequential, special, indirect or
speculative loss or damages (including, but not limited to, lost
profits) suffered by Customer in connection with the transactions
contemplated hereby and the relationship established hereby even if Bank
has been advised as to the possibility of the same and regardless of the
form of the action. Bank shall not be responsible for the insolvency of
any Subcustodian which is not a branch or Affiliate of Bank.
(ii) Bank shall not be responsible for any act, omission, default
or the solvency of any broker or agent which it or a Subcustodian
appoints unless such appointment was made negligently or in bad faith.
(iii) Bank shall be indemnified by, and without liability to
Customer for any action taken or omitted by Bank whether pursuant to
Instructions or otherwise within the scope hereof if such act or
omission was in good faith, without negligence. In performing its
obligations hereunder, Bank may rely on the genuineness of any document
which it believes in good faith to have been validly executed.
(iv) Customer shall pay for and hold Bank harmless from any
liability or loss resulting from the imposition or assessment of any
taxes or other governmental charges, and any related expenses with
respect to income from or Assets in the Accounts.
(v) Bank shall be entitled to rely, and may act, upon the advice
of counsel (who may be counsel for Customer) on all matters and shall be
without liability for any action reasonably taken or omitted pursuant to
such advice.
(vi) Bank need not maintain any insurance for the benefit of
Customer.
(vii) Without limiting the foregoing, Bank shall not be liable for
any loss which results from: 1) the general risk of investing, or 2)
investing or holding Assets in a particular country including, but not
limited to, losses resulting from malfunction, interruption of or error
in the transmission of information caused by any machines or system or
interruption of communication facilities, abnormal operating conditions,
nationalization, expropriation or other governmental actions; regulation
of the banking or securities industry; currency restrictions,
devaluations or fluctuations; and market conditions which prevent the
orderly execution of securities transactions or affect the value of
Assets.
(viii) Neither party shall be liable to the other for any
loss due to forces beyond their control including, but not limited to
strikes or work stoppages, acts of war (whether declared or undeclared)
or terrorism, insurrection, revolution, nuclear fusion, fission or
radiation, or acts of God.
(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that Bank shall have no duty or
responsibility to:
(i) question Instructions or make any suggestions to Customer or
an Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to
investments or the retention of Securities;
(iii) advise Customer or an Authorized Person regarding any
default in the payment of principal or income of any security other than
as provided in Section 5(c) hereof;
(iv) evaluate or report to Customer or an Authorized Person
regarding the financial condition of any broker, agent or other party to
which Securities are delivered or payments are made pursuant hereto; and
(v) review or reconcile trade confirmations received from
brokers. Customer or its Authorized Persons (as defined in Section 10)
issuing Instructions shall bear any responsibility to review such
confirmations against Instructions issued to and statements issued by
Bank.
(c) Customer authorizes Bank to act hereunder notwithstanding that
Bank or any of its divisions or Affiliates may have a material interest in a
transaction, or circumstances are such that Bank may have a potential conflict
of duty or interest including the fact that Bank or any of its Affiliates may
provide brokerage services to other customers, act as financial advisor to the
issuer of Securities, act as a lender to the issuer of Securities, act in the
same transaction as agent for more than one customer, have a material interest
in the issue of Securities, or earn profits from any of the activities listed
herein.
13. Fees and Expenses.
Customer shall pay Bank for its services hereunder the fees set forth in
Schedule B hereto or such other amounts as may be agreed upon in writing,
together with Bank's reasonable out-of-pocket or incidental expenses,
including, but not limited to, legal fees. Bank shall have a lien on and is
authorized to charge any Accounts of Customer for any amount owing to Bank
under any provision hereof
14. Miscellaneous.
(a) Foreign Exchange Transactions. To facilitate the administration
of Customer's trading and investment activity, Bank is authorized to enter
into spot or forward foreign exchange contracts with Customer or an Authorized
Person for Customer and may also provide foreign exchange through its
subsidiaries, Affiliates or Subcustodians. Instructions, including standing
instructions, may be issued with respect to such contracts but Bank may
establish rules or limitations concerning any foreign exchange facility made
available. In all cases where Bank, its subsidiaries, Affiliates or
Subcustodians enter into a foreign exchange contract related to Accounts, the
terms and conditions of the then current foreign exchange contract of Bank,
its subsidiary, Affiliate or Subcustodian and, to the extent not inconsistent,
this Agreement shall apply to such transaction.
(b) Certification of Residency, etc. Customer certifies that it is a
resident of the United States and shall notify Bank of any changes in
residency. Bank may rely upon this certification or the certification of such
other facts as may be required to administer Bank's obligations hereunder.
Customer shall indemnify Bank against all losses, liability, claims or demands
arising directly or indirectly from any such certifications.
(c) Access to Records. Bank shall allow Customer's independent public
accountant reasonable access to the records of Bank relating to the Assets as
is required in connection with their examination of books and records
pertaining to Customer's affairs. Subject to restrictions under applicable
law, Bank shall also obtain an undertaking to permit Customer's independent
public accountants reasonable access to the records of any Subcustodian which
has physical possession of any Assets as may be required in connection with
the examination of Customer's books and records.
(d) Governing Law; Successors and Assigns, Captions THIS AGREEMENT
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN NEW YORK and shall not be assignable by
either party, but shall bind the successors in interest of Customer and Bank.
The captions given to the sections and subsections of this Agreement are for
convenience of reference only and are not to be used to interpret this
Agreement.
(e) Entire Agreement; Applicable Riders. Customer represents that the
Assets deposited in the Accounts are (Check one):
Employee Benefit Plan or other assets subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA");
Investment Company assets subject to certain U.S. Securities and
Exchange Commission rules
and regulations;
Neither of the above.
This Agreement consists exclusively of this document together with
Schedules A and B, Exhibits I - _______ and the following Rider(s)
[Check applicable rider(s)]:
ERISA
INVESTMENT COMPANY
__ PROXY VOTING
SPECIAL TERMS AND CONDITIONS
There are no other provisions hereof and this Agreement supersedes any
other agreements, whether written or oral, between the parties. Any amendment
hereto must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions hereof are
held invalid, illegal or unenforceable in any respect on the basis of any
particular circumstances or in any jurisdiction, the validity, legality and
enforceability of such provision or provisions under other circumstances or in
other jurisdictions and of the remaining provisions shall not in any way be
affected or impaired.
(g) Waiver. Except as otherwise provided herein, no failure or delay
on the part of either party in exercising any power or right hereunder
operates as a waiver, nor does any single or partial exercise of any power or
right preclude any other or further exercise, or the exercise of any other
power or right. No waiver by a party of any provision hereof, or waiver of
any breach or default, is effective unless in writing and signed by the party
against whom the waiver is to be enforced.
(h) Representations and Warranties. (i) Customer hereby represents
and warrants to Bank that: (A) it has full authority and power to deposit and
control the Securities and cash deposited in the Accounts; (B) it has all
necessary authority to use Bank as its custodian; (C) this Agreement is its
legal, valid and binding obligation, enforceable in accordance with its
terms; (D) it shall have full authority and power to borrow moneys and enter
into foreign exchange transactions; and (E) it has not relied on any oral or
written representation made by Bank or any person on its behalf, and
acknowledges that this Agreement sets out to the fullest extent the duties of
Bank. (ii) Bank hereby represents and warrants to Customer that: (A) it has
the power and authority to perform its obligations hereunder, (B) this
Agreement constitutes a legal, valid and binding obligation on it;
enforceable in accordance with its terms; and (C) that it has taken all
necessary action to authorize the execution and delivery hereof.
(i) Notices. All notices hereunder shall be effective when actually
received. Any notices or other communications which may be required
hereunder are to be sent to the parties at the following addresses or such
other addresses as may subsequently be given to the other party in writing:
(a) Bank: The Chase Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, NY
11245, Attention: Global Custody Division; and (b) Customer:
,
,
(j) Termination. This Agreement may be terminated by Customer or Bank
by giving sixty (60) days written notice to the other, provided that such
notice to Bank shall specify the names of the persons to whom Bank shall
deliver the Assets in the Accounts. If notice of termination is given by
Bank, Customer shall, within sixty (60) days following receipt of the notice,
deliver to Bank Instructions specifying the names of the persons to whom Bank
shall deliver the Assets. In either case Bank shall deliver the Assets to the
persons so specified, after deducting any amounts which Bank determines in
good faith to be owed to it under Section 13. If within sixty (60) days
following receipt of a notice of termination by Bank, Bank does not receive
Instructions from Customer specifying the names of the persons to whom Bank
shall deliver the Assets, Bank, at its election, may deliver the Assets to a
bank or trust company doing business in the State of New York to be held and
disposed of pursuant to the provisions hereof, or to Authorized Persons, or
may continue to hold the Assets until Instructions are provided to Bank.
(k) Money Laundering. Customer warrants and undertakes to Bank for
itself and its agents that all Customer's customers are properly identified in
accordance with U.S. Money Laundering Regulations as in effect from time to
time.
(l) Imputation of certain information. Bank shall not be held
responsible for and shall not be required to have regard to information held
by any person by imputation or information of which Bank is not aware by
virtue of a "Chinese Wall" arrangement. If Bank becomes aware of confidential
information which in good faith it feels inhibits it from effecting a
transaction hereunder Bank may refrain from effecting it.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first-above written.
CUSTOMER
By:____________________________________________
Title:
Date:
THE CHASE MANHATTAN BANK
By:____________________________________________
Title:
Date:
78111
STATE OF )
: ss.
COUNTY OF )
On this day of
, 199 , before me personally came
, to me known, who
being by me duly sworn, did depose and say that he/she resides in
at
, that he/she is
of
, the entity described in and which executed the foregoing
instrument; that he/she knows the seal of said entity, that the seal affixed
to said instrument is such seal, that it was so affixed by order of said
entity, and that he/she signed his/her name thereto by like order.
Sworn to before me this
day of , 199 .
Notary
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
On this day of
, 199 , before me personally came
, to me known, who being by me duly sworn, did depose and say that
he/she resides in at
; that
he/she is a Vice President of THE CHASE MANHATTAN BANK, the corporation
described in and which executed the foregoing instrument; that he/she knows
the seal of said corporation, that the seal affixed to said instrument is such
corporate seal, that it was so affixed by order of the Board of Directors of
said corporation, and that he/she signed his/her name thereto by like order.
Sworn to before me this
day of , 199 .
Notary
Investment Company Rider to Global Custody Agreement
Between The Chase Manhattan Bank and
_________________________________________
effective __________________
Customer represents that the Assets being placed in Bank's custody are
subject to the Investment Company Act of 1940, as amended (the "1940 Act"), as
the same may be amended from time to time.
Except to the extent that Bank has specifically agreed to comply with a
condition of a rule, regulation, interpretation promulgated by or under the
authority of the Securities and Exchange Commission ("SEC") or the Exemptive
Order applicable to accounts of this nature issued to Bank (1940 Act, Release
No. 12053, November 20, 1981), as amended, or unless Bank has otherwise
specifically agreed, Customer shall be solely responsible to assure that the
maintenance of Assets hereunder complies with such rules, regulations,
interpretations or exemptive order promulgated by or under the authority of
the Securities Exchange Commission.
The following modifications are made to the Agreement:
Section 3. Subcustodians and Securities Depositories.
Add the following language to the end of Section 3:
The terms Subcustodian and securities depositories as used herein shall
mean a branch of a qualified U.S. bank, an eligible foreign custodian or
an eligible foreign securities depository, which are further defined as
follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined
in Rule 17f-5 under the 1940 Act;
(b) "eligible foreign custodian" shall mean (i) a banking institution
or trust company, incorporated or organized under the laws of a country
other than the United States, that is regulated as such by that
country's government or an agency thereof and that has shareholders'
equity in excess of $200 million in U.S. currency (or a foreign currency
equivalent thereof) as of the close of its fiscal year most recently
completed prior to the date hereof, (ii) a majority owned direct or
indirect subsidiary of a qualified U.S. bank or bank holding company
that is incorporated or organized under the laws of a country other than
the United States and that has shareholders' equity in excess of $100
million in U.S. currency (or a foreign currency equivalent thereof) as
of the close of its fiscal year most recently completed prior to the
date hereof, (iii) a banking institution or trust company incorporated
or organized under the laws of a country other than the United States or
a majority owned direct or indirect subsidiary of a qualified U.S. bank
or bank holding company that is incorporated or organized under the laws
of a country other than the United States which has such other
qualifications as shall be specified in Instructions and approved by
Bank; or (iv) any other entity that shall have been so qualified by
exemptive order, rule or other appropriate action of the SEC; and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws
of a country other than the United States, which operates (i) the
central system for handling securities or equivalent book-entries in
that country, or (ii) a transnational system for the central handling of
securities or equivalent book-entries.
Customer represents that its Board of Directors has approved each of the
Subcustodians listed in Schedule A hereto and the terms of the subcustody
agreements between Bank and each Subcustodian, which are attached as Exhibits
I through of Schedule A, and further represents that its Board has
determined that the use of each Subcustodian and the terms of each subcustody
agreement are consistent with the best interests of the Fund(s) and its
(their) shareholders. Bank shall supply Customer with any amendment to
Schedule A for approval. Customer has supplied or shall supply Bank with
certified copies of its Board of Directors resolution(s) with respect to the
foregoing prior to placing Assets with any Subcustodian so approved.
Section 11. Instructions.
Add the following language to the end of Section 11:
Deposit Account Payments and Custody Account Transactions made pursuant
to Section 5 and 6 hereof may be made only for the purposes listed
below. Instructions must specify the purpose for which any transaction
is to be made and Customer shall be solely responsible to assure that
Instructions are in accord with any limitations or restrictions
applicable to Customer by law or as may be set forth in its prospectus.
(a) In connection with the purchase or sale of Securities at prices as
confirmed by Instructions;
(b) When Securities are called, redeemed or retired, or otherwise
become payable;
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment;
(d) Upon conversion of Securities pursuant to their terms into other
securities;
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities;
(f) For the payment of interest, taxes, management or supervisory fees,
distributions or operating expenses;
(g) In connection with any borrowings by Customer requiring a pledge of
Securities, but only against receipt of amounts borrowed;
(h) In connection with any loans, but only against receipt of adequate
collateral as specified in Instructions which shall reflect any
restrictions applicable to Customer;
(i) For the purpose of redeeming shares of the capital stock of
Customer and the delivery to, or the crediting to the account of, Bank,
its Subcustodian or Customer's transfer agent, such shares to be
purchased or redeemed;
(j) For the purpose of redeeming in kind shares of Customer against
delivery to Bank, its Subcustodian or Customer's transfer agent of such
shares to be so redeemed;
(k) For delivery in accordance with the provisions of any agreement
among Customer, Bank and a broker-dealer registered under the Securities
Exchange Act of 1934 and a member of The National Association of
Securities Dealers, Inc., relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by
Customer;
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released only
upon payment to Bank of monies for the premium due and a receipt for the
Securities which are to be held in escrow. Upon exercise of the option,
or at expiration, Bank shall receive from brokers the Securities
previously deposited. Bank shall act strictly in accordance with
Instructions in the delivery of Securities to be held in escrow and
shall have no responsibility or liability for any such Securities which
are not returned promptly when due other than to make proper request for
such return;
(m) For spot or forward foreign exchange transactions to facilitate
security trading, receipt of income from Securities or related
transactions;
(n) For other proper purposes as may be specified in Instructions
issued by an officer of Customer which shall include a statement of the
purpose for which the delivery or payment is to be made, the amount of
the payment or specific Securities to be delivered, the name of the
person or persons to whom delivery or payment is to be made, and a
certification that the purpose is a proper purpose under the instruments
governing Customer; and
(o) Upon the termination hereof as set forth in Section 14(j).
Section 12. Standard of Care; Liabilities.
Add the following at the end of Section as 12:
(d) Bank hereby warrants to Customer that in its opinion, after due
inquiry, the established procedures to be followed by each of its
branches, each branch of a qualified U.S. Bank, each eligible foreign
custodian and each eligible foreign securities depository holding
Customer's Securities pursuant hereto afford protection for such
Securities at least equal to that afforded by Bank's established
procedures with respect to similar securities held by Bank and its
securities depositories in New York.
Section 14. Access to Records.
Add the following language to the end of Section 14(c):
Upon reasonable request from Customer, Bank shall furnish Customer such
reports (or portions thereof) of Bank's system of internal accounting
controls applicable to Bank's duties hereunder. Bank shall endeavor to
obtain and furnish Customer with such similar reports as it may
reasonably request with respect to each Subcustodian and securities
depository holding Assets.
GLOBAL PROXY SERVICE RIDER
To Global Custody Agreement
Between
THE CHASE MANHATTAN BANK
AND
____________________________________
dated 199_.
1. Global Proxy Services ("Proxy Services") shall be provided for the
countries listed in the procedures and guidelines ("Procedures")
furnished to Customer, as the same may be amended by Bank from time to
time on prior notice to Customer. The Procedures are incorporated by
reference herein and form a part of this Rider.
2. Proxy Services shall consist of those elements as set forth in the
Procedures, and shall include (a) notifications ("Notifications") by
Bank to Customer of the dates of pending shareholder meetings,
resolutions to be voted upon and the return dates as may be received by
Bank or provided to Bank by its Subcustodians or third parties, and (b)
voting by Bank of proxies based on Customer Directions. Original proxy
materials or copies thereof shall not be provided. Notifications shall
generally be in English and, where necessary, shall be summarized and
translated from such non-English materials as have been made available
to Bank or its Subcustodian. In this respect Bank's only obligation is
to provide information from sources it believes to be reliable and/or to
provide materials summarized and/or translated in good faith. Bank
reserves the right to provide Notifications, or parts thereof, in the
language received. Upon reasonable advance request by Customer, backup
information relative to Notifications, such as annual reports,
explanatory material concerning resolutions, management recommendations
or other material relevant to the exercise of proxy voting rights shall
be provided as available, but without translation.
3. While Bank shall attempt to provide accurate and complete Notifications,
whether or not translated, Bank shall not be liable for any losses or
other consequences that may result from reliance by Customer upon
Notifications where Bank prepared the same in good faith.
4 Notwithstanding the fact that Bank may act in a fiduciary capacity with
respect to Customer under other agreements or otherwise under the
Agreement, in performing Proxy Services Bank shall be acting solely as
the agent of Customer, and shall not exercise any discretion with regard
to such Proxy Services.
5. Proxy voting may be precluded or restricted in a variety of
circumstances, including, without limitation, where the relevant
Securities are: (i) on loan; (ii) at registrar for registration or
reregistration; (iii) the subject of a conversion or other corporate
action; (iv) not held in a name subject to the control of Bank or its
Subcustodian or are otherwise held in a manner which precludes voting;
(v) not capable of being voted on account of local market regulations or
practices or restrictions by the issuer; or (vi) held in a margin or
collateral account.
6 Customer acknowledges that in certain countries Bank may be unable to
vote individual proxies but shall only be able to vote proxies on a net
basis (e.g., a net yes or no vote given the voting instructions received
from all customers).
7. Customer shall not make any use of the information provided hereunder,
except in connection with the funds or plans covered hereby, and shall
in no event sell, license, give or otherwise make the information
provided hereunder available, to any third party, and shall not directly
or indirectly compete with Bank or diminish the market for Proxy
Services by provision of such information, in whole or in part, for
compensation or otherwise, to any third party.
8. The names of Authorized Persons for Proxy Services shall be furnished to
Bank in accordance with 10 of the Agreement. Proxy Services fees shall
be as set forth in 13 of the Agreement or as separately agreed.
SPECIAL TERMS AND CONDITIONS RIDER
GLOBAL CUSTODY AGREEMENT
WITH
___________________________________
DATE
___________________________________
DOMESTIC ONLY
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Securities (the latter if held in
DTC), the following provisions shall apply rather than the provisions of
Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of
Bank's nominee or the nominee of a central depository) and
communications with respect to Securities in the Custody Account
as call for voting or relate to legal proceedings within a
reasonable time after sufficient copies are received by Bank for
forwarding to its customers. In addition, Bank shall follow
coupon payments, redemptions, exchanges or similar matters with
respect to Securities in the Custody Account and advise Customer
or the Authorized Person for such Account of rights issued, tender
offers or any other discretionary rights with respect to such
Securities, in each case, of which Bank has received notice from
the issuer of the Securities, or as to which notice is published
in publications routinely utilized by Bank for this purpose.
Fees
The fees referenced in Section 13 hereof cover only domestic and euro-dollar
holdings. There shall be no Schedule A hereto, as there are no foreign assets
in the Accounts.
DOMESTIC AND GLOBAL
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Securities (the latter if held in
DTC), the following provisions shall apply rather than the pertinent
provisions of Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of
Bank's nominee or the nominee of a central depository) and
communications with respect to Securities in the Custody Account
as call for voting or relate to legal proceedings within a
reasonable time after sufficient copies are received by Bank for
forwarding to its customers. In addition, Bank shall follow
coupon payments, redemptions, exchanges or similar matters with
respect to Securities in the Custody Account and advise Customer
or the Authorized Person for such Account of rights issued, tender
offers or any other discretionary rights with respect to such
Securities, in each case, of which Bank has received notice from
the issuer of the Securities, or as to which notice is published
in publications routinely utilized by Bank for this purpose.
8
2
2
- -
1
- -
Independent Auditors' Consent
To the Shareholders and Board of Trustees of
Smith Barney Series Fund:
We consent to the use of our reports as of the dates indicated below with
respect to the Portfolios indicated below of Smith Barney Series Fund,
incorporated herein by reference and to the references to our Firm under the
headings "Financial Highlights" in the Prospectus and "Counsel and Auditors"
in the Statement of Additional Information.
Date of
Portfolio
Auditors' Report
Appreciation Portfolio February
19, 1997
Total Return Portfolio February
19, 1997
Intermediate High Grade Portfolio February 19, 1997
Equity Index Portfolio February
24, 1997
Money Market Portfolio February 24, 1997
Equity Income Portfolio February 24, 1997
Emerging Growth Portfolio February 24, 1997
Growth & Income Portfolio February 24, 1997
International Equity Portfolio February 24, 1997
Diversified Strategic Income Portfolio February 24, 1997
KPMG Peat Marwick LLP
New York, New York
April 25, 1997
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<NAME> DIVERSIFIED STRATEGIC INCOME
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<RECEIVABLES> 1,138,806
<ASSETS-OTHER> 124,359
<OTHER-ITEMS-ASSETS> 0
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<PERIOD-END> DEC-31-1996
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000874835
<NAME> SMITH BARNEY SERIES FUND
<SERIES>
<NUMBER> 1
<NAME> INTERMEDIATE HIGH GRADE PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
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<PERIOD-END> DEC-31-1996
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000874835
<NAME> SMITH BARNEY SERIES FUND
<SERIES>
<NUMBER> 7
<NAME> EQUITY INDEX FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 13,277,032
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000874835
<NAME> SMITH BARNEY SERIES FUND
<SERIES>
<NUMBER> 9
<NAME> INTERNATIONAL EQUITY
<S> <C>
<PERIOD-TYPE> YEAR
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<PERIOD-END> DEC-31-1996
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000874835
<NAME> SMITH BARNEY SERIES FUND
<SERIES>
<NUMBER> 8
<NAME> MONEY MARKET PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 5,997,977
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000874835
<NAME> SMITH BARNEY SERIES FUND
<SERIES>
<NUMBER> 5
<NAME> TOTAL RETURN
<S> <C>
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</TABLE>
