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TravelersLife & Annuity [LOGO]
A Member of TravelersGroup
Underlying Fund
Prospectuses [GRAPHIC]
Smith Barney Series Fund
Appreciation Portfolio
Diversified Strategic Income Portfolio
APRIL 29, 1997
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<PAGE>
SMITH BARNEY SERIES FUND
Diversified Strategic Income Portfolio
388 Greenwich Street
New York, New York 10013
Contract Owner Inquiries: (800) 451-2010
Smith Barney Series Fund is a diversified, open-end management
investment company (the "Fund"), with ten portfolios (the "Portfolios"), each
with separate goals and investment policies. Shares of the Diversified Strategic
Income Portfolio (the "Portfolio") may be acquired only by investing in a
qualifying variable annuity or variable life insurance contract (a "Contract")
offered by participating life insurance companies.
The Portfolio's investment goal is high current income. The 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.
There can be no guarantee that the Portfolio's investment goal will be
achieved since any investment involves risks. Discussions of the Portfolio's
investments, and their related risks, are found in the sections of this
Prospectus entitled "Investment Goal and Policies of the Portfolio," "Additional
Investments" and "Special Considerations and Risk Factors."
This Prospectus, which sets forth certain information about the Fund and
the Portfolio that you should know before investing, should be read in
conjunction with the applicable Contract prospectus and retained for future
reference. Additional information about the Fund and the Portfolio has been
filed with the Securities and Exchange Commission (the "SEC") in a document
entitled "Statement of Additional Information," dated April 29, 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 above or by contacting a representative of a participating life insurance
company.
The Fund is responsible only for statements that are included in this
Prospectus, the Statement of Additional Information or in authorized sales
material. The Statement of Additional Information is incorporated by reference
into this Prospectus in its entirety. 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 CONTRACT PROSPECTUS. BOTH
PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is April 29, 1997.
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CONTENTS
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SUMMARY ......................................................... 1
EXPENSES OF THE PORTFOLIO ....................................... 2
FINANCIAL HIGHLIGHTS ............................................ 2
INVESTMENT GOAL AND POLICIES OF THE PORTFOLIO ................... 3
ADDITIONAL INVESTMENTS .......................................... 4
CERTAIN INVESTMENT STRATEGIES AND GUIDELINES .................... 5
SPECIAL CONSIDERATIONS AND RISK FACTORS ......................... 10
PORTFOLIO TRANSACTIONS .......................................... 13
NET ASSET VALUE ................................................. 13
HOW TO USE THE PORTFOLIO ........................................ 14
DIVIDENDS AND TAXES ............................................. 15
MANAGEMENT OF THE FUND .......................................... 16
PORTFOLIO MANAGEMENT ............................................ 17
CUSTODIAN AND TRANSFER AGENT .................................... 17
DISTRIBUTOR ..................................................... 17
ADDITIONAL INFORMATION .......................................... 17
THE PORTFOLIO'S PERFORMANCE ..................................... 18
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No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, the Statement of
Additional Information or the Fund's official sales literature in connection
with the offering of the Fund's shares, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Fund. This Prospectus does not constitute an offer in any state in which,
or to any person to whom, the offer may not lawfully be made.
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SUMMARY
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The following summary is qualified in its entirety by detailed
information appearing elsewhere in this Prospectus and in the Statement of
Additional Information. Cross-references in this summary are to headings in the
Prospectus.
The Portfolio
The Portfolio is one of ten portfolios of the Fund, a diversified,
open-end management investment company registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Portfolio's investment objective
is high current income. The Portfolio invests primarily in three types of
fixed-income securities - U.S. government and mortgage-related securities,
foreign government securities and corporate securities rated below investment
grade. See "Additional Information."
Management
Smith Barney Mutual Funds Management Inc. ("SBMFM" or "Investment
Adviser") serves as the Portfolio's investment adviser and administrator. SBMFM
is a wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"), which
in turn is a wholly owned subsidiary of Travelers Group Inc., a diversified
financial services holding company engaged, through its subsidiaries,
principally in four business segments: Investment Services, Consumer Finance
Services, Life Insurance Services and Property & Casualty Insurance Services.
Smith Barney Global Capital Management, Inc. ("Global Capital Management" or
"Sub-Investment Adviser") serves as sub-investment adviser to the Portfolio, and
is a wholly owned subsidiary of Holdings. See "Management of the Fund."
Buying Shares
Shares of the Portfolio are offered only to Contract owners as set forth
in the specific Contract prospectus. A Contract owner can direct the allocation
of part or all of his or her net purchase payment to the Portfolio. In the
future, Contract owners may be offered the opportunity to invest in one or more
of the other portfolios of the Fund. See "How to Use the Portfolio."
Redeeming Shares
Shares may be redeemed as described in the applicable Contract
prospectus. See "How to Use the Portfolio."
Risk Factors and Special Considerations
The non-publicly traded and illiquid securities which the Portfolio may
hold may have to be sold at lower prices, or may remain unsold, when the
Portfolio desires to dispose of them. The foreign securities in which the
Portfolio may invest may be subject to certain risks in addition to those
inherent in U.S. investments. The medium- and lower-rated securities as well as
unrated securities and the securities of unseasoned issuers that the Portfolio
may hold, some of which have speculative characteristics, may be subject to
greater market fluctuation and risk of loss of income or principal than
higher-rated securities. The Portfolio may make certain investments and employ
certain investment techniques that involve other risks, including entering into
repurchase agreements, lending portfolio securities and entering into futures
contracts and related options as hedges. These risks and those associated with
when-issued and delayed-delivery transactions, put and call options, covered
option writing, forward roll transactions and reverse repurchase agreements, are
described under "Investment Goal and Policies of the Portfolio" and "Special
Considerations and Risk Factors."
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1
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EXPENSES OF THE PORTFOLIO
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The Portfolio will bear its own expenses. Operating expenses for the
Portfolio generally will consist of all costs not specifically borne by the
Portfolio's investment adviser, sub-investment adviser, administrator and/or
distributor, including organizational costs, investment advisory and
administration fees, fees for necessary professional and brokerage services,
fees for any pricing service, the costs of regulatory compliance and costs
associated with maintaining legal existence and shareholder relations. From time
to time, the Investment Adviser, Sub-investment Adviser and administrator may
waive all or a portion of the fees payable to it by the Portfolio, thereby
reducing the expenses of the Portfolio. A detailed description of the expenses
involved in investing in a Contract and the Portfolio is included in the
Contract prospectus.
FINANCIAL HIGHLIGHTS
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The following information for the fiscal year 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 four years ended December 31, 1994 has been
audited by other auditors, whose report thereon appears in the Fund's Annual
Report dated December 31, 1994. The information set forth 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.
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
Diversified Strategic Income Portfolio 1996 1995 1994 1993 1992 1991(1)
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<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.01 $ 9.18 $ 10.07 $ 9.61 $ 10.14 $10.00
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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
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Total Income (Loss) From Operations 1.12 1.44 (0.28) 1.17 0.14 0.14
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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) -- --
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Total Distributions (0.15) (0.61) (0.61) (0.71) (0.67) --
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Net Asset Value, End of Year $ 10.98 $ 10.01 $ 9.18 $ 10.07 $ 9.61 $10.14
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Total Return 11.16% 16.18% (2.81)% 12.56 1.42% 1.40%++
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Net Assets, End of Year (000's) $59,515 $59,316 $55,260 $43,244 $19,991 $3,914
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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+
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Portfolio turnover rate 106% 46% 54% 94% 65% --
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</TABLE>
(1) For the period from October 31, 1991 (commencement of operations) to
December 31, 1991.
(2) 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. In
addition, 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. If such fees were not waived or expenses reimbursed, the per
share effect on net investment income and the expense ratios would have
been as follows:
<TABLE>
<CAPTION>
Net Investment Income Expense Ratios Without Waivers
Per Share Decrease and Reimbursements
------------------------------------------- -----------------------------------------
Portfolio 1996 1995 1994 1993 1992 1991 1996 1995 1994 1993 1992 1991
--------- ---- ---- ---- ----- ----- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Diversified Strategic Income N/A N/A N/A $0.00* $0.03 $0.03 N/A N/A N/A 1.02% 1.41% 7.76%+
</TABLE>
(3) Includes realized gains and losses from foreign currency transactions for
the four years ended December 31, 1995.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
* Amount represents less than $0.01.
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INVESTMENT GOAL AND POLICIES OF THE PORTFOLIO
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Investment Goal
The Portfolio's goal is high current income. This investment goal may
not be changed without the approval of the holders of a majority (as defined in
the 1940 Act) of the outstanding shares of the Portfolio. There can, of course,
be no guarantee that the Portfolio will achieve its investment goal. Additional
information about investment strategies that the Portfolio may employ and
investment policies mentioned below appears in the Statement of Additional
Information.
Investment Policies
The Portfolio will seek to achieve its goal 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 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-Rated 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.
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ADDITIONAL INVESTMENTS
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Money Market Instruments
The Portfolio may, as a cash management tool, hold up to 20% of the
value of its total assets in cash and invest in short-term instruments and, for
temporary defensive purposes, may hold cash and invest in short-term instruments
without limitation. Short-term instruments in which the Portfolio may invest
include: U.S. government securities; obligations of banks having at least $1
billion in assets (including certificates of deposit, time deposits and bankers'
acceptances of U.S. or foreign banks, U.S. savings and loan associations and
similar institutions); commercial paper rated no lower than A-2 by S&P or
Prime-2 by Moody's or the equivalent from another nationally recognized
statistical rating organization ("NRSRO") or, if unrated, of an issuer having an
outstanding, unsecured debt issue then rated within the two highest rating
categories; and repurchase agreements with respect to any of the foregoing
entered into with banks and non-bank dealers approved by the Fund's Board of
Trustees.
U.S. Government Securities
The U.S. government securities in which the Portfolio may invest
include: direct obligations of the United States Treasury (such as Treasury
Bills, Treasury Notes and Treasury Bonds), and obligations issued by U.S.
government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as
certificates issued by GNMA); securities that are supported by the right of the
issuer to borrow from the U.S. Treasury (such as securities of Federal Home Loan
Banks); and securities that are supported only by the credit of the
instrumentality (such as bonds issued by FNMA) and FHLMC). Treasury Bills have
maturities of less than one year, Treasury Notes have maturities of one to ten
years and Treasury Bonds generally have maturities of greater than ten years at
the date of issuance.
The Portfolio may invest up to 5% of its net assets in U.S. government
securities for which the principal repayment at maturity, while paid in U.S.
dollars, is determined by reference to the exchange rate between the U.S. dollar
and the currency of one or more foreign countries ("Exchange Rate-Related
Securities"). Exchange Rate-Related Securities are issued in a variety of forms,
depending on the structure of the principal repayment formula. The principal
repayment formula may be structured so that the securityholder will benefit if a
particular foreign currency to which the security is linked is stable or
appreciates against the U.S. dollar. In the alternative, the principal repayment
formula may be structured so that the securityholder benefits if the U.S. dollar
is stable or appreciates against the linked foreign currency. Finally, the
principal repayment formula can be a function of more than one currency and,
therefore, be designed in either of the aforementioned forms or a combination of
those forms.
Investments in Exchange Rate-Related Securities entail special risks.
There is the possibility of significant changes in rates of exchange between the
U.S. dollar and any foreign currency to which an Exchange Rate-Related Security
is linked. If currency exchange rates do not move in the direction or to the
extent anticipated at the time of purchase of the security, the amount of
principal repaid at maturity might be significantly below the par value of the
security, which might not be offset by the interest earned by the Portfolio over
the term of the security. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors. The imposition or modification of foreign
exchange controls by the United States or foreign governments or intervention by
central banks also could affect exchange rates.
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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 STRATEGIES AND GUIDELINES
================================================================================
Up to 10% of the total assets of the Portfolio may be invested in
securities with contractual or other restrictions on resale and other
instruments that are not readily marketable, including (a) repurchase agreements
with maturities greater than seven days, (b) futures contracts and related
options for which a liquid secondary market does not exist and (c) time deposits
maturing in more than seven calendar days. The Portfolio may borrow from banks
for temporary or emergency purposes, but not for leverage, in an amount up to
30% of its assets, and may pledge its assets to the same extent in connection
with such borrowings. Whenever borrowings from banks exceed 5% of the value of
the assets of the Portfolio, the Portfolio will not make any additional
investments. Except for the limitations on borrowing, the investment guidelines
set forth in this paragraph may be changed at any time without shareholder
consent by vote of the Board of Trustees of the Fund. A complete list of
investment restrictions that identifies additional restrictions that cannot be
changed without the approval of a majority of the Portfolio's outstanding shares
is contained in the Statement of Additional Information.
Repurchase Agreements
The Portfolio may engage in repurchase agreement transactions on
portfolio securities, in each case with banks which are the issuers of
instruments acceptable for purchase by the Portfolio and with certain dealers
listed on the Federal Reserve Bank of New York's list of reporting dealers.
Under the terms of a typical repurchase agreement, the Portfolio would acquire
an underlying debt obligation for a relatively short period (usually not more
than one week) subject to an obligation of the seller to repurchase, and the
Portfolio to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Portfolio's holding period. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during the Portfolio's holding period. The value of the underlying securities
will be monitored by the Portfolio's investment adviser to ensure that it at
least equals at all times the total amount of the repurchase obligation,
including interest. The Portfolio bears a risk of loss in the event that the
other party to a repurchase agreement defaults on its obligations and the
Portfolio is delayed or prevented from exercising its rights to dispose of the
collateral securities, including the risk of a possible decline in the value of
the underlying securities during the period while the Portfolio seeks to assert
these rights. The Portfolio's Investment Adviser, acting under the supervision
of the Fund's Board of Trustees, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those banks and dealers with which the
Portfolio enters into repurchase agreements to evaluate potential risks. A
repurchase agreement is considered to be a loan collateralized by the underlying
securities under the 1940 Act.
Covered Option Writing
The Portfolio may write put and call options on securities. The
Portfolio realizes fees (referred to as "premiums") for granting the rights
evidenced by the options. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder an underlying
security at a specified price at any time during the option period. In contrast,
a call option embodies the right of its purchaser to compel the writer of the
option to sell to the option holder an underlying security at a specified price
at any time during the option period. Thus, the purchaser of a put option
written by the Portfolio has the right to compel the Portfolio to purchase
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from it the underlying security at the agreed-upon price for a specified time
period, while the purchaser of a call option written by the Portfolio has the
right to purchase from the Portfolio the underlying security owned by the
Portfolio at the agreed-upon price for a specified time period.
Upon the exercise of a put option written by the Portfolio, the
Portfolio may suffer a loss equal to the difference between the price at which
the Portfolio is required to purchase the underlying security plus the premium
received for writing the option and its market value at the time of the option
exercise. Upon the exercise of a call option written by the Portfolio, the
Portfolio may suffer a loss equal to the difference between the security's
market value at the time of the option exercise less the premium received for
writing the option and the Portfolio's acquisition cost of the security.
The Portfolio will write only covered options. Accordingly, whenever the
Portfolio writes a call option, it will continue to own or have the present
right to acquire the underlying security for as long as it remains obligated as
the writer of the option. To support its obligation to purchase the underlying
security if a put option is exercised, the Portfolio that has written a put
option will either (a) deposit with The Chase Manhattan Bank, the custodian of
the Portfolio's investments ("Chase"), in a segregated account cash, U.S.
government securities, debt obligations of any grade or equity securities having
a value at least equal to the exercise price of the underlying securities,
provided such securities have been determined by the SBMFM 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 Chase in a
segregated account).
The Portfolio may engage in a closing purchase transaction to realize a
profit, to prevent an underlying security from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the outstanding
option's expiration). To effect a closing purchase transaction, the Portfolio
would purchase, prior to the holder's exercise of an option that the Portfolio
has written, an option of the same series as that on which the Portfolio desires
to terminate its obligation. The obligation of the Portfolio under an option
that it has written would be terminated by a closing purchase transaction, but
the Portfolio would not be deemed to own an option as the result of the
transaction. There can be no assurance that the Portfolio will be able to effect
closing purchase transactions at a time when it wishes to do so. To facilitate
closing purchase transactions, however, the Portfolio ordinarily will write
options only if a secondary market for the options 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.
Lending of Securities
The Portfolio may lend its portfolio securities to brokers, dealers and
other financial organizations. By lending its securities, the Portfolio can
increase its income by continuing to receive interest on the loaned securities
as well as by either investing the cash collateral in short-term instruments or
obtaining yield in the form of interest paid by the borrower when U.S.
government securities are used as collateral. Loans of portfolio securities, if
and when made, by the Portfolio may not exceed 33 1/3% of the Portfolio's total
assets, taken at value. Loans of portfolio
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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.
Futures and Options on Futures
When deemed advisable by its Investment Adviser, the Portfolio may enter
into interest rate futures contracts, foreign currency futures contracts and may
enter into related options that are traded on a U.S. exchange or board of trade.
These transactions will be made solely for the purpose of hedging against the
effects of changes in the value of portfolio securities due to anticipated
changes in interest rates, market conditions and currency values, as the case
may be. All futures and options contracts will be entered into only when the
transactions are economically appropriate to the reduction of risks inherent in
the management of the Portfolio.
An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a specified amount of a particular
financial instrument (debt security) at a specified price, date, time and place.
Similarly, a foreign currency futures contract provides for the future sale by
one party and the purchase by another party of a certain amount of a particular
currency at a specified price, date, time and place. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally entered into. An option on an interest rate, stock index
or currency futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and short position if the option is a put) at a specified
exercise price at any time prior to the expiration date of the option.
The use of futures contracts and options on futures contracts as a
hedging device involves several risks. There can be no assurance that there will
be a correlation between price movements in the underlying securities, index or
currency, on the one hand, and price movements in the securities that are the
subject of the hedge, on the other hand. Positions in futures contracts and
options on futures contracts may be closed out only on the exchange or board of
trade on which they were entered into, and there can be no assurance that an
active market will exist for a particular contract or option at any particular
time.
The Portfolio may not enter into futures and options contracts for which
aggregate initial margin deposits and premiums paid for unexpired options to
establish such positions that are not bona fide hedging positions (as defined by
the Commodity Futures Trading Commission) exceed 5% of the fair market value of
the Portfolio's assets, after taking into account unrealized profits and
unrealized losses on futures contracts into which it has entered. With respect
to long positions in futures or options on futures, the Portfolio will "cover"
the position in a manner consistent with SEC guidance.
When-Issued Securities and Delayed-Delivery Transactions
The Portfolio may purchase and sell securities on a when-issued basis,
which calls for the purchase (or sale) of securities at an agreed-upon price on
a specified future date. The Portfolio will enter into a when-issued transaction
for the purpose of acquiring portfolio securities and not for the purpose of
leverage. In such transactions, delivery of the securities occurs beyond the
normal settlement periods, but no payment or delivery is made by, and no
interest accrues to, the Portfolio prior to the actual delivery or payment by
the other party to the transaction. Due to fluctuations in the value of
securities purchased or sold on a when-issued or delayed-delivery basis, the
returns obtained on such securities may be higher or lower then the returns
available in the market on the dates when the investments are actually delivered
to the buyers. The
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Portfolio will establish a segregated account consisting of cash, U.S.
government securities, high-grade debt obligations or equity securities in an
amount equal to 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.
The Portfolio will not accrue income with respect to a when-issued security
prior to its stated delivery date.
Purchasing Options on Securities
The Portfolio may purchase put and call options that are traded on a
U.S. securities exchange, foreign exchanges, and in the over-the-counter market.
The Portfolio may utilize up to 10% of its assets to purchase put options on
portfolio securities and may do so at or about the same time that it purchases
the underlying security or at a later time. By buying a put, the Portfolio
limits its risk of loss from a decline in the market value of the underlying
security until the put expires. Any appreciation in the value of and yield
otherwise available from the underlying security, however, will be partially
offset by the amount of the premium paid for the put option and any related
transaction costs. The Portfolio may utilize up to 10% of its assets to purchase
call options on portfolio securities. Call options may be purchased by the
Portfolio in order to acquire the underlying securities for the Portfolio at a
price that avoids any additional cost that would result from a substantial
increase in the market value of a security. The Portfolio also may purchase call
options to increase its return to investors at a time when the call is expected
to increase in value due to anticipated appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing
sale transactions (sales by the Portfolio, prior to the exercise of options that
it has purchased, of options of the same series), and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the option plus the related transaction costs.
Covered Option Writing
The Portfolio may write put and call options on securities. The
Portfolio realizes fees (referred to as "premiums") for granting the rights
evidenced by the options. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder an underlying
security at a specified price at any time during the option period. In contrast,
a call option embodies the right of its purchaser to compel the writer of the
option to sell to the option holder an underlying security at a specified price
at any time during the option period. Thus, the purchaser of a put option
written by the Portfolio has the right to compel the Portfolio to purchase from
it the underlying security at the agreed-upon price for a specified time period,
while the purchaser of a call option written by the Portfolio has the right to
purchase from the Portfolio the underlying security owned by the Portfolio at
the agreed-upon price for a specified time period.
Upon the exercise of a put option written by the Portfolio, the
Portfolio may suffer a loss equal to the difference between the price at which
the Portfolio is required to purchase the underlying security plus the premium
received for writing the option and its market value at the time of the option
exercise. Upon the exercise of a call option written by the Portfolio, the
Portfolio may suffer a loss equal to the difference between the security's
market value at the time of the option exercise less the premium received for
writing the option and the Portfolio's acquisition cost of the security.
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The Portfolio will write only covered options. Accordingly, whenever the
Portfolio writes a call option, it will continue to own or have the present
right to acquire the underlying security for as long as it remains obligated as
the writer of the option. To support its obligation to purchase the underlying
security if a put option is exercised, the Portfolio that has written a put
option will either (a) deposit with 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).
The Portfolio may engage in a closing purchase transaction to realize a
profit, to prevent an underlying security from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the outstanding
option's expiration). To effect a closing purchase transaction, the Portfolio
would purchase, prior to the holder's exercise of an option that the Portfolio
has written, an option of the same series as that on which the Portfolio desires
to terminate its obligation. The obligation of the Portfolio under an option
that it has written would be terminated by a closing purchase transaction, but
the Portfolio would not be deemed to own an option as the result of the
transaction. There can be no assurance that the Portfolio will be able to effect
closing purchase transactions at a time when it wishes to do so. To facilitate
closing purchase transactions, however, the Portfolio 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.
Forward Roll Transactions
In order to enhance current income, the Portfolio may enter into forward
roll transactions with respect to mortgage-related securities issued by GNMA,
FNMA and FHLMC. In a forward roll transaction, the Portfolio sells a mortgage
security to a financial institution, such as a bank or broker-dealer, and
simultaneously agrees to repurchase a similar security from the institution at a
later date at an agreed-upon price. The mortgage securities that are repurchased
will bear the same interest rate as those sold, but generally will be
collateralized by different pools of mortgages with different prepayment
histories than those sold. During the period between the sale and repurchase,
the Portfolio will not be entitled to receive interest and principal payments on
the securities sold. Proceeds of the sale will be invested in short-term
instruments, particularly repurchase agreements, and the income from these
investments, together with any additional fee income received on the sale, will
generate income for the Portfolio exceeding the yield on the securities sold.
Forward roll transactions involve the risk that the market value of the
securities sold by the Portfolio may decline below the repurchase price of those
securities. At the time the Portfolio enters into a forward roll transaction, it
will place in a segregated custodial account cash, U.S. government securities,
high-grade debt obligations or equity securities having a value equal to the
repurchase price (including accrued interest), provided such securities have
been determined by the SBMFM to
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<PAGE>
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 the Portfolio.
Currency Exchange Transactions and Options on Foreign Currencies
The Portfolio 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 Portfolio may enter into reverse repurchase agreement transactions
with member banks of the Federal Reserve System or with certain dealers listed
on the Federal Reserve Bank of New York's list of reporting dealers. A reverse
repurchase agreement, which is considered a borrowing by the Portfolio, involves
a sale by the Portfolio of securities that it holds concurrently with an
agreement by the Portfolio to repurchase the same securities at an agreed-upon
price and date. The Portfolio typically will invest the proceeds of a reverse
repurchase agreement in money market instruments or repurchase agreements
maturing not later than the expiration of the reverse repurchase agreement. This
use of the proceeds is known as leverage. The Portfolio will enter into a
reverse repurchase agreement for leverage purposes only when the interest income
to be earned from the investment of the proceeds is greater than the interest
expense of the transaction. The Portfolio also may use the proceeds of reverse
repurchase agreements to provide liquidity to meet redemption requests when the
sale of the Portfolio's securities is considered to be disadvantageous. At the
time the Portfolio enters into a reverse repurchase agreement with a
broker-dealer (but not a bank), it will place in a segregated custodial account
cash, U.S. government securities, high-grade debt obligations or equity
securities having a value equal to its obligations under the reverse repurchase
agreements provided such securities have been determined by the manager to be
liquid and unencumbered, and are marked to market daily pursuant to guidelines
established by the Trustees.
SPECIAL CONSIDERATIONS AND RISK FACTORS
================================================================================
This section describes certain investments of the Portfolio and related
risks. Further information concerning investments of the Portfolio and related
risks may be found in the Appendix to this Prospectus and in the Statement of
Additional Information.
Fixed-Income Securities
The market value of fixed-income obligations of the Portfolio will be
affected by general changes in interest rates, which will result in increases or
decreases in the value of fixed-income obligations held by the Portfolio. The
market value of the Portfolio's fixed-income obligations can be expected to vary
inversely in
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<PAGE>
relation to changes in prevailing interest rates. In addition, fixed-income
securities in which the Portfolio may invest may not yield as high a level of
current income as might be achieved by investing in securities with less
liquidity and safety and longer maturities.
Non-Publicly Traded and Illiquid Securities
The Portfolio may purchase securities that are not publicly traded. The
sale of securities that are not publicly traded is typically restricted under
federal securities laws. As a result, the Portfolio may be forced to sell these
securities at less than fair market value or may not be able to sell them when
its Investment Adviser believes it desirable to do so. The Portfolio's
investments in illiquid securities are subject to the risk that should the
Portfolio desire to sell any of these securities when a ready buyer is not
available at a price that the Portfolio deems representative of their value, the
value of the Portfolio's net assets could be adversely affected.
Mortgage-Related Securities
To the extent that the 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
the 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.
Foreign Securities
The Portfolio may invest in obligations of companies and governments of
foreign nations, which involve certain risks in addition to the usual risks
inherent in U.S. investments. These risks include those resulting from
revaluation of currencies, future adverse political and economic developments
and the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers and the lack of uniform accounting, auditing and financial
reporting standards or of other regulatory practices and requirements comparable
to those applicable to U.S. companies. The performance of the Portfolio when
investing in foreign securities may be adversely affected by fluctuations in
value of one or more foreign currencies relative to the U.S. dollar. Moreover,
securities of many foreign companies may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies. In addition,
with respect to certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Portfolio, including the withholding
of dividends. Foreign securities may be subject to foreign government taxes that
could reduce the return on such securities. Changes in foreign currency exchange
rates may affect the value of portfolio securities and the appreciation or
depreciation of investments. Investment in foreign securities also may result in
higher expenses due to the cost of converting foreign currency to U.S. dollars,
the payment of fixed brokerage commissions on foreign exchanges, which generally
are higher than commissions on U.S. exchanges, and the expense of maintaining
securities with foreign custodians.
In addition, the 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
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<PAGE>
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-Rated and Unrated Securities
The Portfolio may invest in medium- or lower-rated securities and
unrated securities of comparable quality. Generally, these securities offer a
higher current yield than is offered by higher-rated securities, but also will
likely have some quality and protective characteristics that, in the judgment of
the rating organizations, are outweighed by large uncertainties or major risk
exposures to adverse conditions and are predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal in accordance with
the terms of the obligation. The market values of certain of these securities
also tend to be more sensitive to individual corporate developments and changes
in economic conditions than higher-quality securities. In addition, medium- and
lower-rated securities and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and lower-rated, and comparable
unrated, securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during a major economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium- and lower-rated securities and
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. In light of these risks, SBMFM, in
evaluating the creditworthiness of an issue, whether rated or unrated, will take
various factors established by the Fund's Board of Trustees into consideration,
which may include, as applicable, the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the ability of the
issuer's management and regulatory matters.
The markets in which medium- and lower-rated or comparable unrated
securities are traded generally are more limited than those in which
higher-rated securities are traded. The existence of limited markets for these
securities may restrict the availability of securities for the Portfolio to
purchase and also may have the effect of limiting the ability of the Portfolio
to (a) obtain accurate market quotations for purposes of valuing securities and
calculating net asset value and (b) sell securities at their fair value either
to meet redemption requests or to respond to changes in the economy or the
financial markets. The market for medium- and lower-rated, and comparable
unrated, securities is relatively new and has not fully weathered a major
economic recession. Any such recession, however, would disrupt severely the
market for such securities and adversely affect the value of such securities,
and could adversely affect the ability of the issuers of such securities to
repay principal and pay interest thereon.
Fixed-income securities, including medium- and lower-rated, and
comparable unrated, securities, frequently have call or buy-back features that
permit their issuers to call or repurchase the securities from their holders,
such as the Portfolio. If an issuer exercises these rights during periods of
declining interest rates, the Portfolio may have to replace the security with a
lower yielding security resulting in a decreased return to the Portfolio.
The market value of securities in lower rating categories is more
volatile than that of higher quality securities, and the markets in which
medium- and lower-rated or comparable unrated securities are traded are more
limited than those in which higher-rated securities are traded. Adverse
publicity and investor perceptions also may have a negative impact on the value
and liquidity of lower-rated, high-yield securities, especially in a limited
trading market.
Subsequent to its purchase by the Portfolio, an issue of securities may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Portfolio. Neither event will require sale of such
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12
<PAGE>
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.
Securities of Unseasoned Issuers
The Portfolio 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.
PORTFOLIO TRANSACTIONS
================================================================================
All orders for transactions in securities, options, futures contracts
and options on futures contracts on behalf of the Portfolio will be placed by
SBMFM with broker-dealers that SBMFM selects, including Smith Barney and other
affiliated brokers. The Portfolio may utilize Smith Barney or a Smith
Barney-affiliated broker in connection with a purchase or sale of securities
when SBMFM believes that the broker's charge for the transaction does not exceed
usual and customary levels. The same standard applies to the use of Smith 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 the Portfolio is the net asset value
of that share. The net asset value per share of the Portfolio will be calculated
each day, Monday through Friday, except on days when the New York Stock
Exchange, Inc. (the "NYSE") is closed. The NYSE is currently scheduled to be
closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas, and on the preceding
Friday or subsequent Monday when one of these holidays falls on a Saturday or
Sunday, respectively. Net asset value per share of the Portfolio is determined
as of the close of regular trading on the NYSE (currently 4:00 p.m., New York
time).
Net asset value per share is computed by dividing the value of the
Portfolio's net assets by the total number of its shares outstanding. Generally,
the Portfolio's investments are valued at market value or, in the absence of a
market value with respect to any portfolio securities, at fair value as
determined by or under the direction of the Fund's Board of Trustees. A security
that is primarily traded on a U.S. or foreign exchange (including securities
traded through the National Market System) is valued at the last sale price on
that exchange or, if there were no sales during the day, at the current quoted
bid price. Portfolio securities that are primarily traded on foreign exchanges
are generally valued at the preceding closing values of such securities on their
respective exchanges, except that when an occurrence subsequent to the time a
value was so established is likely to have changed the value, then the fair
value of those securities will be determined by consideration of other factors
by or under the direction of the Fund's Board of Trustees or its delegates.
Over-the-counter securities that are not traded through the National Market
System and securities listed or traded on certain foreign exchanges whose
operations are similar to the U.S. over-the-counter market are valued on
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<PAGE>
the basis of the bid price at the close of business on each day. An option is
generally valued at the last sale price or, in the absence of a last sale price,
the last offer price. Investments in U.S. government securities (other than
short-term securities) are valued at the average of the quoted bid and asked
prices in the over-the-counter market. Short-term investments that mature in 60
days or less are valued at amortized cost when the Fund's Board of Trustees
determines that this constitutes fair value. The value of a futures contract
equals the unrealized gain or loss on the contract, which is determined by
marking the contract to the current settlement price for a like contract
acquired on the day on which the futures contract is being valued. A settlement
price may not be used if the market makes a limit move with respect to the
security, index or currency underlying the futures contract. In such event, the
futures contract will be valued at a fair market price to be determined by or
under the direction of the Fund's Board of Trustees. Further information
regarding the Fund's valuation policies is contained in the Statement of
Additional Information.
HOW TO USE THE PORTFOLIO
================================================================================
Investing in the Portfolio
In order to invest in shares of the Portfolio, an investor must be a
variable annuity or variable life insurance contract owner. For further
information regarding a Contract, see the description provided in the Contract
prospectus.
Sales Charges and Surrender Charges
The Fund does not assess any sales charge, either when it sells or when
it redeems shares of the Portfolio. However, surrender charges that may be
assessed under the Contract are described in the Contract prospectus. Mortality
and expense risk fees and other charges are also described in the Contract
prospectus.
Redeeming and Exchanging Shares
A participating insurance company will redeem shares of the Portfolio in
response to full or partial surrenders under the terms of the Contract.
Generally, payment upon redemption will be made within three days after
receiving a valid redemption request (unless redemption is suspended or payment
is delayed as permitted in accordance with SEC regulations). The Fund will use
the net asset value at the close of trading on the NYSE on the day the notice of
surrender or transfer is received. If the request is received after the close of
trading on the NYSE, the shares will be redeemed at the net asset value at the
close of the next business day. The value of any redeemed shares may be more or
less than their original purchase price.
A detailed description of how to surrender a Contract is included in the
Contract prospectus, which must accompany this prospectus. It is conceivable
that in the future it may be disadvantageous for both variable annuity accounts
and variable life insurance accounts, or for variable accounts of different
insurance companies, to invest simultaneously in the Portfolio, although
currently neither the insurance companies nor the Portfolio foresee any such
disadvantages to either variable annuity or variable life insurance policy of
owners of any insurance company. The Fund's Board of Trustees intends to monitor
events in order to identify any material conflicts between such policy owners
and to determine what action, if any, should be taken in response thereto.
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<PAGE>
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, unless the shareholder instructs
the Portfolio to pay all dividends and distributions in cash. Net investment
income, including dividends on stocks and interest on bonds or other securities
the Fund holds, is distributed to the shareholders of the Portfolio on an annual
basis. The shareholders of this Portfolio are the separate accounts of
participating life insurance companies.
Capital Gains. Distributions of any net realized capital gains of the
Portfolio will be paid annually shortly after the close of the fiscal year in
which they are earned.
Taxes
In the opinion of counsel to the Fund, the Portfolio will be treated as
a separate taxpayer with the result that, for federal income tax purposes, the
amounts of investment income and capital gains earned will be determined on a
portfolio (rather than on a Fund-wide) basis.
The Fund intends that the Portfolio will meet the requirements for
qualification each year as a "regulated investment company" within the meaning
of the Internal Revenue Code of 1986, as amended (the "Code"). In order to
qualify as a regulated investment company, the Portfolio must meet certain
income and diversification tests, including the requirement that it derive less
than 30% of its gross income in each taxable year from the sale or other
disposition of (a) stock or securities held for less than three months, (b)
options, futures or forward contracts (other than options, futures or forward
contracts on foreign currencies) held for less than three months and (c) foreign
currencies (or options, futures or forward contracts on such foreign currencies)
held for less than three months but only if such currencies (or options, futures
or forward contracts) are not directly related to the Portfolio's principal
business of investing in stock or securities (or options or futures with respect
to stock or securities). As a regulated investment company and provided certain
distribution requirements are met, the Portfolio will not be subject to federal
income tax on its net investment income and net capital gains that it
distributes to its shareholders. Dividends paid by the Portfolio from taxable
investment income and distributions of short-term capital gains will be treated
as ordinary income in the hands of the shareholders for federal income tax
purposes, whether received in cash or reinvested in additional shares.
Distributions of net long-term capital gains will be treated as long-term
capital gains in the hands of the shareholders, if certain notice and
designation requirements are satisfied, whether paid in cash or reinvested in
additional shares, regardless of the length of time the investor has held shares
of the Portfolio.
The Fund has been informed that the separate accounts represented by a
Contract should, for federal income tax purposes, be considered the shareholders
of the Portfolio.
To comply with regulations under Section 817(h) of the Code, the
Portfolio will be required to diversify its investments so that on the last day
of each calendar quarter no more than 55% of the value of its assets is
represented by any one investment, no more than 70% is represented by any two
investments, no more than 80% is represented by any three investments and no
more than 90% is represented by any four investments. Generally, all securities
of the same issuer are treated as a single investment. For the purposes of
Section 817(h) of the Code, obligations of the United States Treasury and each
U.S. government agency or instrumentality are treated as securities of separate
issuers.
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<PAGE>
The Treasury Department has indicated that it may issue future
pronouncements addressing the circumstances in which a variable contract owner's
control of the investments of a separate account may cause the variable contract
owner, rather than the insurance company, to be treated as the owner of the
assets held by the separate account. If the variable contract owner is
considered the owner of the securities underlying the separate account, income
and gains produced by those securities would be included currently in the
variable contract owner's gross income. It is not known what standards will be
set forth in such pronouncements or when, if at all, these pronouncements may be
issued.
In the event that rules or regulations are adopted, there can be no
assurance that the Portfolio will be able to operate as currently described in
this Prospectus, or that the Fund will not have to change the investment goal or
investment policies of the Portfolio. While the Portfolio's investment goal is
fundamental and may be changed only by a vote of a majority of the Portfolio's
outstanding shares, the Fund's Board of Trustees reserves the right to modify
the investment policies of the Portfolio as necessary to prevent any such
prospective rules and regulations from causing a Contract owner to be considered
the owner of the shares of the Portfolio.
Please refer to the Contract prospectus for information regarding the
federal income tax treatment of distributions.
MANAGEMENT OF THE FUND
================================================================================
Board of Trustees
Overall responsibility for management and supervision of the Fund and
its portfolios, including the Portfolio, rests with the Fund's Board of
Trustees. The Trustees approve all significant agreements between the Fund and
the persons or companies that furnish services to the Fund and the Portfolio,
including agreements with SBMFM, Global Capital Management, the Portfolio's
custodian, transfer agent and distributor. The day-to-day operations of the
Portfolio are delegated to SBMFM and/or Global Capital Management. The
identities and backgrounds of the Trustees and officers of the Fund, together
with certain additional information about them, are contained in the Statement
of Additional Information. By virtue of the responsibilities assumed by SBMFM,
the Fund requires no employees other than its executive officers, none of whom
devotes full time to the affairs of the Fund.
Investment Adviser, Sub-Investment Adviser and Administrator
Subject to the supervision and direction of the Fund's Board of
Trustees, SBMFM manages the Portfolio in accordance with the Portfolio's goal
and stated investment policies, makes investment decisions for the Portfolio,
places orders to purchase and sell securities on behalf of the Portfolio and
employs professional portfolio managers and securities analysts who provide
research services to the Portfolio.
SBMFM, located at 388 Greenwich Street, New York, New York 10013,
provides investment advisory and management services to investment companies
affiliated with Holdings. SBMFM renders investment advice to investment
companies that had aggregate assets under management as of March 1, 1997 in
excess of $80 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
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<PAGE>
institutional clients and investment companies with aggregate assets under
management, as of March 1, 1997, of approximately $2.1 billion.
PORTFOLIO MANAGEMENT
================================================================================
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.
The Fund's management discussion and analysis, and additional
performance information regarding the portfolios of the Fund, including the
Portfolio, during the fiscal year ended December 31, 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
================================================================================
Chase, located at MetroTech Center, Brooklyn, NY 11245, acts as
custodian of the Fund's investments generally.
First Data Investor Services Group, Inc., located at Exchange Place,
Boston, Massachusetts, 02109, acts as the Fund's transfer and dividend paying
agent.
DISTRIBUTOR
================================================================================
Smith Barney, a subsidiary of Holdings, located at 388 Greenwich Street,
New York, New York, 10013, serves as distributor of the Fund's shares, for which
it receives no separate fee from the Fund. Insurance companies offering the
Contracts pay Smith Barney for the services it provides and the expenses it
bears in distributing the Contracts, including payment of commissions for sales.
Insurance companies offering the Contracts will bear certain additional costs in
connection with the offering of the Portfolio's shares, including the costs of
printing and distributing prospectuses, statements of additional information and
sales literature.
ADDITIONAL INFORMATION
================================================================================
Formation
The Fund was organized on May 13, 1991, under the laws of the
Commonwealth of Massachusetts and is a business entity commonly known as a
"Massachusetts business trust." The Fund is registered with the SEC as a
diversified, open-end management investment company, as defined in the 1940 Act.
The Fund commenced operations on October 16, 1991, under the name Shearson
Series Fund. On October 14, 1994, the Fund changed its name to its current name,
Smith Barney Series Fund.
Shares of Beneficial Interest
The Fund offers shares of beneficial interest of separate series with a
par value of $.001 per share. Shares of ten series have been authorized. 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.
- --------------------------------------------------------------------------------
17
<PAGE>
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 participating life insurance company will send owners of the
Contract a semi-annual report and an audited annual report, each of which
includes a list of the investment securities held by the Portfolio at the end of
the period covered. Contract owners may make inquiries regarding the Portfolio
from a representative of the participating life insurance company.
THE PORTFOLIO'S PERFORMANCE
================================================================================
Total Return
From time to time, the Portfolio may advertise its "average annual total
return" over various periods of time. Such total return figures show the average
percentage change in value of an investment in the Portfolio from the beginning
date of the measuring period to the end of the measuring period. These figures
reflect changes in the price of the Portfolio's shares and assume that any
income dividends and/or capital gains distributions made by the Portfolio during
the period were reinvested in shares of the Portfolio. Figures will be given for
recent one-, five- and ten-year periods (if applicable), and may be given for
other periods as well (such as from commencement of the Portfolio's operations,
or on a year-by-year basis). When considering average annual total return
figures for periods longer than one year, it is important to note that the
Portfolio's annual total return for any one year in the period might have been
greater or less than the average for the entire period. The Portfolio also may
use "aggregate" total return figures for various periods, representing the
cumulative change in value of an investment in the Portfolio for the specific
period (again reflecting changes in the Portfolio's share prices and assuming
reinvestment of dividends and distributions). Aggregate total returns may be
shown by means of schedules, charts or graphs and may indicate subtotals of the
various components of total return (i.e., change in value of initial investment,
income dividends and capital gains distributions).
It is important to note that yield and total return figures are based on
historical earnings and are not intended to indicate future performance. The
Statement of Additional Information describes the method used to determine the
Portfolio's yield and total return. Shareholders may make inquiries regarding
the Portfolio, including current yield quotations or total return figures, to a
Smith Barney Financial Consultant.
In reports or other communications to shareholders or in advertising
material, the Portfolio may compare its performance with that of other mutual
funds as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar independent services that monitor the performance of mutual funds or
with other appropriate indices of investment securities, such as the S&P 500,
Salomon Brothers World Government Bond Index, Lehman Brothers Government Bond
Index and Lehman Brothers Mortgage-Backed Securities
- --------------------------------------------------------------------------------
18
<PAGE>
Index, with the Consumer Price Index, Dow Jones Industrial Average or NASDAQ, or
with investment or savings vehicles. The performance information also may
include evaluations of the Portfolio published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
Barron's, Business Week, Forbes, Fortune, Institutional Investor, Investor's
Business Daily, Kiplinger's Personal Finance Magazine, Money, Morningstar Mutual
Fund Values, Mutual Fund Forecaster, The New York Times, Stranger's Investment
Advisor, USA Today, U.S. News & World Report and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Any such advertisement also would
include the standard performance information required by the SEC as described
above. For these purposes, the performance of the Portfolio, as well as the
performance of other mutual funds or indices, do not reflect sales charges, the
inclusion of which would reduce the Portfolio's performance.
The Portfolio may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
A Contract owner's actual return on its investment in this Portfolio
will be affected by Contract charges imposed by the separate accounts of the
participating life insurance companies.
- --------------------------------------------------------------------------------
19
<PAGE>
SMITH BARNEY SERIES FUND
Appreciation Portfolio
388 Greenwich Street
New York, New York 10013
Contract Owner Inquiries: (800) 451-2010
Prospectus dated April 29, 1997
Smith Barney Series Fund is a diversified, open-end management
investment company (the "Fund"), with ten portfolios (the "Portfolios"), each
with separate goals and investment policies. Shares of the Appreciation
Portfolio (the "Portfolio") may be acquired only by investing in a qualifying
variable annuity or variable life insurance contract (a "Contract") offered by
participating life insurance companies.
The Portfolio's goal is long-term appreciation of capital. The Portfolio
invests primarily in equity securities.
There can be no guarantee that the Portfolio's goal will be achieved
because any investment involves risks. Discussions of the investments which the
Portfolio will make, and their related risks, are found in the sections of this
Prospectus entitled "Investment Goal and Policies of the Portfolio," "Additional
Investments" and "Special Considerations" and the Appendix to this Prospectus.
This Prospectus, which sets forth certain information about the Fund and
the Portfolio that you should know before investing, should be read in
conjunction with the applicable Contract prospectus and retained for future
reference. Additional information about the Fund and the Portfolio has been
filed with the Securities and Exchange Commission (the "SEC") in a document
entitled "Statement of Additional Information," dated April 29, 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 above or by contacting a representative of a participating life insurance
company.
The Fund is responsible only for statements that are included in this
Prospectus, the Statement of Additional Information or in authorized sales
material. The Statement of Additional Information is incorporated by reference
into this Prospectus in its entirety. 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.
The date of this Prospectus is April 29, 1997
- --------------------------------------------------------------------------------
<PAGE>
CONTENTS
================================================================================
SUMMARY ......................................................... 1
EXPENSES OF THE PORTFOLIO ....................................... 2
FINANCIAL HIGHLIGHTS ............................................ 2
INVESTMENT GOAL AND POLICIES OF THE PORTFOLIO ................... 3
ADDITIONAL INVESTMENTS .......................................... 3
CERTAIN INVESTMENT STRATEGIES AND GUIDELINES .................... 5
SPECIAL CONSIDERATIONS AND RISK FACTORS ......................... 6
PORTFOLIO TRANSACTIONS .......................................... 7
NET ASSET VALUE ................................................. 7
HOW TO USE THE PORTFOLIO ........................................ 7
DIVIDENDS AND TAXES ............................................. 8
MANAGEMENT OF THE FUND .......................................... 9
PORTFOLIO MANAGEMENT ............................................ 10
CUSTODIAN AND TRANSFER AGENT .................................... 10
DISTRIBUTOR ..................................................... 11
ADDITIONAL INFORMATION .......................................... 11
THE PORTFOLIO'S PERFORMANCE ..................................... 12
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUMMARY
================================================================================
The Portfolio
The Portfolio is one of ten portfolios of the Fund, a diversified,
open-end management investment company registered under the Investment Company
Act of 1940 as amended (the "1940 Act"). The Portfolio's investment objective is
long-term appreciation of capital. The Portfolio invests primarily in equity
and equity-related securities that are believed to afford attractive
opportunities for appreciation.
Management
Smith Barney Mutual Funds Management Inc. ("SBMFM" or "Investment
Adviser") serves as the Portfolio's investment adviser and administrator. SBMFM
is a wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"), which
in turn is a wholly owned subsidiary of Travelers Group Inc. ("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. See "Management of the Fund."
Buying Shares
Shares of the Portfolio are offered only to Contract owners as set forth
in the specific Contract. In the future, the Fund may establish additional
portfolios which may or may not be available hereunder. 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."
Risk Factors and Special Considerations
Investors in the Portfolio should be aware of the following general
observations. The market value of fixed-income securities, which may constitute
a temporary part of the investments of the Portfolio, may vary inversely in
response to changes in prevailing interest rates. The non-publicly traded and
illiquid securities, which the Portfolio may hold, may have to be sold at lower
prices, or may remain unsold, when the Portfolio desires to dispose of them. The
foreign securities, including securities of developing countries, in which the
Portfolio may invest, may be subject to certain risks in addition to those
inherent in U.S. investments. The Portfolio may make certain investments and
employ certain investment techniques that involve other risks, including
entering into repurchase agreements and lending portfolio securities. These
risks are described under "Investment Goal and Policies of the Portfolio,"
"Special Considerations and Risk Factors" and in the Appendix to this
Prospectus.
- --------------------------------------------------------------------------------
1
<PAGE>
EXPENSES OF THE PORTFOLIO
================================================================================
The Portfolio will bear its own expenses. Operating expenses for the
Portfolio generally will consist of all costs not specifically borne by its
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
and/or Administrator of the 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 Portfolio 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 four years ended December 31, 1994 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.
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
Appreciation Portfolio 1996 1995 1994 1993 1992 1991(1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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(2) 0.27 0.23 0.20 0.15 0.11 0.01
Net realized and unrealized gains (loss) on
investments 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:
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 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
Security Transactions(3) $ 0.06 $ 0.06 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from October 16, 1991 (commencement of operations) to
December 31, 1991.
(2) 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, IDS Life reimbursed expenses of $29,950 and $7,264 for
the year ended December 31, 1992 and the period ended December 31, 1991.
If such fees were not waived and expenses
reimbursed, the per share effect on net investment income would have been a
decrease of $0.01 and the expense ratio would have been 1.16%.
(3) As of September 1995 the SEC instituted new guidelines requiring disclosure
of average commissions per share.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
++ Annualized.
* Amount represents less than $0.01.
- --------------------------------------------------------------------------------
2
<PAGE>
INVESTMENT GOAL AND POLICIES OF THE PORTFOLIO
================================================================================
Set forth below is a description of the investment goal and policies of
the Portfolio. The investment goal of the 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 the Portfolio. There can, of course, be no guarantee that
the Portfolio will achieve its investment goal. Additional information about
investment strategies that the Portfolio may employ and investment policies
mentioned below appears in the 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.
Goal
The Portfolio's goal is long-term appreciation of capital.
Investment Policies
The 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.
ADDITIONAL INVESTMENTS
================================================================================
Money Market Instruments
The Portfolio may, as a cash management tool, hold up to 20% of the
value of its total assets in cash and invest in short-term instruments and, for
temporary defensive purposes, may hold cash and invest in short-term instruments
without limitation. Short-term instruments in which the Portfolio may invest
include: U.S. government securities: obligations of banks having at least $1
billion in assets (including certificates of deposit, time deposits and bankers'
acceptances of U.S. or foreign banks, U.S. savings and loan associations and
similar institutions); commercial paper rated no lower than A-2 by S&P or
Prime-2 by Moody's or the equivalent from another 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.
- --------------------------------------------------------------------------------
3
<PAGE>
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.
U.S. Government Securities
The U.S. government securities in which the Portfolio may invest
include: direct obligations of the United States Treasury (such as Treasury
Bills, Treasury Notes and Treasury Bonds), and obligations issued by U.S.
government agencies and instrumentalities, including securities that are
supported by the full faith and credit of the United States (such as
certificates issued by GNMA); securities that are supported by the right of the
issuer to borrow from the U.S. Treasury (such as securities of Federal Home Loan
Banks); and securities that are supported only by the credit of the
instrumentality (such as bonds issued by FNMA and FHLMC). Treasury Bills have
maturities of less than one year, Treasury Notes have maturities of one to ten
years and Treasury Bonds generally have maturities of greater than ten years at
the date of issuance.
The Portfolio may invest up to 5% of its net assets in U.S. government
securities for which the principal repayment at maturity, while paid in U.S.
dollars, is determined by reference to the exchange rate between the U.S. dollar
and the currency of one or more foreign countries ("Exchange Rate-Related
Securities"). Exchange Rate-Related Securities are issued in a variety of forms,
depending on the structure of the principal repayment formula. The principal
repayment formula may be structured so that the securityholder will benefit if a
particular foreign currency to which the security is linked is stable or
appreciates against the U.S. dollar. In the alternative, the principal repayment
formula may be structured so that the securityholder benefits if the U.S. dollar
is stable or appreciates against the linked foreign currency. Finally, the
principal repayment formula can be a function of more than one currency and,
therefore, be designed in either of the aforementioned forms or a combination of
those forms.
Investments in Exchange Rate-Related Securities entail special risks.
There is the possibility of significant changes in rates of exchange between the
U.S. dollar and any foreign currency to which an Exchange Rate-Related Security
is linked. If currency exchange rates do not move in the direction or to the
extent anticipated at the time of purchase of the security, the amount of
principal repaid at maturity might be significantly below the par value of the
security, which might not be offset by the interest earned by the Portfolio over
the term of the security. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors. The imposition or modification of foreign
exchange controls by the United States or foreign governments or intervention by
central banks also could affect exchange rates. Finally, there is no assurance
that sufficient trading interest to create a liquid secondary market will exist
for particular Exchange Rate-Related Securities due to conditions in the debt
and foreign currency markets. Illiquidity in the forward foreign exchange market
and the high volatility of the foreign exchange market may from time to time
combine to make it difficult to sell an Exchange Rate-Related Security prior to
maturity without incurring a significant price loss.
- --------------------------------------------------------------------------------
4
<PAGE>
CERTAIN INVESTMENT STRATEGIES AND GUIDELINES
================================================================================
Up to 10% of the total assets of the Portfolio may be invested in
securities with contractual or other restrictions on resale and other
instruments that are not readily marketable, including repurchase agreements
with maturities greater than seven days and time deposits maturing in more than
seven calendar days. The Portfolio may borrow from banks for temporary or
emergency purposes, but not for leverage, in an amount up to 30% of its assets,
and may pledge its assets to the same extent in connection with such borrowings.
Whenever borrowings from banks exceed 5% of the value of the assets of the
Portfolio, the Portfolio will not make any additional investments. Except for
the limitations on borrowing, the investment guidelines set forth in this
paragraph may be changed at any time without shareholder consent by vote of the
Board of Trustees of the Fund. A complete list of investment restrictions that
identifies additional restrictions that cannot be changed without the approval
of a majority of the Portfolio's outstanding shares is contained in the
Statement of Additional Information.
Repurchase Agreements
The Portfolio may engage in repurchase agreement
transactions on portfolio securities, in each case with banks which are the
issuers of instruments acceptable for purchase by the Portfolio and with certain
dealers listed on the Federal Reserve Bank of New York's list of reporting
dealers. Under the terms of a typical repurchase agreement, the Portfolio would
acquire an underlying debt obligation for a relatively short period (usually not
more than one week) subject to an obligation of the seller to repurchase, and
the Portfolio to resell, the obligation at an agreed-upon price and time,
thereby determining the yield during the Portfolio's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Portfolio's holding period. The value of the underlying
securities will be monitored by the Portfolio's investment adviser to ensure
that it at least equals at all times the total amount of the repurchase
obligation, including interest. The Portfolio bears a risk of loss in the event
that the other party to a repurchase agreement defaults on its obligations and
the Portfolio is delayed or prevented from exercising its rights to dispose of
the collateral securities, including the risk of a possible decline in the value
of the underlying securities during the period while the Portfolio seeks to
assert these rights. The Portfolio's investment adviser, acting under the
supervision of the Fund's Board of Trustees, reviews on an ongoing basis the
value of the collateral and the creditworthiness of those banks and dealers with
which the Portfolio enters into repurchase agreements to evaluate potential
risks. A repurchase agreement is considered to be a loan collateralized by the
underlying securities under the 1940 Act.
Lending of Securities
The Portfolio may lend its portfolio securities
to brokers, dealers and other financial organizations. By lending its
securities, the Portfolio can increase its income by continuing to receive
interest on the loaned securities as well as by either investing the cash
collateral in short-term instruments or obtaining yield in the form of interest
paid by the borrower when U.S. government securities are used as collateral.
Loans of portfolio securities, if and when made, by the Portfolio may not exceed
331/3% of the Portfolio's total assets, taken at value. Loans of the Portfolio's
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.
- --------------------------------------------------------------------------------
5
<PAGE>
SPECIAL CONSIDERATIONS AND RISK FACTORS
================================================================================
This section describes certain investments of the Portfolio and related
risks. Further information concerning investments of the Portfolio and related
risks may be found in the Appendix to this Prospectus and in the Statement of
Additional Information.
Fixed-Income Securities
The market value of fixed-income obligations of the Portfolio will be
affected by general changes in interest rates, which will result in increases or
decreases in the value of fixed-income obligations held by the Portfolio. The
market value of the Portfolio's fixed-income obligations can be expected to vary
inversely in relation to changes in prevailing interest rates. In addition,
fixed-income securities in which the Portfolio may invest may not yield as high
a level of current income as might be achieved by investing in securities with
less liquidity and safety and longer maturities.
Non-Publicly Traded and Illiquid Securities
The Portfolio may purchase securities that are not publicly traded. The
sale of securities that are not publicly traded is typically restricted under
federal securities laws. As a result, the Portfolio may be forced to sell these
securities at less than fair market value or may not be able to sell them when
its Investment Adviser believes it desirable to do so. The Portfolio's
investments in illiquid securities are subject to the risk that should the
Portfolio desire to sell any of these securities when a ready buyer is not
available at a price that the Portfolio deems representative of their value, the
value of the Portfolio's net assets could be adversely affected.
Foreign Securities
The Portfolio may invest in obligations of companies and governments of
foreign nations, which involve certain risks in addition to the usual risks
inherent in U.S. investments. These risks include those resulting from
revaluation of currencies, future adverse political and economic developments
and the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers and the lack of uniform accounting, auditing and financial
reporting standards or of other regulatory practices and requirements comparable
to those applicable to U.S. companies. The performance of the Portfolio
investing in foreign securities may be adversely affected by fluctuations in
value of one or more foreign currencies relative to the U.S. dollar. Moreover,
securities of many foreign companies may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies. In addition,
with respect to certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Portfolio, including the withholding
of dividends. Foreign securities may be subject to foreign government taxes that
could reduce the return on such securities. Changes in foreign currency exchange
rates may affect the value of portfolio securities and the appreciation or
depreciation of investments. Investment in foreign securities also may result in
higher expenses due to the cost of converting foreign currency to U.S. dollars,
the payment of fixed brokerage commissions on foreign exchanges, which generally
are higher than commissions on U.S. exchanges, and the expense of maintaining
securities with foreign custodians.
- --------------------------------------------------------------------------------
6
<PAGE>
PORTFOLIO TRANSACTIONS
================================================================================
All orders for transactions in securities on behalf of the Portfolio
will be placed by its Investment Adviser with broker-dealers that the Adviser
selects, including Smith Barney and other affiliated brokers. The Portfolio may
utilize Smith Barney or a Smith Barney-affiliated broker in connection with a
purchase or sale of securities when the Portfolio's Investment Adviser believes
that the broker's charge for the transaction does not exceed usual and customary
levels.
NET ASSET VALUE
================================================================================
The value of an individual share of the Portfolio is the net asset value
of that share. The net asset value per share of the Portfolio will be calculated
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 the Portfolio is determined
as of the close of regular trading on the NYSE (currently 4:00 p.m., New York
time).
Net asset value per share is computed by dividing the value of the
Portfolio's net assets by the total number of its shares outstanding. Generally,
the Portfolio's investments are valued at market value or, in the absence of a
market value with respect to any portfolio securities, at fair value as
determined by or under the direction of the Fund's Board of Trustees. A security
that is primarily traded on a U.S. or foreign exchange (including securities
traded through the National Market System) is valued at the last sale price on
that exchange or, if there were no sales during the day, at the current quoted
bid price. Portfolio securities that are primarily traded on foreign exchanges
are generally valued at the preceding closing values of such securities on their
respective exchanges, except that when an occurrence subsequent to the time a
value was so established is likely to have changed the value, then the fair
value of those securities will be determined by consideration of other factors
by or under the direction of the Fund's Board of Trustees or its delegates.
Over-the-counter securities that are not traded through the National Market
System and securities listed or traded on certain foreign exchanges whose
operations are similar to the U.S. over-the-counter market are valued on the
basis of the mean between the bid and asked prices at the close of business on
each day. 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. Further information regarding the Fund's valuation
policies is contained in the Statement of Additional Information.
HOW TO USE THE PORTFOLIO
================================================================================
Investing in the Portfolio
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.
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Sales Charges and Surrender Charges
The Fund does not assess any sales charge, either when it sells or when
it redeems shares of the Portfolio. However, surrender charges that may be
assessed under the Contract are described in the Contract prospectus. Mortality
and expense risk fees and other charges are also described in the Contract
prospectus.
Redeeming and Exchanging Shares
The Fund will redeem shares in response to full or partial surrenders of
a Contract. Generally, payment upon redemption will be made within three
business days after receiving a valid redemption request (unless redemption is
suspended or payment is delayed as permitted in accordance with SEC
regulations). The Fund will use the net asset value at the close of trading on
the NYSE on the day the notice of surrender or transfer is received. If the
request is received after the close of trading on the NYSE, the shares will be
redeemed at the net asset value at the close of the next business day. The value
of any redeemed shares may be more or less than their original purchase price.
A detailed description of how to surrender the Contract 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, unless the shareholder instructs
the Portfolio to pay all dividends and distributions in cash. Net investment
income, including dividends on stocks and interest on bonds or other securities
the Fund holds, is distributed to the shareholders of the Portfolio annually.
Capital Gains. Distributions of any net realized capital gains of the
Portfolio will be paid annually shortly after the close of the fiscal year in
which they are earned.
Taxes
In the opinion of counsel to the Fund, the Portfolio will be treated as
a separate taxpayer with the result that, for federal income tax purposes, the
amounts of investment income and capital gains earned will be determined on a
portfolio (rather than on a Fund-wide) basis.
The Fund intends that the Portfolio will 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, the Portfolio
must meet certain income and diversification tests, including the requirement
that it derive less than 30% of its gross income in each taxable year from the
sale or other disposition of (a) stock or securities held for less than three
months; (b) options, futures or forward contracts (other than options, futures
or forward contracts on foreign currencies) held for less than three months and
(c) foreign currencies (or options, futures or forward contracts on such foreign
currencies) held for less than three months but only if such currencies (or
options, futures or forward contracts) are not directly related to the
Portfolio's principal business of investing in stock or securities (or options
or futures with respect to stock or securities). As a regulated investment
company and provided
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certain distribution requirements are met, the Portfolio will not be subject to
federal income tax on its net investment income and net capital gains that it
distributes to its shareholders.
Dividends paid by the Portfolio from taxable investment income and
distributions of short-term capital gains will be treated as ordinary income in
the hands of the shareholders for federal income tax purposes, whether received
in cash or reinvested in additional shares. Distributions of net long-term
capital gains will be treated as long-term capital gains in the hands of the
shareholders, if certain notice and designation requirements are satisfied,
whether paid in cash or reinvested in additional shares, regardless of the
length of time the investor has held shares of the Portfolio. The Fund has been
informed that the separate accounts represented by the Contracts should, for
federal income tax purposes, be considered the shareholders of the Portfolio.
To comply with regulations under Section 817(h) of the Code, the
Portfolio will be required to diversify its investments so that on the last day
of each calendar quarter no more than 55% of the value of its assets is
represented by any one investment, no more than 70% is represented by any two
investments, no more than 80% is represented by any three investments and no
more than 90% is represented by any four investments. Generally, all securities
of the same issuer are treated as a single investment. For the purposes of
Section 817(h) of the Code, obligations of the United States Treasury and each
U.S. government agency or instrumentality are treated as securities of separate
issuers.
The Treasury Department has indicated that it may issue future
pronouncements addressing the circumstances in which a variable contract owner's
control of the investments of a separate account may cause the variable contract
owner, rather than the insurance company, to be treated as the owner of the
assets held by the separate account. If the variable contract owner is
considered the owner of the securities underlying the separate account, income
and gains produced by those securities would be included currently in the
variable contract owner's gross income. It is not known what standards will be
set forth in such pronouncements or when, if at all, these pronouncements may be
issued.
In the event that rules or regulations are adopted, there can be no
assurance that the Portfolio will be able to operate as currently described in
this Prospectus, or that the Fund will not have to change the investment goal or
investment policies of the Portfolio. While the Portfolio's investment goal is
fundamental and may be changed only by a vote of a majority of the Portfolio's
outstanding shares, the Fund's Board of Trustees reserves the right to modify
the investment policies of the Portfolio as necessary to prevent any such
prospective rules and regulations from causing a Contract owner to be considered
the owner of the shares of the Portfolio.
Reference is made to the Contract prospectus for information regarding
the federal income tax treatment of distribution.
MANAGEMENT OF THE FUND
================================================================================
Board of Trustees
Overall responsibility for management and supervision of the Fund and
the Portfolio rests with the Fund's Board of Trustees. The Trustees approve all
significant agreements between the Fund and the persons or companies that
furnish services to the Fund and the Portfolio, including agreements with the
Investment
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Adviser and Administrator of the Portfolio and with the Fund's custodian,
transfer agent and distributor. The day-to-day operations of the Portfolio are
delegated to the Investment Adviser and Administrator of the Portfolio. 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 Adviser and Administrator
Subject to the supervision and direction of the Fund's Board of
Trustees, the Investment Adviser of the Portfolio manages the Portfolio
in accordance with its goal and stated investment policies, makes
investment decisions for the Portfolio, places orders to purchase and
sell securities on behalf of the Portfolio and employs professional
portfolio managers and securities analysts who provide research
services to the Portfolio.
SBMFM, located at 388 Greenwich Street, New York, New York 10013,
provides investment advisory and management services to investment companies
affiliated with Holdings. Holdings is a wholly owned subsidiary of Travelers,
a diversified financial services holding company engaged through its subsidiary
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.
PORTFOLIO MANAGEMENT
================================================================================
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.
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 of the
Fund at the address or phone number listed on the cover page of this Prospectus.
CUSTODIAN AND TRANSFER AGENT
================================================================================
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, acts as custodian of the Portfolio's investment generally.
The Transfer Agent, First Data Investor Serves Group, Inc., is located
at Exchange Place, Boston, Massachusetts 02109.
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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 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 $0.001 per share. Shares of ten series have been authorized, which
represent the interests in ten portfolios. 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 the 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 each owner of a Contract a semi-annual report and an
annual report, each of which includes a list of the investment securities held
by the Portfolio at the end of the period covered. Contract owners may make
inquiries regarding the Fund and the Portfolio, including the current
performance of the Portfolio, from a Smith Barney Financial Consultant.
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THE PORTFOLIO'S PERFORMANCE
================================================================================
Total Return
From time to time, the Portfolio may advertise its "average annual total
return" over various periods of time. Such total return figure shows 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 figures for
periods longer than one year, it is important to note that the Portfolio's
annual total return for any one year in the period might have been greater 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 the Portfolio's share prices and assuming reinvestment of dividends
and distributions). Aggregate total returns may be shown by means of schedules,
charts or graphs and may indicate subtotals of the various components of total
return (i.e., change in value of initial investment, income dividends and
capital gains distributions).
It is important to note that total return figures are based on
historical earnings and are not intended to indicate future performance. The
Statement of Additional Information describes the method used to determine the
Portfolio's total return. Shareholders may make inquiries regarding the
Portfolio, including total return figures, of a Smith Barney Financial
Consultant.
In reports or other communications to shareholders or in advertising
material, the Portfolio may compare its performance with that of other mutual
funds as listed in the rankings prepared by Lipper Analytical Services, Inc. or
similar independent services that monitor the performance of mutual funds or
with other appropriate indices of investment securities, such as the S&P 500,
the Consumer Price Index, Dow Jones Industrial Average or NASDAQ, or with
investment or savings vehicles. The performance information also may include
evaluations of the Portfolio published by nationally recognized ranking services
and by financial publications that are nationally recognized, such as Barron's,
Business Week, Forbes, Fortune, Institutional Investor, Investor's Business
Daily, Kiplinger's Personal Finance Magazine, Money, Morningstar Mutual Fund
Values, Mutual Fund Forecaster, The New York Times, Stranger's Investment
Advisor, USA Today, U.S. News & World Report and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Any such advertisement also would
include the standard performance information required by the SEC as described
above. For these purposes, the performance of the Portfolio, as well as the
performance of other mutual funds or indices, does not reflect sales charges,
the inclusion of which would reduce the Portfolio's performance.
The Portfolio may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
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TravelersLife & Annuity [LOGO]
A Member of TravelersGroup
L-21162 Underlying Fund Prospectuses
