Smith Barney
Series Fund
Prospectus dated April 29, 1997
Smith Barney Series Fund (the "Fund") is a diversified, open-end management
investment company -- a mutual fund-- with ten portfolios (the "Portfolios"),
each with separate goals and investment policies:
The Appreciation Portfolio's goal is long-term appreciation of capital. This
Portfolio invests primarily in equity securities.
The Diversified Strategic Income Portfolio's goal is high current income. This
Portfolio invests primarily in three types of fixed-income securities -- U.S.
government and mortgage-related securities, foreign government bonds and
corporate bonds rated below investment grade.
The Emerging Growth Portfolio's goal is to provide capital appreciation. This
Portfolio invests primarily in common stocks of small and medium-sized
companies, both domestic and foreign, considered to be emerging growth
companies by its investment adviser.
The Equity Income Portfolio's primary goal is current income, with a secondary
goal of long-term capital appreciation. This Portfolio invests primarily in
dividend-paying common stocks, concentrating in securities of companies in the
utility industry.
The Equity Index Portfolio's goal is to provide investment results that,
before deduction of operating expenses, match the price and yield performance
of U.S. publicly traded common stocks, as measured by the Standard & Poor's
Daily Price Index of 500 Common Stocks (the "S&P 500"). This Portfolio invests
in the common stocks of companies represented in the S&P 500.
The Growth & Income Portfolio's goal is income and long-term capital growth.
This Portfolio invests primarily in dividend-paying equity securities meeting
certain specified investment criteria.
The Intermediate High Grade Portfolio's goal is to provide as high a level of
current income as is consistent with the protection of capital. This Portfolio
invests in high-quality intermediate-term U.S. government securities and
corporate bonds of U.S. issuers.
The International Equity Portfolio's goal is to provide total return on its
assets from growth of capital and income. This Portfolio invests in a
diversified portfolio of equity securities of established non-United States
issuers.
The Money Market Portfolio's goal is maximum current income to the extent
consistent with the preservation of capital and the maintenance of liquidity.
This Portfolio invests in high-quality short-term money market instruments.
The Total Return Portfolio's goal is to provide shareholders with total
return, consisting of long-term capital appreciation and income. This
Portfolio invests primarily in a diversified portfolio of dividend-paying
common stocks.
There can be no guarantee that the Portfolios' goals will be achieved because
any investment involves risks. An investment in the Money Market Portfolio is
neither insured nor guaranteed by the United States government. Although the
Money Market Portfolio will seek to maintain a stable net asset value of $1.00
per share, there can be no assurance that the Portfolio will be able to do so.
Discussions of the investments each Portfolio will make, and their related
risks, are found in the sections of this Prospectus entitled "Investment Goals
and Policies of the Portfolios," "Additional Investments" and "Special
Considerations" and in the Appendix to this Prospectus.
This Prospectus sets forth certain information that you should know about the
Fund and each of the Portfolios before investing, and should be retained for
future reference. Additional information about the Fund and the Portfolios has
been filed with the Securities and Exchange Commission (the "SEC") in a
document entitled "Statement of Additional Information," dated April 29,
1997, as amended or supplemented from time to time, which is available
upon request and without charge by calling or writing the Fund at the telephone
number or address set forth below or by contacting a Smith Barney Financial
Consultant.
The Fund is responsible only for statements that are included in this
Prospectus, the Statement of Additional Information or in authorized sales
material. The Statement of Additional Information is incorporated by reference
into this Prospectus in its entirety. You cannot buy shares of the Fund
directly. You can invest in the Fund by buying separate accounts which fund
certain variable annuity and variable life insurance contracts (each referred
to herein as a "Contract") offered by designated insurance companies.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS OF THE CONTRACT.
BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY STATE
SECURITIES COMMISSION, NOR HAS THE SEC OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Smith Barney Series Fund
388 Greenwich Street
New York, New York 10013
Contract Owner Inquiries: (800) 451-2010
Contents
Synopsis
3
Expenses of the
Portfolios
5
Investment Goals and Policies of the
Portfolios
11
Additional
Investments
17
Certain Investment
Guidelines
19
Special Considerations and Risk
Factors
19
Portfolio
Transactions
24
Net Asset
Value
24
How to Use the
Fund
25
Dividends and
Taxes
25
Management of the
Fund
27
Portfolio
Management
28
Custodian and Transfer
Agent
29
Distributor
29
Additional
Information
29
The Portfolios'
Performance
30
Appendix
31
Synopsis
The Fund
The Fund is a diversified, open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), which
currently offers a selection of ten Portfolios. See "Investment Goals and
Policies of the Portfolios" and "Additional Information."
Management
The organizations that perform services for the Fund are listed below and are
described more fully under "Management of the Fund."
Name
Service
Smith Barney Mutual Funds
Management Inc.
("SBMFM")
Investment Adviser to the Money Market
Portfolio, the Intermediate High Grade
Portfolio, the Diversified Strategic
Income Portfolio, the Equity Income
Portfolio, the Growth & Income
Portfolio, the Appreciation Portfolio,
the Total Return Portfolio and the
International Equity Portfolio and
Administrator to each Portfolio
Davis Skaggs Investment Management,
a division of SBMFM ("Davis
Skaggs")
Investment Adviser to the Total Return
Portfolio
Smith Barney Global Capital
Management, Inc.
("Global Capital Management")
Sub-Investment Adviser to the
Diversified Strategic Income Portfolio
Travelers Investment Management
Company
("TIMCO")
Investment Adviser to the Equity Index
Portfolio
Van Kampen American Capital Asset
Management, Inc. ("VKAC")
Investment Adviser to the Emerging
Growth Portfolio
Smith Barney Inc. ("Smith Barney")
Distributor
PNC Bank, National Association
("PNC")
Custodian to all Portfolios except
International Equity Portfolio and
Diversified Strategic Income Portfolio
The Chase Manhattan Bank ("Chase")
Custodian to International Equity
Portfolio and Diversified Strategic
Income Portfolio
First Data Investor Services Group,
Inc.
(the "Transfer Agent")
Transfer and Dividend Paying Agent
The Portfolios pay their respective Investment Advisers an aggregate fee at an
annual percentage of the value of the relevant Portfolio's average net assets
as follows: Appreciation Portfolio - 0.55%; Diversified Strategic Income
Portfolio - 0.45%; Emerging Growth Portfolio - 0.75%.; Equity Income Portfolio
- - 0.45%; Equity Index Portfolio - 0.15% ; Growth & Income Portfolio
- - 0.45%; Intermediate High Grade Portfolio - 0.40%; International Equity
Portfolio - 0.85%; Money Market Portfolio - 0.30%; and Total Return Portfolio
- - 0.55%. Global Capital Management, as Sub-Investment Adviser to the
Diversified Strategic Income Portfolio, is paid a fee by SBMFM, the
Portfolio's Investment Adviser, at the annual percentage of 0.15% of the
value of the Portfolio's average net assets. SBMFM, as Administrator of the
Portfolios, is paid a fee at the annual percentage of 0.20% of the value of
each Portfolio's average net assets , except with respect to the Equity
Index Portfolio, for which it is paid a fee at an annual percentage of
0.06% of the value of the Portfolio's average net assets . The management
fees paid by the Appreciation, Total Return, International Equity and
Emerging Growth Portfolios are higher than those fees paid by most other
investment companies, but not necessarily higher than those paid by funds
with similar investment objectives and policies. See "Management of the Fund."
Buying Shares
Shares of the Fund are offered only to Contract owners as set forth in the
specific Contract. Typically a Contract owner can direct the allocation of
part or all of his or her net purchase payment to one or more of the ten
Portfolios of the Fund. In the future, the Fund may establish additional
portfolios. See "How to Use the Fund."
Redeeming Shares
Shares may be redeemed as described in the applicable Contract prospectus. See
"How to Use the Fund."
Special Considerations
Investors in the Fund should be aware of the following general observations:
The market value of fixed-income securities, which constitute a major part of
the investments of several Portfolios, may vary inversely in response to
changes in prevailing interest rates. The non-publicly traded and illiquid
securities, and the floating and variable rate demand notes, which certain
Portfolios may hold, may have to be sold at lower prices, or may remain
unsold, when the Portfolios desire to dispose of them. The mortgage-related
securities, including government stripped mortgage-backed securities, in which
certain Portfolios may invest, are sensitive to changes in interest rates and
to prepayment of the mortgages. The foreign securities, including securities
of developing countries, in which several Portfolios may invest, may be
subject to certain risks in addition to those inherent in U.S. investments.
The unrated, medium- and lower-rated securities and the securities of
unseasoned issuers that certain Portfolios may hold, some of which have
speculative characteristics, may be subject to greater market fluctuation and
risk of loss of income or principal than higher-rated securities. Emerging
growth companies, such as those in which the Emerging Growth Portfolio may
invest, may involve certain special risks. Emerging growth companies often
have limited product lines, markets, or financial resources, and may be
dependent upon one or a few key people for management. The securities of such
companies may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or the market averages in
general. The Equity Income Portfolio's concentration policy may involve
greater risk and market fluctuation than if it invested in a broader range of
securities. One or more Portfolios may make certain investments and employ
certain investment techniques that involve other risks, including entering
into repurchase agreements, lending portfolio securities and entering into
futures contracts and related options as hedges. These risks and those
associated with when-issued and delayed-delivery transactions, put and call
options, covered option writing, short sales against the box, forward roll
transactions, currency exchange transactions, options on foreign currencies,
interest rate and other hedging transactions and reverse repurchase
agreements, are described under "Investment Goals and Policies of the
Portfolios," "Special Considerations and Risk Factors" and in the Appendix to
this Prospectus.
Expenses of the Portfolios
Each Portfolio will bear its own expenses. Operating expenses for each
Portfolio generally will consist of all costs not specifically borne by its
Investment Adviser, Sub-Investment Adviser and Administrator or the Fund's
distributor, including organizational costs, investment advisory and
administration fees, fees for necessary professional and brokerage services,
fees for any pricing service, the costs of regulatory compliance and costs
associated with maintaining legal existence and shareholder relations. From
time to time the Investment Adviser, the Sub-Investment Adviser and/or the
Administrator of a Portfolio may waive all or a portion of the fees payable to
it by the Portfolio, thereby reducing the expenses of the Portfolio. A
detailed description of the expenses involved in investing in a Contract and
the Portfolios is included in the Contract prospectus.
Financial Highlights
The following information for the fiscal years ended December 31, 1996 and
1995 has been audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon appears in the Fund's Annual Report dated December 31, 1996.
The information with respect to the fiscal years ended December 31, 1994,
1993, 1992 and 1991, respectively, has been audited by other auditors, whose
report thereon appears in the Fund's Annual Report dated December 31, 1994.
The information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report to
Shareholders, which is incorporated by reference into the Statement of
Additional Information.
Financial Highlights
For a share of beneficial interest outstanding throughout each period:
<TABLE>
<CAPTION>
MONEY MARKET
PORTFOLIO 1996 1995 1994 1993 1992 1991(1)
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Income From Operations:
Net investment income(2) 0.047 0.052 0.035 0.023 0.027 0.005
Dividends from net investment
income (0.047) (0.052) (0.035) (0.023) (0.027) (0.005)
Net Asset Value, End of
Year $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
Total Return 4.80% 5.31% 3.56% 2.37% 2.75% 0.53%
Net Assets, End of Year
(000's) $5,888 $5,653 $7,141 $3,703 $2,108 $803
Ratios to Average Net Assets:
Expenses(2) 0.75% 0.75% 0.75% 0.75% 0.75% 0.65%
Net investment income 4.70 5.19 3.65 2.34 2.79 3.35
INTERMEDIATE HIGH GRADE
PORTFOLIO 1996 1995 1994 1993 1992 1991(1)
Net Asset Value,
Beginning of Year $10.60 $9.66 $10.69 $10.29 $10.24 $10.00
Income (Loss) From Operations:
Net investment income(2) 0.71 0.66 0.61 0.55 0.45 0.03
Net realized and
unrealized gain (loss) (0.53) 1.00 (0.94) 0.26 0.08 0.21
Total Income (Loss)
From Operations 0.18 1.66 (0.33) 0.81 0.53 0.24
Less Distributions From:
Net investment income (0.08) (0.72) (0.61) (0.36) (0.48)
Net realized gains on
security transactions (0.09) (0.05)
Total Distributions (0.08) (0.72) (0.70) (0.41) (0.48)
Net Asset Value, End of
Year $10.70 $10.60 $9.66 $10.69 $10.29 $10.24
Total Return 1.69% 17.76% (3.05)% 8.00% 5.28% 2.40%
Net Assets, End of Year
(000's) $14,736 $16,152 $13,280 $9,859 $3,621 $697
Ratios to Average Net Assets:
Expenses(2) 0.90% 0.86% 0.85% 0.85% 0.85% 0.80%
Net investment income 6.35 6.63 6.57 5.25 4.75 4.49
Portfolio turnover rate 116% 121% 90% 139% 124%
(1) For the period from October 16, 1991 (commencement of operations) to
December 31, 1991.
(2) For the Money Market Portfolio, the Investment Adviser waived all or
part of its fees for the five-year period ended December 31, 1996 and the
period ended December 31, 1991. In addition, for the Intermediate High
Grade Portfolio, the Investment Adviser waived all or part of its fees for
the five-year period ended December 31, 1996 and the period ended December
31, 1991. For the Money Market Portfolio, IDS Life also reimbursed
expenses of $16,616, $17,889, $14,624 and $5,862 for the three-year period
ended December 31, 1994 and the period ended December 31, 1991. In
addition, for the Intermediate High Grade Portfolio, IDS Life reimbursed
expenses of $3,006, $12,616, $16,459, $15,865 and $5,726 for the four-year
period ended December 31, 1995 and the period ended December 31, 1991. If
such fees had not been waived and expenses reimbursed, the per share effect
on net investment income and the expense ratios would have been as follows:
Per Share Decreases to
Net Investment Income
Portfolio 1996 1995 1994 1993 1992 1991
Money Market $0.005 $0.005 $0.005 $0.014 $0.014 $0.034
Intermediate
High Grade 0.02 0.01 0.02 0.05 0.13 0.17
Expense Ratios Without
Waivers and Reimbursements
1996 1995 1994 1993 1992 1991
Money Market 1.25% 1.21% 1.26% 2.15% 2.18% 21.47%
Intermediate
High Grade 1.07 0.94 1.05 1.36 2.28 26.28
Total return is not annualized, as it may not be representative of the
total return for the year
Annualized
Financial Highlights (continued)
For a share of beneficial interest outstanding throughout each period:
DIVERSIFIED STRATEGIC INCOME
PORTFOLIO 1996 1995 1994 1993 1992 1991(1)
Net Asset Value,
Beginning of Year $10.01 $9.18 $10.07 $9.61 $10.14 $10.00
Income (Loss) From Operations:
Net investment
income(2)(3) 0.88 0.74 0.58 0.70 0.67 0.02
Net realized and
unrealized gain (loss) 0.24 0.70 (0.86) 0.47 (0.53) 0.12
Total Income (Loss) From
Operations 1.12 1.44 (0.28) 1.17 0.14 0.14
Less Distributions From:
Net investment income (0.15) (0.61) (0.58) (0.61) (0.67)
Net realized gains on
security transactions (0.04)
Overdistribution of net
realized gains (0.05)
Capital (0.03) (0.01)
Total Distributions (0.15) (0.061) (0.61) (0.71) (0.67)
Net Asset Value, End of
Year $10.98 $10.01 $9.18 $10.07 $9.61 $10.14
Total Return 11.16% 16.18% (2.81)% 12.56% 1.42% 1.40%
Net Assets, End of Year
(000's) $59,515 $59,316 $55,260 $43,244 $19,991 $3,914
Ratios to Average Net Assets:
Expenses(2) 0.84% 0.90% 0.95% 1.00% 1.00% 0.94%
Net investment income 7.94 7.73 7.31 7.14 7.70 4.57
Portfolio turnover rate 106% 46% 54% 94% 65%
EQUITY INCOME
PORTFOLIO 1996 1995 1994 1993 1992 1991(2)
Net Asset Value,
Beginning of Year $12.35 $9.87 $11.55 $10.90 $10.20 $10.00
Income (Loss) From Operations:
Net investment income(2) 0.63 0.54 0.58 0.53 0.45 0.02
Net realized and
unrealized gain (loss) 0.11 2.56 (1.75) 0.60 0.72 0.18
Total Income (Loss) From
Operations 0.74 3.10 (1.17) 1.13 1.17 0.20
Less Distributions From:
Net investment income (0.08) (0.62) (0.49) (0.47) (0.47)
Net realized gains (0.02) (0.01)
Total Distributions (0.08) (0.62) (0.51) (0.48) (0.47)
Net Asset Value,
End of Year $13.01 $12.35 $9.87 $11.55 $10.90 $10.20
Total Return 5.99% 32.47% (10.20)%10.41% 11.74% 2.00%
Net Assets, End of Year
(000's) $45,616 $52,444 $44,417 $60,160 $25,985 $3,900
Ratios to Average Net Assets:
Expenses(2) 0.77% 0.95% 0.84% 0.87% 1.00% 0.93%
Net investment income 4.53 4.95 5.51 4.54 4.93 4.14
Portfolio turnover rate 28% 33% 21% 4% 4%
Average commissions paid
on equity transactions(4) $0.06 $0.06
(1) For the period from October 16, 1991 (commencement of operations) to
December 31, 1991.
(2) For the Diversified Strategic Income Portfolio, the Investment Adviser
waived all or part of its fees and the two-year period ended December 31,
1993 and the period ended December 31, 1991. In addition, for the Equity
Income Portfolio, the Investment Adviser waived all or part of its fees and
year ended December 31, 1992 and the period ended December 31, 1991. For
the Diversified Strategic Income Portfolio, IDS Life reimbursed expenses of
$2,816, $25,396 and $5,927 for the two-year period ended December 31, 1993
and the period ended December 31, 1991. In addition, for the Equity Income
Portfolio, IDS Life reimbursed expenses of $19,510 and $5,825 for the year
ended December 31, 1992 and the period ended December 31, 1991. If such
fees had not been waived and expenses reimbursed, the per share effect on
net investment income and the expense ratios would have been as follows:
Per Share Decreases to
Net Investment Income
Portfolio 1996 1995 1994 1993 1992 1991
Diversified
Strategic Income N/A N/A N/A $0.00 $0.03 $0.03
Equity Income N/A N/A N/A N/A 0.02 0.03
Expense Ratios Without
Waivers and Reimbursements
1996 1995 1994 1993 1992 1991
Diversified
Strategic Income N/A N/A N/A 1.02% 1.41% 7.76%
Equity Index N/A N/A N/A N/A 1.27 8.34
(3) Includes realized gains and losses from foreign currency transactions
for the four years ended December 31, 1995.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per year.
Amount represents less than $0.01.
Total return is not annualized, as it may not be representative of the
total return for the year
Annualized
Financial Highlights (continued)
For a share of beneficial interest outstanding throughout each period:
EQUITY INDEX
PORTFOLIO 1996 1995 1994 1993 1992 1991(1)
Net Asset Value,
Beginning of Year $15.58 $11.69 $11.90 $11.27 $10.62 $10.00
Income From Operations:
Net investment
income(2) 0.22 0.25 0.23 0.20 0.17 0.04
Net realized and unrealized
gain (loss) 3.17 3.88 (0.14) 0.71 0.55 0.58
Total Income From
Operations 3.39 4.13 0.09 0.91 0.72 0.62
Less Distributions From:
Net investment income (0.23) (0.23) (0.15) (0.16) (0.02)
Net realized gains (0.38) (0.01) (0.15) (0.12) (0.05)
Total Distributions (0.61) (0.24) (0.30) (0.28) (0.07)
Net Asset Value, End of
Year $18.36 $15.58 $11.69 $11.90 $11.27 $10.62
Total Return 21.68% 35.81% 0.85% 8.66% 6.74% 6.20%
Net Assets, End of Year
(000's) $19,258 $15,230 $10,225 $8,842 $4,178 $1,733
Ratios to Average Net Assets:
Expenses(2) 1.06% 1.00% 1.00% 1.00% 1.00% 0.98
Net investment income 1.37% 1.84% 2.10% 1.77% 2.10% 2.91%
Portfolio turnover rate 7% 5% 1% 1% 8%
Average commissions paid
on equity transactions (3) $0.04 $0.05
GROWTH & INCOME
PORTFOLIO 1996 1995 1994 1993 1992 1991(1)
Net Asset Value,
Beginning of Year $13.73 $10.75 $11.37 $10.68 $10.15 $10.00
Income (Loss) From Operations:
Net investment income(2) 0.27 0.26 0.27 0.30 0.27 0.02
Net realized and unrealized
gain (loss) 2.45 2.99 (0.63) 0.67 0.55 0.13
Total Income (Loss) From
Operations 2.72 3.25 (0.36) 0.97 0.82 0.15
Less Distributions From:
Net investment income (0.02) (0.27) (0.26) (0.26) (0.29)
Overdistribution of net
realized gains (0.02)
Capital (0.00)
Total Distributions (0.02) (0.27) (0.26) (0.28) (0.29)
Net Asset Value, End of
Year $16.43 $13.73 $10.75 $11.37 $10.68 $10.15
Total Return 19.83% 30.49% (3.20)% 9.09% 8.44% 1.40%
Net Assets, End of Year
(000's) $38,502 $35,158 $29,625 $25,549 $10,951 $1,904
Ratios to Average Net Assets:
Expenses(2) 0.83% 0.98% 0.93% 1.00% 1.00% 0.90%
Net investment income 1.67% 2.09% 2.52% 2.68% 3.06% 4.14
Portfolio turnover rate 22% 17% 77% 78% 78% 3%
Average commissions paid
on equity transactions (3) $0.06 $0.06
(1) For the period from October 16, 1991 (commencement of operations) to
December 31, 1991.
(2) For the Equity Index Portfolio, the Investment Adviser waived all or
part of its fees for the four-year period ended December 31, 1995 and the
period ended December 31, 1991. In addition, for the Growth & Income
Portfolio, the Investment Adviser waived all or part of its fees for the
two-year period ended December 31, 1993 and the period ended December 31,
1991. For the Equity Index Portfolio, IDS Life also reimbursed expenses of
$6,842, $25,496, $28,169, $31,633 and $7,408 for the four-year period ended
December 31, 1995 and the period ended December 31, 1991. In addition, for
the Growth & Income Portfolio, IDS Life reimbursed expenses of $1,085,
$20,683 and $6,497 for the two-year period ended December 31, 1993 and the
period ended December 31, 1991. If such fees had not been waived and
expenses reimbursed, the per share effect on net investment income and the
expense ratios would have been as follows:
Per Share Decreases to
Net Investment Income
Portfolio 1996 1995 1994 1993 1992 1991
Equity Index N/A $0.02 $0.06 $0.10 $0.15 $0.09
Growth &
Income N/A N/A N/A 0.01 0.06 0.07
Expense Ratios Without
Waivers and Reimbursements
1996 1995 1994 1993 1992 1991
Equity Index 1.17% 1.53% 1.88% 2.89% 7.60%
Growth &
Income N/A N/A N/A 1.01% 1.65% 20.02
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per year.
Amount represents less that $0.01.
Total return is not annualized, as it may not be representative of the
total return for the year.
Annualized
Financial Highlights (continued)
For a share of beneficial interest outstanding throughout each period:
APPRECIATION
PORTFOLIO 1996 1995 1994 1993 1992 1991(1)
Net Asset Value,
Beginning of Year $14.39 $11.54 $11.80 $11.13 $10.49 $10.00
Income (Loss) From Operations:
Net investment income(3) 0.27 0.23 0.20 0.15 0.11 0.01
Net realized and unrealized
gain (loss) 2.60 3.04 (0.32) 0.63 0.53 0.48
Total Income (Loss) From
Operations 2.87 3.27 (0.12) 0.78 0.64 0.49
Less Distributions From:
Net investment income (0.25) (0.21) (0.14) (0.11) 0.00
Net realized gains (1.15) (0.21)
Total Distributions (1.40) (0.42) (0.14) (0.11) (0.00)
Net Asset Value, End of
Year $15.86 $14.39 $11.54 $11.80 $11.13 $10.49
Total Return 19.77% 28.84% (1.12)% 7.03% 6.13% 4.90%
Net Assets, End of Year
(000's) $101,232$94,492 $80,823 $77,843 $53,450 $11,436
Ratios to Average Net Assets:
Expenses(3) 0.85% 0.97% 0.88% 1.01% 1.00% 0.94%
Net investment income 1.59 1.65 1.75 1.35 1.61 3.00
Portfolio turnover rate 39% 43% 61% 33% 14%
Average commissions paid
on equity transactions(4) $0.06 $0.06
EMERGING GROWTH
PORTFOLIO 1996 1995 1994 1993(2)
Net Asset Value,
Beginning of Year $13.76 $9.63 $10.41 $10.00
Income (Loss) From Operations:
Net investment income
(loss)(3) (0.10) (0.03) 0.00 0.01
Net realized and unrealized
gain (loss) 2.55 4.16 (0.78) 0.40
Total Income (Loss) From
Operations 2.45 4.13 (0.78) 0.41
Less Distributions From:
Net investment income 0.00
Net realized gains (0.38)
Total Distributions (0.38)
Net Asset Value, End of
Year 15.83 $13.76 $9.63 $10.41
Total Return 17.83% 42.89% (7.48)% 4.10%
Net Assets, End of Year
(000's) $18,901 $17,463 $11,539 $2,257
Ratios to Average Net Assets:
Expenses(3) 1.27% 1.20% 1.20% 1.05%
Net investment
income (0.64) (0.24) (0.17) 1.37
Portfolio turnover rate 84% 121% 66%
Average commissions paid
on equity transactions (4) $0.05 $0.06
(1) For the period from October 16, 1991 (commencement of operations) to
December 31, 1991.
(2) For the period from December 3, 1993 (commencement of operations) to
December 31, 1993.
(3) For the Appreciation Portfolio, the Investment Adviser waived all or
part of its fees for the year ended December 31, 1992 and the period ended
December 31, 1991. In addition, for the Emerging Growth Portfolio, the
Investment Adviser waived all or part of its fees for the two-year period
ended December 31, 1995 and the period ended December 31, 1993. For the
Appreciation Portfolio, IDS Life reimbursed expenses of $29,950 and $7,264
for the year ended December 31, 1992 and the period ended December 31,
1991. In addition, for the Emerging Growth Portfolio, IDS Life reimbursed
expenses of $5,265, $18,068 and $2,915 for the two-year period ended
December 31, 1995 and the period ended December 31, 1993. If such fees had
not been waived and expenses reimbursed, the per share effect on net
investment income and the expense ratios would have been as follows:
Per Share Decreases to
Net Investment Income
Portfolio 1996 1995 1994 1993 1992 1991
Appreciation N/A N/A N/A N/A $0.01 $0.01
Emerging
Growth N/A $0.02 $0.01 $0.06 N/A N/A
Expense Ratios Without
Waivers and Reimbursements
1996 1995 1994 1993 1992 1991
Appreciation N/A N/A N/A N/A 1.16% 3.64%
Emerging
Growth N/A 1.39% 1.59% 9.99% N/A N/A
(4) As of September 1995 the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
Amount represents less than $0.01.
Total return is not annualized, as it may not be representative of the
total return for the year.
Annualized.
Financial Highlights (continued)
For a share of beneficial interest outstanding throughout each period:
TOTAL RETURN
PORTFOLIO 1996 1995 1994 1993(1)
Net Asset Value,
Beginning of Year $12.75 $10.78 $10.30 $10.00
Income From Operations:
Net investment
income(2) 0.26 0.43 0.34 0.01
Net realized and unrealized
gain (loss) 2.97 2.19 0.42 0.29
Total Income (Loss) From
Operations 3.23 2.62 0.76 0.30
Less Distributions From:
Net investment income (0.07) (0.41) (0.28)
Net realized gains (0.18) (0.24)
Total Distributions (0.25) (0.65) (0.28)
Net Asset Value, End of
Year $15.73 $12.75 $10.78 $10.30
Total Return 25.33% 25.04% 7.40% 3.00%
Net Assets, End of Year
(000's) $171,503$78,042 $23,196 $2,777
Ratios to Average Net Assets:
Expenses(2) 0.83% 1.00% 1.00% 0.85%
Net investment income 3.06 3.80 3.84 1.93
Portfolio turnover rate 82% 81% 118%
Average commissions paid
on equity transactions(3) $0.06 $0.06
INTERNATIONAL EQUITY
PORTFOLIO 1996 1995 1994 1993(1)
Net Asset Value,
Beginning of Year $9.98 $9.21 $10.05 $10.00
Income (Loss) From Operations:
Net investment income
(Loss)(2) (0.02) 0.03 0.00 0.00
Net realized and unrealized
gain (loss) 2.15 0.78 (0.84) 0.05
Total Income (Loss) From
Operations 2.13 0.81 (0.84) 0.05
Less Distributions From:
Net investment income (0.04) (0.04)
Total Distributions (0.04) (0.04)
Net Asset Value, End of
Year $12.07 $9.98 $9.21 $10.05
Total Return 21.38% 8.80% (8.36)% 0.50%
Net Assets, End of Year
(000's) $33,337 $28,979 $28,413 $5,867
Ratios to Average Net Assets:
Expenses(2)(4) 1.35% 1.43% 1.30% 1.08%
Net investment income
(loss) (0.20) 0.35 0.31 (0.51)
Portfolio turnover rate 33% 34% 12%
Average commissions paid
on equity transactions(3) $0.03 $0.01
(1) For the period from December 3, 1993 (commencement of operations) to
December 31, 1993.
(2) For the Total Return Portfolio, the Investment Adviser waived all or
part of its fees for the year ended December 31, 1994 and the period ended
December 31, 1993. In addition, for the International Equity Portfolio,
the Investment Adviser waived all or part of its fees for the year ended
December 31, 1994 and the period ended December 31, 1993. For the Total
Return Portfolio, IDS Life reimbursed expenses of $7,873 and $1,472 for the
year ended December 31, 1994 and the period ended December 31, 1993. In
addition, for the International Equity Portfolio, IDS Life also reimbursed
expenses of $23,712 and $1,902 for the year ended December 31, 1994 and the
period ended December 31, 1993. If such fees had not been waived and
expenses reimbursed, the per share effect on net investment income and the
expense ratios would have been as follows:
Per Share Decreases to
Net Investment Income
Portfolio 1996 1995 1994 1993
Total Return N/A N/A $0.01 $0.02
International
Equity N/A N/A $0.00 $0.02
Expense Ratios Without
Waivers and Reimbursements
1996 1995 1994 1993
Total Return N/A N/A 1.11% 4.14%
International
Equity N/A N/A 1.51% 2.96%
(3) As of September 1995 the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(4) During the period ended December 31, 1995, the Portfolio has earned
credits from the custodian which reduce service fees incurred. If the
credits are taken into consideration, the ratios of expenses to average net
assets would be 1.37%.
The amount shown in this caption for each share outstanding throughout the
period may not accord with the change in the aggregate gains and losses in
the Portfolio securities for the period because of the timing of purchases
and withdrawals of shares in relation to the fluctuating market values of
the Portfolio.
Amount represents less than $0.01.
Includes realized gains and losses from foreign currency transactions
for the two years ended December 31, 1995 and the period ended December
31,1993
Total Return is not annualized, as it may not be representative of the
total return for the year.
Annualized.
</TABLE>
Investment Goals and Policies of the Portfolios
Set forth below is a description of the investment goals and policies of the
ten Portfolios currently offered by the Fund, which consist of one money
market Portfolio, two fixed-income Portfolios and seven equity Portfolios. The
investment goals of a Portfolio may not be changed without the approval of the
holders of a majority (as defined in the 1940 Act) of the outstanding shares
of that Portfolio. There can, of course, be no guarantee that the Portfolios
will achieve their investment goals. Additional information about investment
strategies that one or more of the Portfolios may employ and investment
policies mentioned below appears in the Appendix to this Prospectus and in the
Statement of Additional Information. A description of the corporate bond and
commercial paper rating systems of Standard & Poor's Ratings Group ("S&P"),
Moody's Investors Service, Inc. ("Moody's") and other nationally recognized
statistical rating organizations ("NRSROs") is also contained in the Statement
of Additional Information.
Money Market Portfolio
Goal - The Money Market Portfolio's goal is maximum current income to the
extent consistent with the preservation of capital and the maintenance of
liquidity.
Investment Policies - In seeking to achieve its goal, the Money Market
Portfolio will invest in short-term money market instruments, including:
securities issued or guaranteed by the U.S. government, its agencies and
instrumentalities ("U.S. government securities"); repurchase agreements, U.S.
and foreign bank time deposits, certificates of deposit and bankers'
acceptances; high-grade commercial paper of U.S. and foreign issuers and other
short-term corporate debt obligations of such issuers that are comparable in
priority and security to such instruments, including variable-rate and
floating-rate instruments. Except when maintaining a temporary defensive
position, the Portfolio intends to invest more than 25% of its assets in
short-term bank instruments. The Portfolio will invest in money market
instruments that are determined by SBMFM to present minimal credit risks and
which at the time of purchase are considered to be "Eligible Securities," as
defined by the SEC.
The Portfolio will invest only in securities that are purchased with and
payable in U.S. dollars and that have (or, pursuant to regulations adopted by
the SEC, are deemed to have) remaining maturities of 13 months or less at the
date of purchase by the Portfolio. The Portfolio will maintain a dollar-
weighted average portfolio maturity of 90 days or less. The Portfolio will
follow these policies to maintain a constant net asset value of $1.00 per
share, although there is no assurance that it can do so on a continuing basis.
The Bond Portfolios
Intermediate High Grade Portfolio
Goal - The Intermediate High Grade Portfolio's goal is to provide as high a
level of current income as is consistent with the protection of capital.
Investment Policies - The Intermediate High Grade Portfolio will seek to
achieve its goal by investing, under normal circumstances, substantially all
- - but not less than 65% - of its assets in U.S. government securities and
high-grade corporate bonds of U.S. issuers (i.e., bonds rated within the two
highest rating categories by Moody's or S&P or, if not rated, believed by
SBMFM to be of comparable quality).
Under normal market conditions, the average weighted maturity of the
Portfolio's assets will be from three to ten years. The portion of the
Portfolio's assets not invested in intermediate-term U.S. government
securities and U.S. corporate bonds may be invested in long- or short-term
U.S. government and corporate obligations, convertible securities and
preferred stock that is not convertible into common stock. The Portfolio may
not hold securities rated lower than Baa by Moody's or BBB by S&P or unrated
securities deemed to be comparable to securities rated below investment grade.
The Portfolio may invest up to 10% of its total assets in government stripped
mortgage-backed securities and may invest in floating or variable rate demand
notes.
Diversified Strategic Income Portfolio
Goal - The Diversified Strategic Income Portfolio's goal is high current
income.
Investment Policies - The Diversified Strategic Income Portfolio will seek to
achieve its goal through allocating and reallocating its assets primarily
among three types of fixed-income securities - U.S. government and mortgage-
related securities, foreign government securities and corporate securities
rated below investment grade. Under current market conditions, SBMFM expects
to maintain 50% of its assets in government and mortgage-securities, 25% in
foreign government securities and 25% of its assets in high-yield corporate
securities. The portions of the Portfolio's assets invested in each type of
security will vary from time to time and, at any given time, the Portfolio may
be entirely invested in a single type of fixed-income security. Under normal
circumstances, substantially all - but not less than 65% - of the
Portfolio's assets will be invested in fixed-income securities, including non-
convertible preferred stocks.
SBMFM and Global Capital Management will select investments on the basis of an
analysis of economic and market conditions and relative risks and
opportunities of those types of fixed-income securities. In general, the
particular type or types of fixed-income securities selected for investment by
the Portfolio at any given time will be those that, in the view of its
Investment Adviser, offer the highest income available at the time, unless the
Investment Adviser believes that such income potential is not sufficient to
justify the higher risks associated with these securities. The Portfolio
generally will invest in intermediate- and long-term fixed-income securities
with the result that, under normal market conditions, the weighted average
maturity of the Portfolio's securities is expected to be from four to in
excess of 12 years.
Mortgage-related securities in which the Portfolio may invest, which include
mortgage obligations collateralized by mortgage loans or mortgage pass-through
certificates, will be rated no lower than Aa by Moody's or AA by S&P or, if
unrated, will be deemed by SBMFM to be of comparable quality. Under normal
market conditions, the Portfolio's mortgage-related holdings can be expected
to consist primarily of securities issued or guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
The Portfolio may invest up to 35% of its assets in corporate fixed-income
securities of U.S. issuers rated Ba or lower by Moody's or BB or lower by S&P,
but not lower than Caa or CCC, respectively, or in unrated securities deemed
by SBMFM and Global Capital Management to be of comparable quality. Special
considerations arising from investment in lower-rated and unrated securities
are described in "Special Considerations and Risk Factors -- Medium-, Lower-
and Unrated Securities."
The Portfolio may also invest in fixed-income securities issued by
supranational organizations and may engage in transactions in options,
interest rate futures contracts, options on interest rate futures contracts,
forward currency contracts, options on foreign currencies and foreign currency
futures contracts. Up to 5% of the Portfolio's assets may be invested in
developing countries.
The Equity Portfolios
Equity Income Portfolio
Goal - The Equity Income Portfolio's primary goal is current income. Long-term
capital appreciation is a secondary goal.
Investment Policies - The Equity Income Portfolio will seek to achieve its
goals principally through investment in dividend-paying common stocks of
companies whose prospects for dividend growth and capital appreciation are
considered favorable by SBMFM. The Portfolio will normally invest at least 65%
of its assets in equity securities. Under normal circumstances, the Portfolio
will concentrate at least 25% of its assets in equity and debt securities of
companies in the utility industry. A company will be considered to be in the
utility industry if it is principally engaged (i.e., at least 50% of a
company's assets consist of, or gross income or net profits result from,
utility operations or the company is regulated as a utility by a government
agency or authority) in the manufacture, production, generation, transmission
and sale of electric and gas energy and companies principally engaged in the
communications field, including entities such as telephone, telegraph,
satellite, microwave and other companies regulated by governmental agencies as
utilities that provide communication facilities for the public benefit.
Other types of securities that may be held by the Portfolio when deemed
advisable by SBMFM include investment-grade debt securities such as bonds,
debentures and commercial paper, U.S. government securities and money market
instruments, provided that up to 10% of the Portfolio's assets may be invested
in debt securities rated as low as B by Moody's or S&P or in unrated
securities deemed by SBMFM to be of comparable quality. When the outlook for
common stocks is not considered promising in the judgment of SBMFM, a
substantial portion of the assets of the Portfolio may be held in these other
types of securities for temporary defensive purposes.
The Portfolio's investments in common stocks will generally be made in
companies that share some of the following characteristics: established
operating histories; low price/earnings ratios relative to the S&P 500; and
strong balance sheets and other financial characteristics. The Portfolio may
also invest in securities convertible into or ultimately exchangeable for
common stock (i.e., convertible bonds or convertible preferred stock) and may
purchase common stocks that do not provide current income but which offer
opportunities for capital appreciation and future income. The Portfolio also
may enter into repurchase agreements and reverse repurchase agreements, borrow
money, lend its portfolio securities, write covered options on securities,
purchase options on securities, sell securities short against the box,
purchase and sell securities on a when-issued or delayed-delivery basis and
enter into interest rate futures contracts and related options.
Equity Index Portfolio
Goal - The Equity Index Portfolio's goal is to provide investment results
that, before deduction of operating expenses, match the price and yield
performance of U.S. publicly traded common stocks, as measured by the S&P 500.
Investment Policies - The Equity Index Portfolio will seek to achieve its goal
by owning all 500 stocks in the S&P 500 in proportion to their actual market
capitalization weightings. The Portfolio will be reviewed daily and adjusted,
when necessary, to maintain security weightings as close to those of the S&P
500 as possible, given the amount of assets in the Portfolio at that time. The
Portfolio may invest up to 5% of its assets in equity securities that are not
included in the S&P 500 if TIMCO believes such investments will assist the
Portfolio in approximating the return of the S&P 500. The Portfolio may use up
to an additional 20% of its assets to enter into stock index futures and
related options to increase efficiency, may lend portfolio securities and
write covered options to help offset operating expenses, and may acquire money
market instruments. Portfolio turnover is expected to be lower than for most
other investment companies.
No attempt will be made to manage the Portfolio in the traditional sense using
economic, financial and market analysis, nor will the adverse financial
situation of an issuer necessarily result in the elimination of its securities
from the Portfolio, unless the securities are removed from the S&P 500. From
time to time, administrative adjustments may be made in the Portfolio because
of changes in the composition of the S&P 500. TIMCO reserves the right to
remove an investment from the Portfolio if, in its opinion, the merit of the
investment has been substantially impaired by extraordinary events or
financial conditions.
The Portfolio will use the S&P 500 as its standard for performance comparison
because the S&P 500 represents approximately 70% of the total market value of
all U.S. common stocks, is well known to investors and is representative of
the performance of publicly traded U.S. common stocks.
Growth & Income Portfolio
Goal - The Growth & Income Portfolio's goal is income and long-term capital
growth.
Investment Policies - The Growth & Income Portfolio will seek to achieve its
goal by investing in income-producing equity securities, including dividend-
paying common stocks, securities that are convertible into common stocks and
warrants. SBMFM has developed quantitative investment criteria against which
prospective investments will be evaluated and will make buy and sell decisions
based on those criteria. Those criteria establish parameters for suitable
investments and deal with such matters as market capitalization, credit
quality, dividend growth, historic earnings, current yield and industry
diversification. The criteria, which may be changed by SBMFM in light of its
experience in managing the Portfolio or in response to changing market or
economic conditions, are designed to identify companies with consistent
dividend-paying histories, relatively high levels of dividends, the capacity
to raise dividends in the future and the potential for capital appreciation.
Under normal market conditions, the Portfolio will invest substantially all -
but not less than 65% - of its assets in equity securities. The Portfolio may
invest the remainder of its assets in money market instruments, as well as in
corporate bonds, convertible securities and mortgage-related securities that
are rated investment-grade or are deemed to be of comparable quality. The
Portfolio may enter into repurchase agreements, lend portfolio securities,
enter into interest rate and stock index futures and related options, purchase
or sell securities on a when-issued or delayed-delivery basis and write
covered options.
Appreciation Portfolio
Goal - The Appreciation Portfolio's goal is long-term appreciation of capital.
Investment Policies - The Appreciation Portfolio will attempt to achieve its
goal by investing primarily in equity and equity-related securities that are
believed to afford attractive opportunities for appreciation. For example, the
Portfolio may invest in the securities of companies whose earnings are
expected to increase, companies whose securities prices are lower than are
believed justified in relation to their underlying assets or earning power or
companies in which changes are anticipated that would result in improved
operations or profitability. The Portfolio's investments will be broadly
diversified among different industries. In analyzing securities for
investment, SBMFM will consider many different factors, including past growth
records, management capability, future earnings prospects and technological
innovation, as well as general market and economic factors that can influence
the price of securities.
Under normal market conditions, substantially all - but not less than 65% -
of the Portfolio's assets will consist of common stocks, but the Portfolio
also may hold securities convertible into common stocks and warrants. When
SBMFM believes that a conservative or defensive investment posture is
warranted or when opportunities for capital appreciation do not appear
attractive, the Portfolio may invest temporarily in debt obligations,
preferred securities or short-term money market instruments. The Portfolio may
from time to time lend its portfolio securities and invest in securities of
non-U.S. issuers in the form of depository receipts representing interests in
the common stocks of foreign issuers.
Total Return Portfolio
Goal - The Total Return Portfolio's goal is to provide shareholders with total
return, consisting of long-term capital appreciation and income.
Investment Policies - The Total Return Portfolio will seek to achieve its goal
by investing primarily in a diversified portfolio of dividend-paying common
stocks. The Portfolio may engage in various portfolio strategies involving
options to seek to increase its return and to hedge its portfolio against
movements in the equity markets and interest rates. Because the Portfolio
seeks total return by emphasizing investments in dividend-paying common
stocks, it will not have as much investment flexibility as total return funds
which may pursue their objective by investing in income and equity securities
without such an emphasis. The Portfolio also may invest up to 10% of its
assets in securities rated less than investment grade by Moody's or S&P or
comparable unrated securities of comparable quality, interest-paying debt
securities, such as U.S. government securities, and other securities,
including convertible bonds, convertible preferred stock and warrants. In
addition, the Portfolio will limit its investments in warrants to 5% of its
net assets. The Portfolio also may lend its portfolio securities and enter
into short sales against the box.
International Equity Portfolio
Goal - The International Equity Portfolio's goal is to provide a total return
on its assets from growth of capital and income.
Investment Policies - Under normal market conditions, the Portfolio will
invest at least 65% of its assets in a diversified portfolio of equity
securities consisting of dividend and non-dividend paying common stock,
preferred stock, convertible debt and rights and warrants to such securities
and up to 35% of the Portfolio's assets in bonds, notes and debt securities
(consisting of securities issued in the Euro-currency markets or obligations
of the United States or foreign governments and their political subdivisions)
of established non-United States issuers. Investments may be made for capital
appreciation or for income or any combination of both for the purpose of
achieving a higher overall return than might otherwise be obtained solely from
investing for growth of capital or for income. There is no limitation on the
percentage or amount of the Portfolio's assets which may be invested for
growth or income and, therefore, from time to time the investment emphasis may
be placed solely or primarily on growth of capital or solely or primarily on
income. In seeking to achieve its objective, the Portfolio presently expects
to invest its assets primarily in common stocks of established non-United
States companies which in the opinion of its Investment Adviser have potential
for growth of capital. In determining whether the Portfolio will be invested
for capital appreciation or for income or any combination of both, its
Investment Adviser regularly analyzes a broad range of international equity
and fixed-income markets in order to assess the degree of risk and level of
return that can be expected from each market.
The Portfolio will generally invest its assets broadly among countries and
will have represented in the portfolio business activities in not less than
three different countries. Except as stated below, the Portfolio will invest
at least 65% of its assets in companies organized or governments located in
any area of the world other than the United States, such as the Far East
(e.g., Hong Kong, Japan, Malaysia and Singapore), Western Europe (e.g.,
France, Germany, Italy, the Netherlands, Switzerland and the United Kingdom),
Central and South America (e.g., Chile, Mexico and Venezuela), Australia,
Canada and such other areas and countries as its Investment Adviser may
determine from time to time. The Portfolio may invest in securities issued by
companies formerly party to the Warsaw Pact. However, under unusual economic
or market conditions as determined by its Investment Adviser, for defensive
purposes the Portfolio may temporarily invest all or a major portion of its
assets in U.S. government securities or in debt or equity securities of
companies incorporated in and having their principal business activities in
the United States. To the extent the Portfolio's assets are invested for
temporary defensive purposes, such assets will not be invested in a manner
designed to achieve the Portfolio's investment objective.
In determining the appropriate distribution of investments among various
countries and geographic regions, the Investment Adviser will ordinarily
consider the following factors: prospects for relative economic growth among
countries; expected levels of inflation; government policies influencing
business conditions; the outlook for currency relationships; and the range of
individual investment opportunities available to international investors. In
the future, if any other relevant factors arise, they will also be considered.
In analyzing companies for investment, the Investment Adviser ordinarily looks
for one or more of the following characteristics: an above-average earnings
growth per share; high return on invested capital; healthy balance sheet;
sound financial and accounting policies and overall financial strength; strong
competitive advantages; effective research and product development and
marketing; efficient service; pricing flexibility; strength of management; and
general operating characteristics which will enable the company to compete
successfully in its market place. Ordinarily, the Portfolio's Investment
Adviser will not view a company as being sufficiently well established to be
considered for inclusion in the Portfolio unless the company, together with
any predecessors, has been operating for at least three fiscal years. It is
expected that securities held by the Portfolio will ordinarily be traded on a
stock exchange or other market in the country in which the issuer is
principally based, but also may be traded on markets in other countries
including, in many cases, U.S. securities exchanges and over-the-counter
markets.
To the extent that the Portfolio's assets are not otherwise invested as
described above, the assets may be held in cash, in any currency, or invested
in U.S., as well as foreign, high-quality money market instruments and their
equivalents.
Emerging Growth Portfolio
Goal - The Emerging Growth Portfolio's goal is to provide capital
appreciation.
Investment Policies - The Emerging Growth Portfolio seeks to invest at least
65% of its total assets in common stocks of small and medium-sized companies,
both domestic and foreign, in the early stages of their life cycle, that its
Investment Adviser believes have the potential to become major enterprises.
Investments in such companies may offer greater opportunities for growth of
capital than larger, more established companies, but also may involve certain
special risks. Emerging growth companies often have limited product lines,
markets or financial resources, and they may be dependent upon one or a few
key people for management. The securities of such companies may be subject to
more abrupt or erratic market movements than securities of larger, more
established companies or the market averages in general. While the Portfolio
will invest primarily in common stocks, it may invest, to a limited extent, in
other securities such as preferred stocks, convertible securities and
warrants.
The Portfolio does not limit its investments to any single group or type of
security. The Portfolio also may invest in special situations involving new
management, special products and techniques, unusual developments, mergers or
liquidations. Investments in unseasoned companies and special situations often
involve much greater risks than are inherent in ordinary investments, because
securities of such companies may be more likely to experience unexpected
fluctuations in price.
The Portfolio's primary approach is to seek what its Investment Adviser
believes to be unusually attractive growth investments on an individual
company basis. The Portfolio may invest in securities that have above-average
volatility of price movement. Because prices of common stocks and other
securities fluctuate, the value of an investment in the Portfolio will vary
based upon its investment performance. The Portfolio attempts to reduce
overall exposure to risk from declines in securities prices by spreading its
investments over many different companies in a variety of industries. There
is, however, no assurance that the Portfolio will be successful in achieving
its objective.
The Portfolio may invest up to 20% of its total assets in securities of
foreign issuers. Additionally, the Portfolio may invest up to 15% of the value
of its total assets in restricted securities (i.e., securities which may not
be sold without registration under the Securities Act of 1933 (the "1933
Act")) and in other securities not having readily available market quotations.
The Portfolio may enter into repurchase agreements with domestic banks and
broker-dealers, which involve certain risks.
Additional Investments
Money Market Instruments
The Money Market Portfolio will invest exclusively in money market
instruments. Each of the remaining Portfolios may, as a cash management tool,
hold up to 20% (except that each of the Total Return, Emerging Growth and
International Equity Portfolios may invest up to 35%) of the value of its
total assets in cash and invest in short-term instruments and, for temporary
defensive purposes, may hold cash and invest in short-term instruments without
limitation. Short-term instruments in which the Portfolios may invest include:
U.S. government securities; obligations of banks having at least $1 billion in
assets (including certificates of deposit, time deposits and bankers'
acceptances of U.S. or foreign banks, U.S. savings and loan associations and
similar institutions); commercial paper rated no lower than A-2 by S&P or
Prime-2 by Moody's or the equivalent from another NRSRO or, if unrated, of an
issuer having an outstanding, unsecured debt issue then rated within the two
highest rating categories; and repurchase agreements with respect to any of
the foregoing entered into with banks and non-bank dealers approved by the
Fund's Board of Trustees.
The Money Market Portfolio will limit its portfolio investments to securities
that the Fund's Board of Trustees determines present minimal credit risks and
which are "Eligible Securities" at the time of acquisition by the Portfolio.
Eligible Securities include securities rated by the "Requisite NRSROs" in one
of the two highest short-term rating categories, securities of issuers that
have received such ratings with respect to other short-term debt securities
and comparable unrated securities. "Requisite NRSROs" means (a) any two NRSROs
that have issued a rating with respect to a security or class of debt
obligations of an issuer, or (b) one NRSRO, if only one NRSRO has issued such
a rating at the time that the Portfolio acquires the security. Currently,
there are six NRSROs: S&P, Moody's, Fitch Investors Services, Inc., Duff and
Phelps Credit Rating Co., IBCA Limited and its affiliate, IBCA, Inc. and
Thomson BankWatch. A discussion of the ratings categories of the NRSROs is
contained in the Appendix to the Statement of Additional Information.
The Money Market Portfolio generally may not invest more than 5% of its total
assets in the securities of any one issuer, except for U.S. government
securities. In addition, the Portfolio may not invest more than 5% of its
total assets in Eligible Securities that have not received the highest rating
from the Requisite NRSROs and comparable unrated securities ("Second Tier
Securities") and may not invest more than 1% of its total assets in the Second
Tier Securities of any one issuer. The Portfolio may invest more than 5% (but
no more than 25%) of the then-current value of the Portfolio's total assets in
the securities of a single issuer for a period of up to three business days,
provided that (a) the securities either are rated by the Requisite NRSROs in
the highest short-term rating category or are securities of issuers that have
received such rating with respect to other short-term debt securities or are
comparable unrated securities, and (b) the Portfolio does not make more than
one such investment at any one time.
Eurodollar or Yankee Obligations
The Money Market Portfolio may invest in Eurodollar and Yankee obligations.
Eurodollar bank obligations are dollar denominated debt obligations issued
outside the U.S. capital markets by foreign branches of U.S. banks and by
foreign banks. Yankee obligations are dollar denominated obligations issued in
the U.S. capital markets by foreign issuers. Eurodollar (and to a limited
extent, Yankee) obligations are subject to certain sovereign risks. One such
risk is the possibility that a foreign government might prevent dollar
denominated funds from flowing across its borders. Other risks include:
adverse political and economic developments in a foreign country; the extent
and quality of government regulation of financial markets and institutions;
the imposition of foreign withholding taxes; and expropriation or
nationalization of foreign issuers.
U.S. Government Securities
The U.S. government securities in which the Portfolios may invest include:
direct obligations of the United States Treasury (such as Treasury Bills,
Treasury Notes and Treasury Bonds), and obligations issued by U.S. government
agencies and instrumentalities, including securities that are supported by the
full faith and credit of the United States (such as certificates issued by
GNMA); securities that are supported by the right of the issuer to borrow from
the U.S. Treasury (such as securities of Federal Home Loan Banks); and
securities that are supported only by the credit of the instrumentality (such
as bonds issued by FNMA and FHLMC). Treasury Bills have maturities of less
than one year, Treasury Notes have maturities of one to ten years and Treasury
Bonds generally have maturities of greater than ten years at the date of
issuance.
The Portfolios may invest up to 5% of their net assets in U.S. government
securities for which the principal repayment at maturity, while paid in U.S.
dollars, is determined by reference to the exchange rate between the U.S.
dollar and the currency of one or more foreign countries ("Exchange Rate-
Related Securities"). Exchange Rate-Related Securities are issued in a variety
of forms, depending on the structure of the principal repayment formula. The
principal repayment formula may be structured so that the securityholder will
benefit if a particular foreign currency to which the security is linked is
stable or appreciates against the U.S. dollar. In the alternative, the
principal repayment formula may be structured so that the securityholder
benefits if the U.S. dollar is stable or appreciates against the linked
foreign currency. Finally, the principal repayment formula can be a function
of more than one currency and, therefore, be designed in either of the
aforementioned forms or a combination of those forms.
Investments in Exchange Rate-Related Securities entail special risks. There is
the possibility of significant changes in rates of exchange between the U.S.
dollar and any foreign currency to which an Exchange Rate-Related Security is
linked. If currency exchange rates do not move in the direction or to the
extent anticipated at the time of purchase of the security, the amount of
principal repaid at maturity might be significantly below the par value of the
security, which might not be offset by the interest earned by the Portfolios
over the term of the security. The rate of exchange between the U.S. dollar
and other currencies is determined by the forces of supply and demand in the
foreign exchange markets. These forces are affected by the international
balance of payments and other economic and financial conditions, government
intervention, speculation and other factors. The imposition or modification of
foreign exchange controls by the United States or foreign governments or
intervention by central banks also could affect exchange rates. Finally, there
is no assurance that sufficient trading interest to create a liquid secondary
market will exist for particular Exchange Rate-Related Securities due to
conditions in the debt and foreign currency markets. Illiquidity in the
forward foreign exchange market and the high volatility of the foreign
exchange market may from time to time combine to make it difficult to sell an
Exchange Rate-Related Security prior to maturity without incurring a
significant price loss.
Certain Investment Guidelines
Up to 10% (15% in the case of the International Equity, Emerging Growth and
Total Return Portfolios) of the total assets of any Portfolio may be invested
in securities with contractual or other restrictions on resale and other
instruments that are not readily marketable, including (a) repurchase
agreements with maturities greater than seven days, (b) futures contracts and
related options for which a liquid secondary market does not exist and (c)
time deposits maturing in more than seven calendar day (or in the case of
the Money Market Portfolio, maturing from two business days through six
months). With respect to the Money Market Portfolio, the above restriction
does not apply to securities subject to Rule 144A of the 1933 Act if two or
more dealers make a market in such securities . Each Portfolio may borrow
from banks for temporary or emergency purposes, but not for leverage, in an
amount up to 30% of its assets, and may pledge its assets to the same extent in
connection with such borrowings. Whenever borrowings from banks exceed 5% of
the value of the assets of a Portfolio, the Portfolio will not make any
additional investments. The International Equity Portfolio may borrow for
investment purposes, provided that any transactions constituting borrowing
by the Portfolio may not exceed one-third of its assets. Except for the
limitations on borrowing, the investment guidelines set forth in this
paragraph may be changed at any time without shareholder consent by vote of
the Board of Trustees of the Fund. A complete list of investment restrictions
that identifies additional restrictions that cannot be changed without the
approval of a majority of an affected Portfolio's outstanding shares is
contained in the Statement of Additional Information.
Special Considerations and Risk Factors
This section describes certain investments of one or more Portfolios and
related risks. Further information concerning investments of the Portfolios
and related risks may be found in the Appendix to this Prospectus and in the
Statement of Additional Information.
Fixed-Income Securities
The market value of fixed-income obligations of the Portfolios will be
affected by general changes in interest rates, which will result in increases
or decreases in the value of fixed-income obligations held by the Portfolios.
The market value of the Portfolios' fixed-income obligations can be expected
to vary inversely in relation to changes in prevailing interest rates.
Investors also should recognize that in periods of declining interest rates
the yield of income-oriented Portfolios will tend to be somewhat higher than
prevailing market rates, while in periods of rising interest rates these
Portfolios' yield will tend to be somewhat lower. Also, when interest rates
are falling, the inflow of net new money to these Portfolios from the
continuous sale of their shares probably will be invested in instruments
producing lower yields than the balance of their holdings, thereby reducing
the Portfolios' current yield. In periods of rising interest rates the
opposite can be expected to occur. In addition, fixed-income securities in
which certain Portfolios may invest may not yield as high a level of current
income as might be achieved by investing in securities with less liquidity and
safety and longer maturities.
Non-Publicly Traded and Illiquid Securities
Each Portfolio may purchase securities that are not publicly traded. The sale
of securities that are not publicly traded is typically restricted under
federal securities laws. As a result, a Portfolio may be forced to sell these
securities at less than fair market value or may not be able to sell them when
its Investment Adviser believes it desirable to do so. The Portfolios'
investments in illiquid securities are subject to the risk that should a
Portfolio desire to sell any of these securities when a ready buyer is not
available at a price that the Portfolio deems representative of their value,
the value of the Portfolio's net assets could be adversely affected.
Mortgage-Related Securities
To the extent that a Portfolio purchases mortgage-related securities at a
premium, mortgage foreclosures and prepayments of principal by mortgagors
(which may be made at any time without penalty) may result in some loss of the
Portfolio's principal investment to the extent of the premium paid. The yield
of a Portfolio that invests in mortgage-related securities may be affected by
reinvestment of prepayments at higher or lower rates than the original
investment. In addition, like other debt securities, the values of mortgage-
related securities, including government and government-related mortgage
pools, generally will fluctuate in relation to interest rates.
Government Stripped Mortgage-Backed Securities
The Intermediate High Grade Portfolio may invest up to 10% of its total assets
in government stripped mortgage-backed securities issued and guaranteed by
GNMA, FNMA or FHLMC. These securities represent beneficial ownership interests
in either periodic principal distributions ("principal-only") or interest
distributions ("interest-only") on mortgage-backed certificates issued by
GNMA, FNMA or FHLMC, as the case may be. The certificates underlying
government stripped mortgage-backed securities represent all or part of the
beneficial interest in pools of mortgage loans.
Investing in government stripped mortgage-backed securities involves risks
normally associated with investing in mortgage-backed securities issued by
government or government-related entities. See "Mortgage-Related Securities"
above. In addition, the yields on government stripped mortgage-backed
securities are extremely sensitive to the prepayment experience on the
mortgage loans underlying the certificates collateralizing the securities. If
a decline in prevailing interest rates results in a rate of principal
prepayments higher than anticipated, distributions of principal will be
accelerated, thereby reducing the yield to maturity on interest-only
government stripped mortgage-backed securities and increasing the yield to
maturity on principal-only government stripped mortgage-backed securities.
Sufficiently high prepayment rates could result in the Portfolio not fully
recovering its initial investment in an interest-only government stripped
mortgage-backed security. Government stripped mortgage-backed securities are
currently traded in an over-the-counter market maintained by several large
investment banking firms. There can be no assurance that the Portfolio will be
able to effect a trade of a government stripped mortgage-backed security at a
time when it wishes to do so, although the Portfolio will acquire government
stripped mortgage-backed securities only if a secondary market for the
securities exists at the time of acquisition.
Foreign Securities
Each Portfolio may invest in obligations of companies and governments of
foreign nations, which involve certain risks in addition to the usual risks
inherent in U.S. investments. These risks include those resulting from
revaluation of currencies, future adverse political and economic developments
and the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers and the lack of uniform accounting, auditing and financial
reporting standards or of other regulatory practices and requirements
comparable to those applicable to U.S. companies. The performance of a
Portfolio investing in foreign securities may be adversely affected by
fluctuations in value of one or more foreign currencies relative to the U.S.
dollar. Moreover, securities of many foreign companies may be less liquid and
their prices more volatile than those of securities of comparable U.S.
companies. In addition, with respect to certain foreign countries, there is
the possibility of expropriation, nationalization, confiscatory taxation and
limitations on the use or removal of funds or other assets of a Portfolio,
including the withholding of dividends. Foreign securities may be subject to
foreign government taxes that could reduce the return on such securities.
Changes in foreign currency exchange rates may affect the value of portfolio
securities and the appreciation or depreciation of investments. Investment in
foreign securities also may result in higher expenses due to the cost of
converting foreign currency to U.S. dollars, the payment of fixed brokerage
commissions on foreign exchanges, which generally are higher than commissions
on U.S. exchanges, and the expense of maintaining securities with foreign
custodians.
In addition, the Diversified Strategic Income Portfolio may invest up to 5% of
its total assets in securities traded in markets of developing countries. A
developing country generally is considered to be a country that is in the
initial stages of its industrialization cycle. Investing in the equity and
fixed-income markets of developing countries involves exposure to economic
structures that are generally less diverse and mature, and to political
systems that can be expected to have less stability, than those of developed
countries. Historical experience indicates that the markets of developing
countries have been more volatile than the markets of the more mature
economies of developed countries; however, such markets often have provided
higher rates of return to investors.
Medium-, Lower- and Unrated Securities
The Intermediate High Grade, Diversified Strategic Income, Equity Income,
Growth & Income and Total Return Portfolios may invest in medium- or lower-
rated securities and unrated securities of comparable quality. Generally,
these securities offer a higher current yield than is offered by higher-rated
securities, but also will likely have some quality and protective
characteristics that, in the judgment of the rating organizations, are
outweighed by large uncertainties or major risk exposures to adverse
conditions and are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms of
the obligation. The market values of certain of these securities also tend to
be more sensitive to individual corporate developments and changes in economic
conditions than higher-quality securities. In addition, medium- and lower-
rated securities and comparable unrated securities generally present a higher
degree of credit risk. Issuers of medium-, lower-rated and comparable unrated
securities are often highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during a major economic downturn or during sustained periods
of rising interest rates may be impaired. The risk of loss due to default by
such issuers is significantly greater because medium- and lower-rated
securities and comparable unrated securities generally are unsecured and
frequently are subordinated to the prior payment of senior indebtedness. In
light of these risks, each Portfolio's Investment Adviser, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take various
factors established by the Fund's Board of Trustees into consideration, which
may include, as applicable, the issuer's financial resources, its sensitivity
to economic conditions and trends, the operating history of and the community
support for the facility financed by the issue, the ability of the issuer's
management and regulatory matters.
The markets in which medium- and lower-rated or comparable unrated securities
are traded generally are more limited than those in which higher-rated
securities are traded. The existence of limited markets for these securities
may restrict the availability of securities for a Portfolio to purchase and
also may have the effect of limiting the ability of the Portfolio to (a)
obtain accurate market quotations for purposes of valuing securities and
calculating net asset value and (b) sell securities at their fair value either
to meet redemption requests or to respond to changes in the economy or the
financial markets. The market for medium-, lower-rated and comparable unrated
securities is relatively new and has not fully weathered a major economic
recession. Any such recession, however, would disrupt severely the market for
such securities and adversely affect the value of such securities, and could
adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon.
Fixed-income securities, including medium-, lower-rated and comparable unrated
securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as a
Portfolio. If an issuer exercises these rights during periods of declining
interest rates, the Portfolio may have to replace the security with a lower-
yielding security resulting in a decreased return to the Portfolio.
The market value of securities in lower rating categories is more volatile
than that of higher quality securities, and the markets in which medium- and
lower-rated or comparable unrated securities are traded are more limited than
those in which higher-rated securities are traded. Adverse publicity and
investor perceptions also may have a negative impact on the value and
liquidity of lower-rated, high-yield securities, especially in a limited
trading market.
Subsequent to its purchase by a Portfolio, an issue of securities may cease to
be rated or its rating may be reduced below the minimum required for purchase
by the Portfolio. Neither event will require sale of such securities by the
Portfolio involved, but the Portfolio's Investment Adviser will consider such
event in its determination of whether the Portfolio should continue to hold
the securities.
Securities that are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to their capacity to pay interest and repay
principal. Securities that are rated B generally lack characteristics of the
desirable investment and assurance of interest and principal payments over any
long period of time may be small. Securities that are rated Caa or CCC are of
poor standing. These issues may be in default or present elements of danger
with respect to principal or interest.
The Diversified Strategic Income Portfolio's holdings (as rated by S&P) for
the fiscal year ended December 31, 1996, were composed as follows: .20% rated
BBB; 12.01% rated BB; 21.86% rated B; and .53% rated CCC. The percentages were
calculated on a dollar weighted average basis by determining monthly the
percentage of the Portfolio's net assets invested in each rating category and
do not necessarily indicate what the composition of the Portfolio's holdings
will be in subsequent years.
Concentration
The Money Market Portfolio will concentrate at least 25% of its assets in the
banking industry and the Equity Income Portfolio will concentrate at least 25%
of its assets in the utility industry, provided that, if, at some future date,
adverse economic conditions prevail in either of those industries, the
relevant Portfolio may temporarily, for defensive purposes, invest less than
25% of its assets in the affected industry. Because of its concentration
policy, either of these Portfolios may be subject to greater risk and market
fluctuation than a fund that had securities representing a broader range of
investment alternatives. The Money Market and Equity Income Portfolios'
concentration policies are fundamental policies that cannot be changed without
the approval of a majority of the relevant Portfolio's outstanding voting
securities.
Securities of Unseasoned Issuers
The Diversified Strategic Income, Total Return, International Equity and
Emerging Growth Portfolios may invest in securities of unseasoned issuers,
which may have limited marketability and, therefore, may be subject to wide
fluctuations in market value. In addition, certain securities may lack a
significant operating history and may be dependent on products or services
without an established market share.
Floating- and Variable-Rate Demand Notes
The Money Market Portfolio may acquire floating and variable rate demand notes
of corporate issuers. Although floating and variable rate demand notes are
frequently not rated by credit rating agencies, unrated notes purchased by the
Portfolio will be determined by the Portfolio's Investment Adviser to be of
comparable quality at the time of purchase to instruments rated "high quality"
(i.e., within the two highest rating categories) by any NRSRO. Moreover, while
there may be no active secondary market with respect to a particular floating
or variable rate demand note purchased by the Portfolio, the Portfolio may,
upon the notice specified in the note, demand payment of the principal of and
accrued interest on the note at any time and may resell the note at any time
to a third party. The absence of such an active secondary market, however,
could make it difficult for the Portfolio to dispose of a particular floating
or variable rate demand note in the event the issuer of the note defaulted on
its payment obligations, and the Portfolio could, for this or other reasons,
suffer a loss to the extent of the default.
Leverage
The International Equity Portfolio may borrow from banks, on a secured or
unsecured basis, up to one-third of the value of its assets. If the Portfolio
borrows and uses the proceeds to make additional investments, income and
appreciation from such investments will improve its performance if they exceed
the associated borrowing costs but impair its performance if they are less
than such borrowing costs. This speculative factor is known as "leverage."
Leverage creates an opportunity for increased returns to shareholders of the
Portfolio but, at the same time, creates special risk considerations. For
example, leverage may exaggerate changes in the net asset value of the
Portfolio's shares and in the Portfolio's yield. Although the principal or
stated value of such borrowings will be fixed, the Portfolio's assets may
change in value during the time the borrowing is outstanding. Leverage will
create interest or dividend expenses for the Portfolio which can exceed the
income from the assets retained. To the extent the income or other gain
derived from securities purchased with borrowed funds exceed the interest or
dividends the Portfolio will have to pay in respect thereof, the Portfolio's
net income or other gain will be greater than if leverage had not been used.
Conversely, if the income or other gain from the incremental assets is not
sufficient to cover the cost of leverage, the net income or other gain of the
Portfolio will be less than if leverage had not been used. If the amount of
income from the incremental securities is insufficient to cover the cost of
borrowing, securities might have to be liquidated to obtain required funds.
Depending on market or other conditions, such liquidations could be
disadvantageous to the Portfolio.
Portfolio Transactions
All orders for transactions in securities, options, futures contracts and
options on futures contracts on behalf of the Portfolios will be placed by
their respective Investment Advisers with broker-dealers that those advisers
select, including Smith Barney and other affiliated brokers. A Portfolio may
utilize Smith Barney or a Smith Barney-affiliated broker in connection with a
purchase or sale of securities when the Portfolio's Investment Adviser
believes that the broker's charge for the transaction does not exceed usual
and customary levels. The same standard applies to the use of Smith Barney or
a Smith Barney-affiliated broker as a commodities broker in connection with
entering into futures contracts and options on futures contracts.
Net Asset Value
The value of an individual share of a Portfolio is the net asset value of that
share. The net asset value per share of each Portfolio will be calculated
separately on each day, Monday through Friday, except on days when the New
York Stock Exchange, Inc. (the "NYSE") is closed. The NYSE is currently
scheduled to be closed on New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday when one of these holidays falls on
a Saturday or Sunday, respectively. Net asset value per share of each
Portfolio is determined as of the close of regular trading on the NYSE
(currently 4:00 p.m., New York time). The Money Market Portfolio seeks to
maintain its net asset value at $1.00 per share.
Net asset value per share is computed by dividing the value of a Portfolio's
net assets by the total number of its shares outstanding. Generally, a
Portfolio's investments are valued at market value or, in the absence of a
market value with respect to any portfolio securities, at fair value as
determined by or under the direction of the Fund's Board of Trustees. A
security that is primarily traded on a U.S. or foreign exchange (including
securities traded through the National Market System) is valued at the last
sale price on that exchange or, if there were no sales during the day, at the
current quoted bid price. Portfolio securities that are primarily traded on
foreign exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed
the value, then the fair value of those securities will be determined by
consideration of other factors by or under the direction of the Fund's Board
of Trustees or its delegates. Over-the-counter securities that are not traded
through the National Market System and securities listed or traded on certain
foreign exchanges whose operations are similar to the U.S. over-the-counter
market are valued on the basis of the mean between the bid and asked prices at
the close of business on each day. An option is generally valued at the last
sale price or, in the absence of a last sale price, the last offer price.
Investments in U.S. government securities (other than short-term securities)
are valued at the average of the quoted bid and asked prices in the over-the-
counter market. Short-term investments that mature in 60 days or less are
valued at amortized cost when the Fund's Board of Trustees determines that
this constitutes fair value; assets of the Money Market Portfolio also are
valued at amortized cost. The value of a futures contract equals the
unrealized gain or loss on the contract, which is determined by marking the
contract to the current settlement price for a like contract acquired on the
day on which the futures contract is being valued. A settlement price may not
be used if the market makes a limit move with respect to the security, index
or currency underlying the futures contract. In such event, the futures
contract will be valued at a fair market price to be determined by or under
the direction of the Fund's Board of Trustees. Further information regarding
the Fund's valuation policies is contained in the Statement of Additional
Information.
How to Use the Fund
Investing in the Fund
Shares of the Fund are currently offered exclusively to Contract owners. To
find out which insurance companies offer Contracts that are eligible to invest
in the Fund, call the Fund at (800) 451-2010. For further information, see the
description provided in the Contract prospectus.
Sales Charges and Surrender Charges
The Fund does not assess any sales charge, either when it sells or when it
redeems shares of a Portfolio. However, surrender charges that may be assessed
under the Contract are described in the Contract prospectus. Mortality and
expense risk fees and other charges are also described in the Contract
prospectus.
Redeeming and Exchanging Shares
The Fund will redeem shares in response to full or partial surrenders of a
Contract or a transfer of money from one Portfolio to another. Information on
how to transfer funds is described in the Contract prospectus. Generally,
payment upon redemption will be made on the third business day after receiving
a valid redemption request (unless redemption is suspended or payment is
delayed as permitted in accordance with SEC regulations). The Fund will use
the net asset value at the close of trading on the NYSE on the day the notice
of surrender or transfer is received. If the request is received after the
close of trading on the NYSE, the shares will be redeemed at the net asset
value at the close of the next business day. The value of any redeemed shares
may be more or less than their original purchase price.
A detailed description of how to surrender the Contract and transfer money
among Portfolios is included in the Contract prospectus.
Dividends and Taxes
Dividends
Net Investment Income. Dividends and distributions will be automatically
reinvested, without a sales charge, in the shareholder's account at net asset
value in additional shares of the Portfolio that paid the dividend or
distribution, unless the shareholder instructs the Portfolio to pay all
dividends and distributions in cash. Net investment income, including
dividends on stocks and interest on bonds or other securities the Fund holds,
is distributed to the shareholders of the Portfolios as follows:
monthly for the Money Market Portfolio;
annually for the Appreciation, Diversified Strategic Income, Emerging
Growth, Equity Income, Equity Index, Growth & Income, Intermediate High
Grade, International Equity, and Total Return Portfolios.
Capital Gains. Distributions of any net realized capital gains of the
Portfolios will be paid annually shortly after the close of the fiscal year in
which they are earned.
Taxes
In the opinion of counsel to the Fund, each Portfolio will be treated as a
separate taxpayer with the result that, for federal income tax purposes, the
amounts of investment income and capital gains earned will be determined on a
Portfolio-by-Portfolio (rather than on a Fund-wide) basis.
The Fund intends that each Portfolio will separately meet the requirements for
qualification each year as a "regulated investment company" within the meaning
of the Internal Revenue Code of 1986, as amended (the "Code"). In order to
qualify as a regulated investment company, each Portfolio must meet certain
income and diversification tests, including the requirement that it derive
less than 30% of its gross income in each taxable year from the sale or other
disposition of (a) stock or securities held for less than three months, (b)
options, futures or forward contracts (other than options, futures or forward
contracts on foreign currencies) held for less than three months and (c)
foreign currencies (or options, futures or forward contracts on such foreign
currencies) held for less than three months but only if such currencies (or
options, futures or forward contracts) are not directly related to the
Portfolio's principal business of investing in stock or securities (or options
or futures with respect to stock or securities). As a regulated investment
company and provided certain distribution requirements are met, a Portfolio
will not be subject to federal income tax on its net investment income and net
capital gains that it distributes to its shareholders.
Dividends paid by a Portfolio from taxable investment income and distributions
of short-term capital gains will be treated as ordinary income in the hands of
the shareholders for federal income tax purposes, whether received in cash or
reinvested in additional shares. Distributions of net long-term capital gains
will be treated as long-term capital gains in the hands of the shareholders,
if certain notice and designation requirements are satisfied, whether paid in
cash or reinvested in additional shares, regardless of the length of time the
investor has held shares of the Portfolio. The Fund has been informed that the
separate accounts represented by the Contracts should, for federal income tax
purposes, be considered the shareholders of each of the Portfolios.
To comply with regulations under Section 817(h) of the Code, each Portfolio
will be required to diversify its investments so that on the last day of each
calendar quarter no more than 55% of the value of its assets is represented by
any one investment, no more than 70% is represented by any two investments, no
more than 80% is represented by any three investments and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For the purposes of Section 817(h)
of the Code, obligations of the United States Treasury and each U.S.
government agency or instrumentality are treated as securities of separate
issuers. Compliance with these diversification rules will limit the ability of
the Money Market and Intermediate High Grade Portfolios, in particular, to
invest more than 55% of their assets in direct obligations of the United
States Treasury or to invest primarily in securities issued by a single agency
or instrumentality of the U.S. government.
The Treasury Department has indicated that it may issue future pronouncements
addressing the circumstances in which a variable contract owner's control of
the investments of a separate account may cause the variable contract owner,
rather than the insurance company, to be treated as the owner of the assets
held by the separate account. If the variable contract owner is considered the
owner of the securities underlying the separate account, income and gains
produced by those securities would be included currently in the variable
contract owner's gross income. It is not known what standards will be set
forth in such pronouncements or when, if at all, these pronouncements may be
issued.
In the event that rules or regulations are adopted, there can be no assurance
that the Portfolios will be able to operate as currently described in this
Prospectus, or that the Fund will not have to change the investment goal or
investment policies of a Portfolio. While a Portfolio's investment goal is
fundamental and may be changed only by a vote of a majority of the Portfolio's
outstanding shares, the Fund's Board of Trustees reserves the right to modify
the investment policies of a Portfolio as necessary to prevent any such
prospective rules and regulations from causing a Contract owner to be
considered the owner of the shares of the Portfolio.
Reference is made to the Contract prospectus for information regarding the
federal income tax treatment of distributions.
Management of the Fund
Board of Trustees
Overall responsibility for management and supervision of the Fund and the
Portfolios rests with the Fund's Board of Trustees. The Trustees approve all
significant agreements between the Fund and the persons or companies that
furnish services to the Fund and its Portfolios, including agreements with the
Investment Advisers and/or Sub-Investment Adviser and Administrator of the
Portfolios and with the Fund's custodian, transfer agent and distributor. The
day-to-day operations of the Portfolios are delegated to the Investment
Advisers and/or Sub-Investment Advisers and Administrator of the Portfolios.
The identities and backgrounds of the Trustees and officers of the Fund,
together with certain additional information about them, are contained in the
Statement of Additional Information. The Fund requires no employees other than
its executive officers, none of whom devotes full time to the affairs of the
Fund.
Investment Advisers and Administrator
Each Portfolio's assets are managed separately. Subject to the supervision and
direction of the Fund's Board of Trustees, the Investment Adviser of each
Portfolio manages the Portfolio in accordance with the Portfolio's goal or
goals and stated investment policies, makes investment decisions for the
Portfolio, places orders to purchase and sell securities on behalf of the
Portfolio and employs professional portfolio managers and securities analysts
who provide research services to the Portfolio.
SBMFM, located at 388 Greenwich Street, New York, New York 10013, provides
investment advisory and management services to investment companies affiliated
with Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned
subsidiary of Travelers Group Inc. ("Travelers"), a diversified financial
services holding company engaged through its subsidiaries principally in four
business segments: Investment Services, Consumer Finance Services, Life
Insurance Services and Property & Casualty Insurance Services. SBMFM renders
investment advice to investment companies that had aggregate assets under
management as of March 1, 1997, in excess of $ 80 billion.
TIMCO, located at One Tower Square, Hartford, CT 06183-2030, provides
investment advisory and management services to investment companies affiliated
with Holdings. TIMCO renders investment advice to investment companies that
had aggregate assets under management as of March 1, 1997, of approximately of
$1.4 billion.
Global Capital Management, located at 10 Piccadilly, London, W1V 9LA England,
is a wholly owned subsidiary of Holdings. Global Capital Management is
responsible for and selects the Diversified Strategic Income Portfolio's
investments in foreign securities and selects brokers and dealers that execute
the Portfolio's investments in foreign securities. Global Capital Management
renders investment advice to institutional clients and investment companies
with aggregate assets under management, as of March 1, 1997, of approximately
$ 2.1 billion.
VKAC, located at One Parkview Plaza, Oakwood Terrace, Illinois, 60181, is a
wholly owned subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is a wholly
owned subsidiary of Morgan Stanley Group Inc.
On February 5, 1997, Morgan Stanley Group Inc. and Dean Witter, Discover & Co.
announced that they had entered into an Agreement and Plan of Merger to form a
new company to be named Morgan Stanley, Dean Witter, Discover & Co.
Subsequent to certain conditions being met, it is currently anticipated that
the transaction will close in mid-1997. Thereafter, VKAC will be an indirect
subsidiary of Morgan Stanley Dean Witter, Discover & Co.
VKAC, together with its predecessors, has been in the investment advisory
business since 1926. VKAC provides investment advice to investment companies
and has aggregate assets under management or supervision as of March 1, 1997
in excess of approximately $57 billion.
Portfolio Management
Appreciation Portfolio - Harry D. Cohen is a Vice President and Investment
Officer of the Fund, and a Managing Director of Smith Barney. Prior to July
1993, Mr. Cohen served as Executive Vice President of Shearson Lehman Brothers
Inc. ("Shearson Lehman Brothers").
Diversified Strategic Income Portfolio - James C. Conroy is a Vice President
and Investment Officer of the Fund, and a Managing Director of Smith Barney.
Prior to July 1993, Mr. Conroy served as Managing Director of Shearson Lehman
Brothers. Victor Filatov of Global Capital Management is a Vice President and
Investment Officer of the Fund. Prior to November 1993, Mr. Filatov was a
Vice President of J.P. Morgan Securities, Inc.
Emerging Growth Portfolio - Gary Lewis is a Vice President and Investment
Officer of the Fund, and Senior Vice President of VKAC. Mr. Lewis has been a
Portfolio Manager at VKAC since 1989.
Equity Income Portfolio - Jack S. Levande is a Vice President and Investment
Officer of the Fund, and a Managing Director of Smith Barney. Prior to July
1993, Mr. Levande served as Managing Director of Shearson Lehman Brothers
Equity Index Portfolio - Kent A. Kelley is Chief Executive Officer of TIMCO.
Mr. Kelley joined TIMCO in 1986. Mr. Sandip A. Bhagat is a Vice President and
Investment Officer of the Fund, and President of TIMCO. Mr. Bhagat joined
TIMCO in 1987.
Growth & Income Portfolio - R. Jay Gerken is a Vice President and Investment
Officer of the Fund, and a Managing Director of Smith Barney. Prior to July
1993, Mr. Gerken served as Managing Director of Shearson Lehman Brothers.
George V. Novello is a Vice President and Investment Officer of the Fund, and
a Managing Director of Smith Barney. Prior to July 1993, Mr. Novello served
as Managing Director of Shearson Lehman Brothers.
Intermediate High Grade Portfolio - George Rupert Vernon, Jr. is a Vice
President of Smith Barney. Mr. Vernon is a Fixed Income Portfolio Manager of
Greenwich Street Advisers, a division of SBMFM.
International Equity Portfolio - Jeffrey Russell is a Vice President and
Investment Officer of the Fund, and a Managing Director of Smith Barney.
Total Return Portfolio - John G. Goode is a Vice President and Investment
Officer of the Fund, and Chairman and Chief Investment Officer of Davis Skaggs
Investment Management, a division of SBMFM.
Money Market Portfolio - Phyllis Zahorodny is a Vice President and Investment
Officer of the Fund, and the Managing Director of Taxable Money Markets of
SBMFM.
The Fund's management discussion and analysis, and additional performance
information regarding the Portfolios of the Fund during the fiscal year ended
December 31, 1996, is included in the Annual Report dated December 31, 1996. A
copy of the Annual Report may be obtained upon request without charge from a
Smith Barney Financial Consultant or by writing or calling the Fund at the
address or phone number listed on page one of this Prospectus.
Custodian and Transfer Agent
PNC, located at 17th and Chestnut Streets, Philadelphia, PA 19103, acts as
custodian of the Appreciation, Emerging Growth, Equity Income, Equity Index,
Growth & Income, Intermediate High Grade, Money Market and Total Return
Portfolios' investments generally.
Chase, located at MetroTech Center, Brooklyn, New York 11245, acts as the
custodian of the International Equity and Diversified Strategic Income
Portfolios' investments generally.
The Transfer Agent, First Data Investor Services Group, Inc.,
is located at Exchange Place, Boston, Massachusetts 02109.
Distributor
Smith Barney, a subsidiary of Holdings, located at 388 Greenwich Street, New
York, New York, 10013, serves as distributor of the Fund's shares, for which
it receives no separate fee from the Fund. Insurance companies offering the
Contracts pay Smith Barney for the services it provides and the expenses it
bears in distributing the Contracts, including payment of commissions for
sales. Insurance companies offering the Contracts will bear certain additional
costs in connection with the offering of the Fund's shares, including the
costs of printing and distributing prospectuses, statements of additional
information and sales literature.
Additional Information
Formation
The Fund was organized on May 13, 1991, under the laws of the Commonwealth of
Massachusetts and is a business entity commonly known as a "Massachusetts
business trust. " The Fund is registered with the SEC as a diversified, open-
end management investment company, as defined in the 1940 Act. The Fund
commenced operations on October 16, 1991, under the name Shearson Series Fund.
On July 30, 1993 and October 14, 1994, the Fund changed its name to Smith
Barney Shearson Series Fund and Smith Barney Series Fund, respectively.
Shares of Beneficial Interest
The Fund offers shares of beneficial interest of separate series with a par
value of $.001 per share. Shares of ten series have been authorized, which
represent the interests in the ten Portfolios described in this Prospectus.
When matters are submitted for shareholder vote, shareholders of each
Portfolio will have one vote for each full share owned and proportionate,
fractional votes for fractional shares held.
For a discussion of the rights of Contract owners concerning the voting of
shares, please refer to the Contract prospectus.
Generally, shares of the Fund vote by individual Portfolio on all matters
except (a) matters affecting only the interests of more than one of the
Portfolios, in which case shares of the affected Portfolios would be entitled
to vote, or (b) when the 1940 Act requires that shares of the Portfolios be
voted in the aggregate. All shares of the Fund vote together as one series for
the election of Trustees. There will normally be no meetings of shareholders
for the purpose of electing Trustees unless less than a majority of the
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Any Trustee may be removed from office upon the vote of shareholders
holding at least two-thirds of the Fund's outstanding shares at a meeting
called for that purpose. The Trustees are required to call such a meeting upon
the written request of shareholders holding at least 10% of the Fund's
outstanding shares. In addition, shareholders who meet certain criteria will
be assisted by the Fund in communicating with other shareholders in seeking
the holding of such a meeting.
The Fund sends to each owner of a Contract a semi-annual report and an audited
annual report, each of which includes a list of the investment securities held
by the Portfolios at the end of the period covered. Contract owners may make
inquiries regarding the Fund and its Portfolios, including the current
performance of the Portfolios, of a Smith Barney Financial Consultant.
The Portfolios' Performance
Yield
The Money Market Portfolio may, from time to time, include the yield and
effective yield in advertisements or reports to shareholders or prospective
investors. Current yield for the Money Market Portfolio will be based on
income received by a hypothetical investment over a given seven-day period
(less expenses accrued during the period), and then "annualized" (i.e.,
assuming that the seven-day yield would be received for fifty-two weeks,
stated in terms of an annual percentage return on the investment). "Effective
yield" for the Money Market Portfolio will be calculated in a manner similar
to that used to calculate yield, but will reflect the compounding effect of
earnings on reinvested dividends.
For the Diversified Strategic Income Portfolio and the Intermediate High Grade
Portfolio, from time to time, the Fund may advertise the thirty-day yield. The
yield of a Portfolio refers to the income generated by an investment in such
Portfolio over the thirty-day period identified in the advertisement and is
computed by dividing the net investment income per share earned by the
Portfolio during the period by the net asset value per share on the last day
of the period. This income is "annualized" by assuming that the amount of
income is generated each month over a one-year period and is compounded semi-
annually. The annualized income is then shown as a percentage of the net asset
value.
Total Return
From time to time, a Portfolio other than the Money Market Portfolio may
advertise its "average annual total return" over various periods of time. Such
total return figure shows the average percentage change in value of an
investment in the Portfolio from the beginning date of the measuring period to
the end of the measuring period. These figures reflect changes in the price of
the Portfolio's shares and assume that any income dividends and/or capital
gains distributions made by the Portfolio during the period were reinvested in
shares of the Portfolio. Figures will be given for recent one-, five- and ten-
year periods (if applicable), and may be given for other periods as well (such
as from commencement of the Portfolio's operations, or on a year-by-year
basis). When considering average annual total return figures for periods
longer than one year, it is important to note that the relevant Portfolio's
annual total return for any one year in the period might have been greater or
less than the average for the entire period. A Portfolio also may use
"aggregate" total return figures for various periods, representing the
cumulative change in value of an investment in the Portfolio for the specific
period (again reflecting changes in a Portfolio's share prices and assuming
reinvestment of dividends and distributions). Aggregate total returns may be
shown by means of schedules, charts or graphs and may indicate subtotals of
the various components of total return (i.e., change in value of initial
investment, income dividends and capital gains distributions).
It is important to note that yield and total return figures are based on
historical earnings and are not intended to indicate future performance. The
Statement of Additional Information describes the method used to determine the
Portfolios' yield and total return. Shareholders may make inquiries regarding
a Portfolio, including current yield quotations or total return figures, of a
Smith Barney Financial Consultant.
In reports or other communications to shareholders or in advertising material,
a Portfolio may compare its performance with that of other mutual funds as
listed in the rankings prepared by Lipper Analytical Services, Inc. or similar
independent services that monitor the performance of mutual funds or with
other appropriate indices of investment securities, such as the S&P 500,
Salomon Brothers World Government Bond Index, Lehman Brothers Government Bond
Index and Lehman Brothers Mortgage-Backed Securities Index, with the Consumer
Price Index, Dow Jones Industrial Average or NASDAQ, or with investment or
savings vehicles. The performance information also may include evaluations of
the Portfolios published by nationally recognized ranking services and by
financial publications that are nationally recognized, such as Barron's,
Business Week, Forbes, Fortune, Institutional Investor, Investor's Business
Daily, Kiplinger's Personal Finance Magazine, Money, Morningstar Mutual Fund
Values, Mutual Fund Forecaster, The New York Times, Stranger's Investment
Advisor, USA Today, U.S. News & World Report and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Any such advertisement also would
include the standard performance information required by the SEC as described
above. For these purposes, the performance of the Portfolios, as well as the
performance of other mutual funds or indices, do not reflect sales charges,
the inclusion of which would reduce a Portfolio's performance.
A Portfolio may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
Appendix
Certain Investment Strategies
In attempting to achieve its investment goal or goals, a Portfolio may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained
in the Statement of Additional Information.
In the future, the Fund may desire to employ additional investment strategies,
including, in the case of Portfolios not currently authorized to engage in
futures activity, such hedging strategies as entering into futures contracts
and related options. The Fund will do so only upon 60 days' notice to
shareholders of the Portfolios involved and in conformity with its investment
restrictions.
Repurchase Agreements. The Money Market Portfolio will enter into repurchase
agreements with respect to U.S. government securities and each other Portfolio
may engage in repurchase agreement transactions on portfolio securities, in
each case with banks which are the issuers of instruments acceptable for
purchase by the Portfolio and with certain dealers listed on the Federal
Reserve Bank of New York's list of reporting dealers. Under the terms of a
typical repurchase agreement, a Portfolio would acquire an underlying debt
obligation for a relatively short period (usually not more than one week)
subject to an obligation of the seller to repurchase, and the Portfolio to
resell, the obligation at an agreed-upon price and time, thereby determining
the yield during the Portfolio's holding period. This arrangement results in a
fixed rate of return that is not subject to market fluctuations during the
Portfolio's holding period. The value of the underlying securities will be
monitored by the relevant Portfolio's Investment Adviser to ensure that it at
least equals at all times the total amount of the repurchase obligation,
including interest. A Portfolio bears a risk of loss in the event that the
other party to a repurchase agreement defaults on its obligations and the
Portfolio is delayed or prevented from exercising its rights to dispose of the
collateral securities, including the risk of a possible decline in the value
of the underlying securities during the period while the Portfolio seeks to
assert these rights. Each Portfolio's Investment Adviser, acting under the
supervision of the Fund's Board of Trustees, reviews on an ongoing basis the
value of the collateral and the creditworthiness of those banks and dealers
with which the Portfolio enters into repurchase agreements to evaluate
potential risks. A repurchase agreement is considered to be a loan
collateralized by the underlying securities under the 1940 Act.
Lending of Securities. Each Portfolio, other than the Money Market Portfolio,
may lend its portfolio securities to brokers, dealers and other financial
organizations. By lending its securities, a Portfolio can increase its income
by continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term instruments or obtaining
yield in the form of interest paid by the borrower when U.S. government
securities are used as collateral. Loans of portfolio securities, if and when
made, by a Portfolio may not exceed 33 1/3% of the Portfolio's total assets,
taken at value. Loans of portfolio securities will be collateralized by cash,
letters of credit or U.S. government securities, which are maintained at all
times in an amount equal to the current market value of the loaned securities.
Any gain or loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the Portfolio
involved.
Futures and Options on Futures. When deemed advisable by their respective
Investment Advisers, the Intermediate High Grade, Diversified Strategic
Income, Equity Income, Emerging Growth, International Equity, Total Return and
Growth & Income Portfolios may enter into interest rate futures contracts; the
Equity Income, Equity Index, Emerging Growth, International Equity, Total
Return and Growth & Income Portfolios may enter into stock index futures
contracts; the Diversified Strategic Income, International Equity and Emerging
Growth Portfolios may enter into foreign currency futures contracts; and each
such Portfolio may enter into related options that are traded on a U.S.
exchange or board of trade. These transactions will be made solely for the
purpose of hedging against the effects of changes in the value of portfolio
securities due to anticipated changes in interest rates, market conditions and
currency values, as the case may be. The Equity Index, Emerging Growth,
International Equity and Total Return Portfolios will enter into futures and
options on futures to purchase stock indices in anticipation of future
purchases of securities ("long positions"). All futures and options contracts
will be entered into only when the transactions are economically appropriate
to the reduction of risks inherent in the management of the Portfolio
involved.
An interest rate futures contract provides for the future sale by one party
and the purchase by the other party of a specified amount of a particular
financial instrument (debt security) at a specified price, date, time and
place. Similarly, a foreign currency futures contract provides for the future
sale by one party and the purchase by another party of a certain amount of a
particular currency at a specified price, date, time and place. Stock index
futures contracts are based on indices that reflect the market value of common
stock of the firms included in the indices. An index futures contract is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally entered into. An option on an interest rate, stock
index or currency futures contract gives the purchaser the right, in return
for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put)
at a specified exercise price at any time prior to the expiration date of the
option.
The use of futures contracts and options on futures contracts as a hedging
device involves several risks. There can be no assurance that there will be a
correlation between price movements in the underlying securities, index or
currency, on the one hand, and price movements in the securities that are the
subject of the hedge, on the other hand. Positions in futures contracts and
options on futures contracts may be closed out only on the exchange or board
of trade on which they were entered into, and there can be no assurance that
an active market will exist for a particular contract or option at any
particular time.
A Portfolio may not enter into futures and options contracts for which
aggregate initial margin deposits and premiums paid for unexpired options to
establish such positions that are not bona fide hedging positions (as defined
by the Commodity Futures Trading Commission) exceed 5% of the fair market
value of the Portfolio's assets, after taking into account unrealized profits
and unrealized losses on futures contracts into which it has entered. With
respect to long positions in futures or options on futures, a Portfolio will
"cover" the position in a manner consistent with SEC guidance.
When-Issued Securities and Delayed-Delivery Transactions. The Intermediate
High Grade, Diversified Strategic Income, Equity Income, Growth & Income,
Total Return, Emerging Growth and International Equity Portfolios may purchase
and sell securities on a when-issued basis, which calls for the purchase (or
sale) of securities at an agreed-upon price on a specified future date. A
Portfolio will enter into a when-issued transaction for the purpose of
acquiring portfolio securities and not for the purpose of leverage. In such
transactions, delivery of the securities occurs beyond the normal settlement
periods, but no payment or delivery is made by, and no interest accrues to, a
Portfolio prior to the actual delivery or payment by the other party to the
transaction. Due to fluctuations in the value of securities purchased or sold
on a when-issued or delayed-delivery basis, the returns obtained on such
securities may be higher or lower than the returns available in the market on
the dates when the investments are actually delivered to the buyers. A
Portfolio will establish a segregated account consisting of cash, U.S.
government securities, debt obligations of any grade or equity securities in
an amount equal to or greater than the amount of its when-issued and delayed-
delivery commitments, provided such securities have been determined by the
Investment Adviser to be liquid and unencumbered, and are marked to market
daily pursuant to guidelines established by the Trustees. Placing
securities rather than cash in the segregated account may have a leveraging
effect on the Portfolio's net assets. A Portfolio will not accrue income with
respect to a when-issued security prior to its stated delivery date.
Purchasing Options on Securities and Stock Indices. The Intermediate High
Grade, Diversified Strategic Income, Total Return, Emerging Growth,
International Equity and Equity Income Portfolios may purchase put and call
options that are traded on a U.S. securities exchange and the Total Return,
Emerging Growth, International Equity and Diversified Strategic Income
Portfolios may also purchase such options on, foreign exchanges and in the
over-the-counter market. The Portfolios may utilize up to 10% of their
respective assets to purchase put options on portfolio securities and may do
so at or about the same time that they purchase the underlying security or at
a later time. By buying a put, a Portfolio limits its risk of loss from a
decline in the market value of the underlying security until the put expires.
Any appreciation in the value of and yield otherwise available from the
underlying security, however, will be partially offset by the amount of the
premium paid for the put option and any related transaction costs. The
Portfolios may utilize up to 10% of their respective assets to purchase call
options on portfolio securities. Call options may be purchased by a Portfolio
in order to acquire the underlying securities for the Portfolio at a price
that avoids any additional cost that would result from a substantial increase
in the market value of a security. A Portfolio also may purchase call options
to increase its return to investors at a time when the call is expected to
increase in value due to anticipated appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing sale
transactions (sales by a Portfolio, prior to the exercise of options that it
has purchased, of options of the same series), and profit or loss from the
sale will depend on whether the amount received is more or less than the
premium paid for the option plus the related transaction costs.
The Equity Index, Total Return, Emerging Growth and International Equity
Portfolios may purchase call options on stock indices. The Total Return
Portfolio may also write call options and buy put options on stock indices.
Options on stock indices are similar to options on securities. However,
options on stock indices do not involve the delivery of an underlying
security; rather, the options represent the holder's right to obtain from the
writer in cash a fixed multiple of the amount by which the exercise price
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the exercise date.
A stock index measures the movement of a certain group of stocks by assigning
relative values to the common stocks included in the index. In purchasing put
options on a stock index, the Total Return Portfolio seeks to benefit from a
decline in the value of the stocks underlying the index or seeks to hedge
against the risk of loss on securities that it holds. In purchasing call
options on a stock index, the Portfolio seeks to participate in an advancing
market in anticipation of becoming more fully invested in equity securities.
The advisability of using stock index options to hedge against the risk of
marketwide movements will depend on the extent of diversification of the stock
investments of the Fund and the sensitivity of its stock investments to
factors influencing the underlying index. The effectiveness of purchasing or
writing stock index options as a hedging technique will depend upon the extent
to which price movements in the Portfolio's securities investments correlate
with price movements in the stock index selected.
Covered Option Writing. The Intermediate High Grade, Diversified Strategic
Income, Equity Income, Equity Index, Total Return, International Equity,
Emerging Growth and Growth & Income Portfolios may write put and call options
on securities. Each Portfolio realizes fees (referred to as "premiums") for
granting the rights evidenced by the options. A put option embodies the right
of its purchaser to compel the writer of the option to purchase from the
option holder an underlying security at a specified price at any time during
the option period. In contrast, a call option embodies the right of its
purchaser to compel the writer of the option to sell to the option holder an
underlying security at a specified price at any time during the option period.
Thus, the purchaser of a put option written by a Portfolio has the right to
compel the Portfolio to purchase from it the underlying security at the
agreed-upon price for a specified time period, while the purchaser of a call
option written by a Portfolio has the right to purchase from the Portfolio the
underlying security owned by the Portfolio at the agreed-upon price for a
specified time period.
Upon the exercise of a put option written by a Portfolio, the Portfolio may
suffer a loss equal to the difference between the price at which the Portfolio
is required to purchase the underlying security plus the premium received for
writing the option and its market value at the time of the option exercise.
Upon the exercise of a call option written by a Portfolio, the Portfolio may
suffer a loss equal to the difference between the security's market value at
the time of the option exercise less the premium received for writing the
option and the Portfolio's acquisition cost of the security.
The Portfolios with option-writing authority will write only covered options.
Accordingly, whenever a Portfolio writes a call option, it will continue to
own or have the present right to acquire the underlying security for as long
as it remains obligated as the writer of the option. To support its obligation
to purchase the underlying security if a put option is exercised, a Portfolio
that has written a put option will either (a) deposit with the Portfolio's
custodian in a segregated account cash, U.S. government securities, debt
obligations of any grade or equity securities having a value equal to or
greater than the exercise price of the underlying securities, provided such
securities have been determined by the Investment Adviser to be liquid and
unencumbered, and are marked to market daily pursuant to guidelines
established by the Trustees or (b) continue to own an equivalent number of
puts of the same "series" (that is, puts on the same underlying security
having the same exercise prices and expiration dates as those written by the
Portfolio) or an equivalent number of puts of the same "class" (that is, puts
on the same underlying security) with exercise prices greater than those that
it has written (or, if the exercise prices of the puts that it holds are less
than the exercise prices of those that it has written, it will deposit the
difference with the Portfolio's custodian in a segregated account).
A Portfolio may engage in a closing purchase transaction to realize a profit,
to prevent an underlying security from being called or put or, in the case of
a call option, to unfreeze an underlying security (thereby permitting its sale
or the writing of a new option on the security prior to the outstanding
option's expiration). To effect a closing purchase transaction, a Portfolio
would purchase, prior to the holder's exercise of an option that the Portfolio
has written, an option of the same series as that on which the Portfolio
desires to terminate its obligation. The obligation of a Portfolio under an
option that it has written would be terminated by a closing purchase
transaction, but the Portfolio would not be deemed to own an option as the
result of the transaction. There can be no assurance that a Portfolio will be
able to effect closing purchase transactions at a time when it wishes to do
so. To facilitate closing purchase transactions, however, the Portfolios with
option-writing authority ordinarily will write options only if a secondary
market for the options exists on a U.S. securities exchange or in the over-
the-counter market. The staff of the SEC considers most over-the-counter
options to be illiquid. The ability to terminate options positions established
in the over-the-counter market may be more limited than in the case of
exchange-traded options and also may involve the risk that securities dealers
participating in such transactions would fail to meet their obligations to the
Portfolio involved.
Short Sales Against the Box. The Equity Income, Total Return, International
Equity and Emerging Growth Portfolios may make short sales of common stock if,
at all times when a short position is open, the Portfolio owns the stock or
owns preferred stocks or debt securities convertible or exchangeable into the
shares of common stock sold short. Short sales of this kind are referred to as
short sales "against the box." The broker-dealer that executes a short sale
generally invests cash proceeds of the sale until they are paid to the
Portfolio. Arrangements may be made with the broker-dealer to obtain a portion
of the interest earned by the broker-dealer on the investment of short sale
proceeds. The Portfolio will segregate the common stock or convertible or
exchangeable preferred stock or debt securities in a special account with the
Portfolio's Custodian.
Forward Roll Transactions. In order to enhance current income, the
Intermediate High Grade and Diversified Strategic Income Portfolios may enter
into forward roll transactions with respect to mortgage-related securities
issued by GNMA, FNMA and FHLMC. In a forward roll transaction, a Portfolio
sells a mortgage security to a financial institution, such as a bank or
broker-dealer, and simultaneously agrees to repurchase a similar security from
the institution at a later date at an agreed-upon price. The mortgage
securities that are repurchased will bear the same interest rate as those
sold, but generally will be collateralized by different pools of mortgages
with different prepayment histories than those sold. During the period between
the sale and repurchase, the Portfolio will not be entitled to receive
interest and principal payments on the securities sold. Proceeds of the sale
will be invested in short-term instruments, particularly repurchase
agreements, and the income from these investments, together with any
additional fee income received on the sale, will generate income for the
Portfolio exceeding the yield on the securities sold. Forward roll
transactions involve the risk that the market value of the securities sold by
a Portfolio may decline below the repurchase price of those securities. At the
time a Portfolio enters into a forward roll transaction, it will place in a
segregated custodial account cash, U.S. government securities, debt
obligations of any grade or equity securities having a value equal to or
greater than the repurchase price (including accrued interest) provided such
securities have been determined by the Investment Adviser to be liquid and
unencumbered, and are marked to market daily pursuant to guidelines
established by the Trustees , and will subsequently monitor the account to
insure that such equivalent value is maintained. Forward roll transactions are
considered to be borrowings by a Portfolio.
Currency Exchange Transactions and Options on Foreign Currencies. The
Diversified Strategic Income, International Equity and Emerging Growth
Portfolios may engage in currency exchange transactions and purchase exchange-
traded put and call options on foreign currencies in order to protect against
uncertainty in the level of future currency exchange rates. The Portfolio will
conduct its currency exchange transactions either on a spot (i.e., cash) basis
at the rate prevailing in the currency exchange market or through entering
into forward contracts to purchase or sell currencies. The Portfolio's
dealings in forward currency exchange and options on foreign currencies are
limited to hedging involving either specific transactions or portfolio
positions. A forward currency contract involves an obligation to purchase or
sell a specific currency for an agreed-upon price at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. An option on a foreign currency gives the purchaser, in return for
a premium, the right to sell, in the case of a put, and buy, in the case of a
call, the underlying currency at a specified price during the term of the
option.
Reverse Repurchase Agreements. The Intermediate High Grade, Diversified
Strategic Income, Equity Income and International Equity Portfolios may enter
into reverse repurchase agreement transactions with member banks of the
Federal Reserve System or with certain dealers listed on the Federal Reserve
Bank of New York's list of reporting dealers. A reverse repurchase agreement,
which is considered a borrowing by the Portfolio, involves a sale by the
Portfolio of securities that it holds concurrently with an agreement by the
Portfolio to repurchase the same securities at an agreed-upon price and date.
The Portfolio typically will invest the proceeds of a reverse repurchase
agreement in money market instruments or repurchase agreements maturing not
later than the expiration of the reverse repurchase agreement. This use of the
proceeds is known as leverage. The Portfolio will enter into a reverse
repurchase agreement for leverage purposes only when the interest income to be
earned from the investment of the proceeds is greater than the interest
expense of the transaction. The Portfolio also may use the proceeds of reverse
repurchase agreements to provide liquidity to meet redemption requests when
the sale of the Portfolio's securities is considered to be disadvantageous. At
the time a Portfolio enters into a reverse repurchase agreement with a broker-
dealer (but not a bank), it will place in a segregated custodial account cash,
U.S. government securities, debt obligations of any grade or equity
securities having a value equal to its obligations under the reverse repurchase
agreements, provided such securities have been determined by the Investment
Adviser to be liquid and unencumbered, and are marked to market daily pursuant
to guidelines established by the Trustees.
Index Strategy. The Equity Index Portfolio will invest in the common stocks of
the companies represented in the S&P 500 with the goal of matching, before
deduction of operating expenses, the price and yield performance of the S&P
500. The S&P 500 is composed of 500 selected common stocks, most of which are
listed on the NYSE. S&P chooses the stocks to be included in the S&P 500
solely on a statistical basis. The S&P 500 is a trademark of S&P and inclusion
of a stock in the S&P 500 in no way implies an opinion by S&P as to its
attractiveness as an investment. S&P is neither a sponsor nor in any way
affiliated with the Portfolio.
The weightings of stocks in the S&P 500 are based on each stock's relative
total market value; that is, its market price per share times the number of
shares outstanding. The Portfolio's Investment Adviser generally will select
stocks for the Portfolio in the order of their weightings in the S&P 500,
beginning with the heaviest weighted stocks.
The Portfolio's Investment Adviser expects that, once the Portfolio's assets
reach $25 million, the correlation between the performance of the Portfolio
and that of the S&P 500 will be above 0.95, with a figure of 1.00 indicating
perfect correlation. Perfect correlation would be achieved when the
Portfolio's net asset value per share increases and decreases in exact
proportion to changes in the S&P 500. The Portfolio's ability to replicate the
performance of the S&P 500 will depend to some extent on the size of cash
flows into and out of the Portfolio. Investment changes to accommodate these
cash flows will be made to maintain the similarity of the Portfolio's assets
to the S&P 500 to the maximum extent practicable.
Investment in Utility Securities. The Equity Income Portfolio is subject to
risks that are inherent in the utility industry, including difficulty in
obtaining an adequate return on invested capital, difficulty in financing
large construction programs during an inflationary period, restrictions on
operations and increased cost and delays attributable to environmental
considerations and regulation, difficulty in raising capital in adequate
amounts on reasonable terms in periods of high inflation and unsettled capital
markets, increased costs and reduced availability of certain types of fuel,
occasionally reduced availability and high costs of natural gas for resales,
the effects of energy conservation, the effects of a national energy policy
and lengthy delays and greatly increased costs and other problems associated
with the design, construction, licensing, regulation and operation of nuclear
facilities for electric generation, including, among other considerations, the
problems associated with the use of radioactive materials and the disposal of
radioactive wastes. Costs incurred by utilities, such as fuel costs, are
subject to immediate market action resulting from political or military forces
operating in geographic regions, such as the Persian Gulf, where oil
production is concentrated, while the rates of return of utility companies
generally are subject to review and limitation by state public utility
commissions, which results ordinarily in a lag between costs and return. There
are substantial differences between the regulatory practices and policies of
various jurisdictions, and any given regulatory agency may make major shifts
in policy from time to time. There is no assurance that regulatory authorities
will grant rate increases in the future or that such increases will be
adequate to permit the payment of dividends on common stocks. Additionally,
existing and possible future regulatory legislation may make it even more
difficult for these utilities to obtain adequate relief. Certain of the
issuers of securities in the Portfolio may own or operate nuclear generating
facilities. Governmental authorities may from time to time review existing
policies and impose additional requirements governing the licensing,
construction and operation of nuclear power plants.
Each of the risks referred to above could adversely affect the ability and
inclination of public utilities to declare or pay dividends and the ability of
holders of common stock to realize any value from the assets of the issuer
upon liquidation or bankruptcy. Many, if not all, of the utilities that are
issuers of the securities expected to be included in the Portfolio have been
experiencing one or more of these problems in varying degrees. Moreover, price
disparities within selected utility groups and discrepancies in relation to
averages and indices have occurred frequently for reasons not directly related
to the general movements or price trends of utility common stocks. Causes of
these discrepancies include changes in the overall demand for and supply of
various securities (including the potentially depressing effect of new stock
offerings) and changes in investment objectives, market expectations or cash
requirements of other purchasers and sellers of securities.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, the Statement
of Additional Information or the Fund's official sales literature in
connection with the offering of the Fund's shares, and, if given or made, such
other information or representations must not be relied upon as having been
authorized by the Fund. This Prospectus does not constitute an offer in any
state in which, or to any person to whom, the offer may not lawfully be made.
Symphony
IDS Life Insurance Company
IDS Tower 10
Minneapolis, Minnesota 55440-0010
42
8
<PAGE>
SMITH BARNEY SERIES FUND
PROSPECTUS DATED APRIL 29, 1997
Smith Barney Series Fund (the "Fund") is a diversified, open-end management
investment company--a mutual fund--with ten portfolios, each with separate
goals and investment policies. The Appreciation Portfolio (the "Portfolio") is
the only portfolio offered herein.
THE APPRECIATION PORTFOLIO'S goal is long-term appreciation of capital. This
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 sets forth certain information that you should know about
the Fund and the Portfolio before investing and should be 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 below or by contacting a Smith Barney Financial Consultant.
The Fund is responsible only for statements that are included in this
Prospectus, the Statement of Additional Information or in authorized sales
material. The Statement of Additional Information is incorporated by reference
into this Prospectus in its entirety. You cannot buy shares of the Fund
directly. You can invest in the Fund by buying separate accounts which fund
certain variable annuity and variable life insurance contracts (each referred
to herein as a "Contract") offered by designated insurance companies.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS OF THE CONTRACT.
BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SEC OR ANY
STATE SECURITIES COMMISSION, NOR HAS THE SEC OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
SMITH BARNEY SERIES FUND
388 GREENWICH STREET
NEW YORK, NEW YORK 10013
Contract Owner Inquiries: (800) 451-2010
<PAGE>
CONTENTS
<TABLE>
<S> <C>
SYNOPSIS.................................................................... 1
EXPENSES OF THE PORTFOLIO................................................... 2
INVESTMENT GOAL AND POLICIES OF THE PORTFOLIO............................... 3
ADDITIONAL INVESTMENTS...................................................... 3
CERTAIN INVESTMENT GUIDELINES............................................... 4
SPECIAL CONSIDERATIONS AND RISK FACTORS..................................... 4
PORTFOLIO TRANSACTIONS...................................................... 5
NET ASSET VALUE............................................................. 5
HOW TO USE THE FUND......................................................... 6
DIVIDENDS AND TAXES......................................................... 7
MANAGEMENT OF THE FUND...................................................... 8
PORTFOLIO MANAGEMENT........................................................ 8
CUSTODIAN AND TRANSFER AGENT................................................ 9
DISTRIBUTOR................................................................. 9
ADDITIONAL INFORMATION...................................................... 9
THE PORTFOLIO'S PERFORMANCE................................................. 10
APPENDIX.................................................................... A-1
</TABLE>
i
<PAGE>
SYNOPSIS
THE FUND
The Fund is a diversified, open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act"), which
currently offers a selection of ten portfolios. The Appreciation Portfolio
(the "Portfolio") is the only portfolio available hereunder. See "Investment
Goal and Policies of the Portfolio" and "Additional Information."
MANAGEMENT
The organizations that perform services for the Portfolio are listed below
and are described more fully under "Management of the Fund."
<TABLE>
<CAPTION>
NAME SERVICE
- ---- -------
<S> <C>
Investment Adviser and
Smith Barney Mutual Funds Management Inc. ........ Administrator
("SBMFM")
Smith Barney Inc. ................................ Distributor
("Smith Barney")
PNC Bank, National Association.................... Custodian
("PNC")
Transfer and Dividend Paying
First Data Investor Services Group. Inc. ......... Agent
(the "Transfer Agent")
</TABLE>
The Portfolio pays SBMFM, its Investment Adviser, a fee at the annual
percentage rate of 0.55% of the value of the Portfolio's average net assets.
SBMFM, as Administrator of the Portfolio, is paid a fee at the annual
percentage of 0.20% of the value of the Portfolio's average net assets. The
management fees paid by the Portfolio are higher than those fees paid by most
other investment companies, but not necessarily higher than those paid by
funds with similar investment objectives and policies. See "Management of the
Fund."
BUYING SHARES
Shares of the Fund are offered only to Contract owners as set forth in the
specific Contract. 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."
SPECIAL CONSIDERATIONS
Investors in the Fund 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.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
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............... .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) -- --
-------- ------- ------- ------- ------- -------
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(2)........ $ 0.06 $ 0.06 -- -- -- --
-------- ------- ------- ------- ------- -------
</TABLE>
(1) For the period from October 16, 1991 (commencement of operations) to
December 31, 1991.
(2) 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 Investment Company
Act of 1940, as amended (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.
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.
3
<PAGE>
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.
CERTAIN INVESTMENT 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.
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.
4
<PAGE>
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.
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
5
<PAGE>
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 FUND
INVESTING IN THE FUND
Shares of the Fund are currently offered exclusively to Contract owners. To
find out which insurance companies offer Contracts that are eligible to invest
in the Fund, call the Fund at (800) 451-2010. For further information, see the
description provided in the Contract prospectus.
SALES CHARGES AND SURRENDER CHARGES
The Fund does not assess any sales charge, either when it sells or when it
redeems shares of 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.
6
<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
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 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
7
<PAGE>
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 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
The assets of each Portfolio of the Fund are managed separately. 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 Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned
subsidiary of Travelers Group Inc. ("Travelers"), a diversified financial
services holding company engaged through its 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.
8
<PAGE>
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.
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.
9
<PAGE>
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.
10
Appendix
Certain Investment Strategies
In attempting to achieve its investment goal the Portfolio may employ,
among others, one or more of the strategies set forth below. More detailed
information concerning these strategies and their related risks is contained
in the Statement of Additional Information.
In the future, the Fund may desire to employ additional investment strategies,
including such hedging strategies as entering into futures contracts
and related options. The Fund will do so only upon 60 days' notice to
shareholders of the Portfolios involved and in conformity with its investment
restrictions.
Repurchase Agreements. The 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 33 1/3% of the Portfolio's total assets,
taken at value. Loans of portfolio securities will be collateralized by cash,
letters of credit or U.S. government securities, which are maintained at all
times in an amount equal to the current market value of the loaned securities.
Any gain or loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the Portfolio.
No person has been authorized to give any information or to make any
representation 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
A-1
<PAGE>
PROSPECTUS
SMITH BARNEY SERIES FUND
INTERMEDIATE HIGH GRADE PORTFOLIO
April 29, 1997
<PAGE>
SMITH BARNEY SERIES FUND
Intermediate High Grade 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 Intermediate High
Grade Portfolio (the "Portfolio") may be acquired only by investing in a
qualifying variable annuity or variable life insurance contract (a "Contract")
offered by participating life insurance companies.
The Portfolio's investment goal is to provide as high a level of current
income as is consistent with the protection of capital. The Portfolio invests in
U.S. government securities and high-grade corporate bonds of U.S. issuers.
There can be no guarantee that the Portfolio's investment goal will be
achieved since any investment involves risks. Discussions of the Portfolio's
investments, and their related risks, are found in the sections of this
Prospectus entitled "Investment Goal and Policies of the Portfolio," "Additional
Investments" and "Special Considerations and Risk Factors."
This Prospectus, which sets forth certain information about the Fund and
the Portfolio that you should know before investing, should be read in
conjunction with the applicable Contract prospectus and retained for future
reference. Additional information about the Fund and the Portfolio has been
filed with the Securities and Exchange Commission (the "SEC") in a document
entitled "Statement of Additional Information," dated April 29, 1997, as amended
or supplemented from time to time, which is available upon request and without
charge by calling or writing the Fund at the telephone number or address set
forth below or by contacting a representative of a participating life insurance
company.
The Fund is responsible only for statements that are included in this
Prospectus, the Statement of Additional Information or in authorized sales
material. The Statement of Additional Information is incorporated by reference
into this Prospectus in its entirety.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT CONTRACT PROSPECTUS.
BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE
REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is April 29, 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 Guidelines ............................................. 9
Special Considerations and Risk Factors ................................... 9
Portfolio Transactions .................................................... 11
Net Asset Value ........................................................... 12
How to Use the Portfolio .................................................. 12
Dividends and Taxes ....................................................... 13
Management of the Fund .................................................... 14
Portfolio Management ...................................................... 15
Custodian and Transfer Agent .............................................. 15
Distributor ............................................................... 15
Additional Information .................................................... 16
The Portfolio's Performance ............................................... 16
- --------------------------------------------------------------------------------
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 following summary is qualified in its entirety by detailed
information appearing elsewhere in this Prospectus and in the Statement of
Additional Information. Cross-references in this summary are to headings in the
Prospectus.
The Portfolio. The Portfolio is one of ten portfolios of the Fund, a
diversified, open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Portfolio's
investment objective is to provide as high a level of current income as is
consistent with the protection of capital. The Portfolio invests in U.S.
government securities and high-grade corporate bonds of U.S. issuers. See
"Additional Information."
Management. Smith Barney Mutual Funds Management Inc. ("SBMFM") serves
as the Portfolio's investment adviser and administrator. SBMFM is a wholly owned
subsidiary of Smith Barney Holdings Inc. ("Holdings"), which in turn is a wholly
owned subsidiary of Travelers Group Inc., a diversified financial services
holding company engaged, through its subsidiaries, principally in four business
segments: Investment Services, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance Services. See "Management of the
Fund."
Buying Shares. Shares of the Portfolio are offered only to Contract
owners as set forth in the specific Contract prospectus. A Contract owner can
direct the allocation of part or all of his or her net purchase payment to the
Portfolio. In the future, Contract owners may be offered the opportunity to
invest in one or more of the other portfolios of the Fund. See "How to Use the
Portfolio."
Redeeming Shares. Shares may be redeemed as described in the applicable
Contract prospectus. See "How to Use the Portfolio."
Risk Factors and Special Considerations. The non-publicly traded and illiquid
securities which the Portfolio may hold may have to be sold at lower prices, or
may remain unsold, when the Portfolio desires to dispose of them. Government-
stripped mortgage-backed securities in which the Portfolio may invest are
sensitive to changes in interest rates and to prepayment of the mortgages. The
foreign securities in which the Portfolio may invest may be subject to certain
risks in addition to those inherent in U.S. investments. The medium- and lower-
rated securities as well as unrated securities and the securities of unseasoned
issuers that the Portfolio may hold, some of which have speculative
characteristics, may be subject to greater market fluctuation and risk of loss
of income or principal than higher-rated securities. The Portfolio may make
certain investments and employ certain investment techniques that involve other
risks, including entering into repurchase agreements, lending portfolio
securities and entering into futures contracts and related options as hedges.
These risks and those associated with when-issued and delayed-delivery
transactions, put and call options, covered option writing, forward roll
transactions and reverse repurchase agreements, are described under "Investment
Goal and Policies of the Portfolio" and "Special Considerations and Risk
Factors."
- --------------------------------------------------------------------------------
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 the
Portfolio's investment adviser, administrator and/or distributor, including
organizational costs, investment advisory and administration fees, fees for
necessary professional and brokerage services, fees for any pricing service, the
costs of regulatory compliance and costs associated with maintaining legal
existence and shareholder relations. From time to time, the investment adviser,
administrator and/or distributor may waive all or a portion of the fees payable
to it by the Portfolio, thereby reducing the expenses of the Portfolio. A
detailed description of the expenses involved in investing in a Contract and the
Portfolio is included in the Contract prospectus.
FINANCIAL HIGHLIGHTS
================================================================================
The following information 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>
Intermediate High Grade Portfolio 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Intermediate High Grade Portfolio
Net Asset Value, Beginning of Year $ 10.60 $ 9.66 $ 10.69 $ 10.29 $ 10.24 $ 10.00
- --------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.71 0.66 0.61 0.55 0.45 0.03
Net realized and unrealized gain (loss) (0.53) 1.00 (0.94) 0.26 0.08 0.21
- --------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.18 1.66 (0.33) 0.81 0.53 0.24
- --------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.08) (0.72) (0.61) (0.36) (0.48) --
Net realized gains -- -- (0.09) (0.05) -- --
- --------------------------------------------------------------------------------------------------------------
Total Distributions (0.08) (0.72) (0.70) (0.41) (0.48) --
- --------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.70 $ 10.60 $ 9.66 $ 10.69 $ 10.29 $ 10.24
- --------------------------------------------------------------------------------------------------------------
Total Return 1.69% 17.76% (3.05)% 8.00% 5.28% 2.40%++
- --------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000's) $ 14,736 $16,152 $13,280 $9,859 $3,621 $ 697
- --------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.90% 0.86% 0.85% 0.85% 0.85% 0.80%+
Net investment income 6.35% 6.63% 6.57% 5.25% 4.75% 4.49%+
- --------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 116% 121% 90% 139% 124% --
- --------------------------------------------------------------------------------------------------------------
</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 five-year
period ended December 31, 1996 and the period ended December 31, 1991. In
addition, IDS Life reimbursed expenses of $3,006, $12,616, $16,459, $15,865
and $5,726 for the four-year period ended December 31, 1995 and the period
ended December 31, 1991. If such fees 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>
Intermediate High Grade $0.02 $0.01 $0.02 $0.05 $0.05 $0.17 1.07% 0.94% 1.05% 1.36% 2.28% 26.28%
</TABLE>
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
- --------------------------------------------------------------------------------
2
<PAGE>
INVESTMENT GOAL AND POLICIES OF THE PORTFOLIO
================================================================================
Investment Goal
The Portfolio's goal is to provide as high a level of current income as
is consistent with the protection of capital. This investment goal may not be
changed without the approval of the holders of a majority (as defined in the
1940 Act) of the outstanding shares of the Portfolio. There can, of course, be
no guarantee that the Portfolio will achieve its investment goal. Additional
information about investment strategies that the Portfolio may employ and
investment policies mentioned below appears in the Statement of Additional
Information.
Investment Policies
The Portfolio will seek to achieve its goal by investing, under normal
circumstances, substantially all - but no less than 65% - of its assets in U.S.
government securities and high-grade corporate bonds of U.S. issuers (i.e.,
bonds rated within the two highest rating categories by Standard & Poor's
Ratings Group ("S&P") or Moody's Investors Service, Inc. ("Moody's") or, if not
rated, believed by SBMFM to be of comparable quality). Under normal market
conditions, the average weighted maturity of the Portfolio's assets will be
between three and ten years. The portion of the Portfolio's assets not invested
in intermediate-term U.S. government securities and U.S. corporate bonds may be
invested in short-term U.S. government and corporate obligations, convertible
securities and preferred stock that is not convertible into common stock. The
Portfolio may not hold securities rated lower than Baa by Moody's or BBB by S&P
or unrated securities deemed to be comparable to securities rated below
investment grade. The Portfolio may invest up to 10% of its total assets in
government stripped mortgage-backed securities and may invest in floating or
variable rate demand notes.
ADDITIONAL INVESTMENTS
================================================================================
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 Government National Mortgage Association ("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
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC")). Treasury Bills have maturities of less than one
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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.
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
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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 from it the underlying security at the agreed-upon price for a
specified time period, while the purchaser of a call option written by the
Portfolio has the right to purchase from the Portfolio the underlying security
owned by the Portfolio at the agreed-upon price for a specified time period.
Upon the exercise of a put option written by the Portfolio, the
Portfolio may suffer a loss equal to the difference between the price at which
the Portfolio is required to purchase the underlying security plus the premium
received for writing the option and its market value at the time of the option
exercise. Upon the exercise of a call option written by the Portfolio, the
Portfolio may suffer a loss equal to the difference between the security's
market value at the time of the option exercise less the premium received for
writing the option and the Portfolio's acquisition cost of the security.
The Portfolio will write only covered options. Accordingly, whenever the
Portfolio writes a call option, it will continue to own or have the present
right to acquire the underlying security for as long as it remains obligated as
the writer of the option. To support its obligation to purchase the underlying
security if a put option is exercised, the Portfolio that has written a put
option will either (a) deposit with PNC Bank, National Association, the
custodian of the Fund's investments ("PNC"), in a segregated account cash, U.S.
government securities, high-grade debt obligations 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 PNC in a
segregated account).
The Portfolio may engage in a closing purchase transaction to realize a
profit, to prevent an underlying security from being called or put or, in the
case of a call option, to unfreeze an underlying security (thereby permitting
its sale or the writing of a new option on the security prior to the outstanding
option's expiration). To
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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
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 and may
enter into related options that are traded on a U.S. exchange or board of trade.
These transactions will be made solely for the purpose of hedging against the
effects of changes in the value of portfolio securities due to anticipated
changes in interest rates, market conditions and currency values, as the case
may be. All futures and options contracts will be entered into only when the
transactions are economically appropriate to the reduction of risks inherent in
the management of the Portfolio.
An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a specified amount of a particular
financial instrument (debt security) at a specified price, date, time and place.
Similarly, a foreign currency futures contract provides for the future sale by
one party and the purchase by another party of a certain amount of a particular
currency at a specified price, date, time and place. Stock index futures
contracts are based on indices that reflect the market value of common stock of
the firms included in the indices. An index futures contract is an agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day of the contract and the price at which the index contract was
originally entered into. An option on an interest rate, stock index or currency
futures contract gives the purchaser the right, in return for the premium paid,
to assume a position in a futures contract (a long position if the option is a
call and short position if the option is a put) at a specified exercise price at
any time prior to the expiration date of the option.
The use of futures contracts and options on futures contracts as a
hedging device involves several risks. There can be no assurance that there will
be a correlation between price movements in the underlying securities, index or
currency, on the one hand, and price movements in the securities that are the
subject of the hedge, on the other hand. Positions in futures contracts and
options on futures contracts may be closed out only on the exchange or board of
trade on which they were entered into, and there can be no assurance that an
active market will exist for a particular contract or option at any particular
time.
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The Portfolio may not enter into futures and options contracts for which
aggregate initial margin deposits and premiums paid for unexpired options to
establish such positions that are not bona fide hedging positions (as defined by
the Commodity Futures Trading Commission) exceed 5% of the fair market value of
the Portfolio's assets, after taking into account unrealized profits and
unrealized losses on futures contracts into which it has entered. With respect
to long positions in futures or options on futures, the Portfolio will "cover"
the position in a manner consistent with SEC guidance.
When-Issued Securities and Delayed-Delivery Transactions. The Portfolio
may purchase and sell securities on a when-issued basis, which calls for the
purchase (or sale) of securities at an agreed-upon price on a specified future
date. The Portfolio will enter into a when-issued transaction for the purpose of
acquiring portfolio securities and not for the purpose of leverage. In such
transactions, delivery of the securities occurs beyond the normal settlement
periods, but no payment or delivery is made by, and no interest accrues to, the
Portfolio prior to the actual delivery or payment by the other party to the
transaction. Due to fluctuations in the value of securities purchased or sold on
a when-issued or delayed-delivery basis, the returns obtained on such securities
may be higher or lower then the returns available in the market on the dates
when the investments are actually delivered to the buyers. The Portfolio will
establish a segregated account consisting of cash, U.S. government securities,
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 Manager 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 and Stock Indices. The Portfolio may
purchase put and call options that are traded on a U.S. securities exchange. The
Portfolio may utilize up to 10% of its assets to purchase put options on
portfolio securities and may do so at or about the same time that it purchases
the underlying security or at a later time. By buying a put, the Portfolio
limits its risk of loss from a decline in the market value of the underlying
security until the put expires. Any appreciation in the value of and yield
otherwise available from the underlying security, however, will be partially
offset by the amount of the premium paid for the put option and any related
transaction costs. The Portfolio may utilize up to 10% of its assets to purchase
call options on portfolio securities. Call options may be purchased by the
Portfolio in order to acquire the underlying securities for the Portfolio at a
price that avoids any additional cost that would result from a substantial
increase in the market value of a security. The Portfolio also may purchase call
options to increase its return to investors at a time when the call is expected
to increase in value due to anticipated appreciation of the underlying security.
Prior to their expirations, put and call options may be sold in closing
sale transactions (sales by the Portfolio, prior to the exercise of options that
it has purchased, of options of the same series), and profit or loss from the
sale will depend on whether the amount received is more or less than the premium
paid for the option plus the related transaction costs.
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
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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 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.
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 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.
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Non-Publicly Traded and Illiquid Securities
The Portfolio may purchase securities that are not publicly traded. The
sale of securities that are not publicly traded is typically restricted under
federal securities laws. As a result, the Portfolio may be forced to sell these
securities at less than fair market value or may not be able to sell them when
its investment adviser believes it desirable to do so. The Portfolio's
investments in illiquid securities are subject to the risk that should the
Portfolio desire to sell any of these securities when a ready buyer is not
available at a price that the Portfolio deems representative of their value, the
value of the Portfolio's net assets could be adversely affected.
Government Stripped Mortgage-Backed Securities
The Portfolio may invest up to 10% of its total assets in government
stripped mortgage-backed securities issued and guaranteed by GNMA, FNMA or
FHLMC. These securities represent beneficial ownership interests in either
periodic principal distributions ("principal-only") or interest distributions
("interest-only") on mortgage-backed certificates issued by GNMA, FNMA or FHLMC,
as the case may be. The certificates underlying government stripped
mortgage-backed securities represent all or part of the beneficial interest in
pools of mortgage loans.
Investing in government stripped mortgage-backed securities involves the
risks normally associated with investing in mortgage-backed securities issued by
the government or government related entities. In addition, the yields on
government stripped mortgage-backed securities are extremely sensitive to the
prepayment experience on the mortgage loans underlying the certificates
collateralizing the securities. If a decline in the level of prevailing interest
rates results in a rate of principal prepayments higher than anticipated,
distributions of principal will be accelerated, thereby reducing the yield to
maturity on interest-only government stripped mortgage-backed securities and
increasing the yield to maturity on principal-only government stripped
mortgage-backed securities. Sufficiently high prepayment rates could result in
the Portfolio not fully recovering its initial investment in an interest-only
government stripped mortgage-backed security. Government stripped
mortgage-backed securities are currently traded in an over-the-counter market
maintained by several large investment banking firms. There can be no assurance
that the Portfolio will be able to effect a trade of a government stripped
mortgage-backed security at a time when it wishes to do so, although the
Portfolio will acquire government stripped mortgage-backed securities only if a
secondary market for the securities exists at the time of acquisition.
Foreign Securities
The Portfolio may invest in obligations of companies and governments of
foreign nations, which involve certain risks in addition to the usual risks
inherent in U.S. investments. These risks include those resulting from
revaluation of currencies, future adverse political and economic developments
and the possible imposition of currency exchange blockages or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers and the lack of uniform accounting, auditing and financial
reporting standards or of other regulatory practices and requirements comparable
to those applicable to U.S. companies. The performance of the Portfolio when
investing in foreign securities may be adversely affected by fluctuations in
value of one or more foreign currencies relative to the U.S. dollar. Moreover,
securities of many foreign companies may be less liquid and their prices more
volatile than those of securities of comparable U.S. companies. In addition,
with respect to certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the use
or removal of funds or other assets of the Portfolio, including the withholding
of dividends. Foreign securities may be subject to foreign government taxes that
could reduce the return on such securities. Changes in foreign currency exchange
rates may affect the
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value of portfolio securities and the appreciation or depreciation of
investments. Investment in foreign securities also may result in higher expenses
due to the cost of converting foreign currency to U.S. dollars, the payment of
fixed brokerage commissions on foreign exchanges, which generally are higher
than commissions on U.S. exchanges, and the expense of maintaining securities
with foreign custodians.
Medium-Lower-, 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.
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Subsequent to its purchase by the Portfolio, an issue of securities may
cease to be rated or its rating may be reduced below the minimum required for
purchase by the Portfolio. Neither event will require sale of such securities by
the Portfolio involved, but the Portfolio's investment adviser will consider
such event in its determination of whether the Portfolio should continue to hold
the securities.
Securities that are rated Ba by Moody's or BB by S&P have speculative
characteristics with respect to their capacity to pay interest and repay
principal. Securities that are rated B generally lack characteristics of the
desirable investment and assurance of interest and principal payments over any
long period of time may be small. Securities that are rated Caa or CCC are of
poor standing. These issues may be in default or present elements of danger with
respect to principal or interest.
PORTFOLIO TRANSACTIONS
================================================================================
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 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
- --------------------------------------------------------------------------------
10
<PAGE>
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.
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.
- --------------------------------------------------------------------------------
12
<PAGE>
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.
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
- --------------------------------------------------------------------------------
13
<PAGE>
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, the Fund's custodian, transfer agent and
distributor. The day-to-day operations of the Portfolio are delegated to SBMFM.
The identities and backgrounds of the Trustees and officers of the Fund,
together with certain additional information about them, are contained in the
Statement of Additional Information. By virtue of the responsibilities assumed
by SBMFM, the Fund requires no employees other than its executive officers, none
of whom devotes full time to the affairs of the Fund.
Investment Adviser and Administrator
Subject to the supervision and direction of the Fund's Board of
Trustees, SBMFM manages the Portfolio in accordance with the Portfolio's goal
and stated investment policies, makes investment decisions for the Portfolio,
places orders to purchase and sell securities on behalf of the Portfolio and
employs professional portfolio managers and securities analysts who provide
research services to the Portfolio.
SBMFM, located at 388 Greenwich Street, New York, New York 10013,
provides investment advisory and management services to investment companies
affiliated with Holdings. SBMFM renders investment advice to investment
companies that had aggregate assets under management as of March 1, 1997 in
excess of $80 billion.
PORTFOLIO MANAGEMENT
================================================================================
G. Ruppert Vernon, Jr. is a Vice President of Smith Barney and a Fixed
Income Portfolio Manager of Greenwich Street Advisers, a division of SBFM.
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
================================================================================
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, acts as custodian of the Fund's investments generally.
- --------------------------------------------------------------------------------
14
<PAGE>
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.
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.
- --------------------------------------------------------------------------------
15
<PAGE>
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 Index, with the Consumer
Price Index, Dow Jones Industrial Average or NASDAQ, or with investment or
savings vehicles. The performance information also may include evaluations of
the Portfolio published by nationally recognized ranking services and by
financial publications that are nationally recognized, such as Barron's,
Business Week, Forbes, Fortune, Institutional Investor, Investor's Business
Daily, Kiplinger's Personal Finance Magazine, Money, Morningstar Mutual Fund
Values, Mutual Fund Forecaster, The New York Times, Stranger's Investment
Advisor, USA Today, U.S. News & World Report and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Any such advertisement also would
include the standard performance information required by the SEC as described
above. For these purposes, the performance of the Portfolio, as well as the
performance of other mutual funds or indices, do not reflect sales charges, the
inclusion of which would reduce the Portfolio's performance.
The Portfolio may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
A Contract owner's actual return on its investment in this Portfolio
will be affected by Contract charges imposed by the separate accounts of the
participating life insurance companies.
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16
<PAGE>
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<PAGE>
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<PAGE>
PROSPECTUS
APO-2982-A Smith Barney Series Fund SB Ed. 4-97
<PAGE>
PROSPECTUS
SMITH BARNEY SERIES FUND
TOTAL RETURN PORTFOLIO
April 29, 1997
<PAGE>
SMITH BARNEY SERIES FUND
Total Return 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 Total Return
Portfolio (the "Portfolio") may be acquired only by investing in a qualifying
variable annuity or variable life insurance contract (a "Contract") offered by
participating life insurance companies.
The Portfolio's investment goal is to provide shareholders with total
return, consisting of long-term capital appreciation and income. The Portfolio
invests primarily in a diversified portfolio of dividend-paying common stocks.
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."
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 below or by contacting a representative of a participating life insurance
company.
The Fund is responsible only for statements that are included in this
Prospectus, the Statement of Additional Information or in authorized sales
material. The Statement of Additional Information is incorporated by reference
into this Prospectus in its entirety.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT CONTRACT PROSPECTUS.
BOTH PROSPECTUSES SHOULD BE READ CAREFULLY AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is April 29, 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 .............................. 4
SPECIAL CONSIDERATIONS AND RISK FACTORS ................................... 8
PORTFOLIO TRANSACTIONS .................................................... 11
NET ASSET VALUE ........................................................... 11
HOW TO USE THE PORTFOLIO .................................................. 12
DIVIDENDS AND TAXES ....................................................... 12
MANAGEMENT OF THE FUND .................................................... 14
PORTFOLIO MANAGEMENT ...................................................... 14
CUSTODIAN AND TRANSFER AGENT .............................................. 14
DISTRIBUTOR ............................................................... 15
ADDITIONAL INFORMATION .................................................... 15
THE PORTFOLIO'S PERFORMANCE ............................................... 15
<PAGE>
SUMMARY
================================================================================
The following summary is qualified in its entirety by detailed
information appearing elsewhere in this Prospectus and in the Statement of
Additional Information. Cross-references in this summary are to headings in the
Prospectus.
The Portfolio. The Portfolio is one of ten portfolios of the Fund, a
diversified, open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Portfolio's
investment objective is to provide shareholders with total return, consisting of
long-term capital appreciation and income. The Portfolio invests primarily in a
diversified portfolio of dividend-paying common stocks. See "Additional
Information."
Management. Smith Barney Mutual Funds Management Inc. ("SBMFM") serves
as the Portfolio's investment adviser and administrator. SBMFM is a wholly owned
subsidiary of Smith Barney Holdings Inc. ("Holdings"), which in turn is a wholly
owned subsidiary of Travelers Group, Inc., a diversified financial services
holding company engaged, through its subsidiaries, principally in four business
segments: Investment Services, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance Services. See "Management of the
Fund."
Buying Shares. Shares of the Portfolio are offered only to Contract
owners as set forth in the specific Contract prospectus. A Contract owner can
direct the allocation of part or all of his or her net purchase payment to the
Portfolio. In the future, Contract owners may be offered the opportunity to
invest in one or more of the other portfolios of the Fund. See "How to Use the
Portfolio."
Redeeming Shares. Shares may be redeemed as described in the applicable
Contract prospectus. See "How to Use the Portfolio."
Risk Factors and Special Considerations. The non-publicly traded and
illiquid securities, which the Portfolio may hold, may have to be sold at lower
prices, or may remain unsold, when the Portfolio desires to dispose of them. 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 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, short sales against the box, forward roll transactions, currency
exchange transactions, options on foreign currencies, interest rate and other
hedging transactions and reverse repurchase agreements, are described under
"Investment Goal and Policies of the Portfolio" and "Special Considerations and
Risk Factors."
- --------------------------------------------------------------------------------
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 SBMFM
and/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, SBMFM 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 two 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>
Total Return Portfolio 1996 1995 1994 1993(1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 12.75 $ 10.78 $ 10.30 $10.00
- -----------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(2) 0.26 0.43 0.34 0.01
Net realized and unrealized gain (loss) 2.97 2.19 0.42* 0.29
- -----------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 3.23 2.62 0.76 0.30
- -----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.07) (0.41) (0.28) --
Net realized gains (0.18) (0.24) -- --
- -----------------------------------------------------------------------------------------------------------
Total Distributions (0.25) (0.65) (0.28) --
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.73 $ 12.75 $ 10.78 $10.30
- -----------------------------------------------------------------------------------------------------------
Total Return 25.33% 25.04% 7.40% 3.00%
- -----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000's) $171,503 $78,042 $23,196 $2,777
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.83% 1.00% 1.00% 0.85%+
Net investment income 3.06 3.80 3.84 1.93+
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover rate 82% 81% 118% --
- -----------------------------------------------------------------------------------------------------------
Average commissions paid on equity transactions(3) $ 0.06 $ 0.06 -- --
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) For the period from December 3, 1993 (commencement of operations) to
December 31, 1993.
(2) The Investment Adviser waived all or part of its fees for the year ended
December 31, 1994 and the period ended December 31, 1993. In addition, IDS
Life reimbursed expenses of $7,873 and $1,472 for the year ended December
31, 1994 and the period ended December 31, 1993. If such fees were not
waived and 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
---------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio 1996 1995 1994 1993 1996 1995 1994 1993
- --------- ---- ---- ---- ---- ---- ---- ---- ----
Total Return N/A N/A $0.01 $0.02 N/A N/A 1.11% 4.14%+
</TABLE>
(3) As of September 1995 the SEC instituted new guidelines requiring the
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.
* The amount shown in this caption for each share outstanding throughout the
period may not accord with the change in the aggregate gains and losses in
the portfolio securities for the period because of the timing of purchases
and withdrawals of shares in relation to the fluctuating market values of
the portfolio.
- --------------------------------------------------------------------------------
2
<PAGE>
INVESTMENT GOAL AND POLICIES OF THE PORTFOLIO
================================================================================
Investment Goal
The Portfolio's goal is to provide shareholders with total return,
consisting of long-term capital appreciation and 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 goals.
Additional information about investment strategies that the Portfolio may employ
and investment policies mentioned below appears in this Prospectus and in the
Statement of Additional Information.
Investment Policies
The Portfolio will seek to achieve its goal by investing primarily in a
diversified portfolio of dividend-paying common stocks. The Portfolio may engage
in various portfolio strategies involving options to seek to increase its return
and to hedge its portfolio against movements in the equity markets and interest
rates. Because the Portfolio seeks total return by emphasizing investments in
dividend-paying common stocks, it will not have as much investment flexibility
as total return funds which may pursue their objective by investing in both
income and equity stocks without such an emphasis. The Portfolio also may invest
up to 10% of its assets in medium- or low-rated securities (securities rated
less than investment-grade by Moody's Investors Service, Inc. ("Moody's") or
Standard and Poor's Ratings Group ("S&P")) or unrated securities of comparable
quality, interest-paying debt securities, such as U.S. government securities,
and other securities, including convertible bonds, convertible preferred stock
and warrants. In addition, the Portfolio will limit its investments in warrants
to 5% of its net assets. The Portfolio also may lend its portfolio securities
and enter into "short sales against the box." A description of the corporate
bond and commercial paper rating systems of S&P, Moody's and other nationally
recognized statistical rating organizations ("NRSROs") is also contained in the
Statement of Additional Information.
ADDITIONAL INVESTMENTS
================================================================================
Money Market Instruments
The Portfolio may, as a cash management tool, invest up to 35% of the
value of its total assets in cash and invest in short-term instruments and, for
temporary defensive purposes, may hold cash and invest in short-term instruments
without limitation. Short-term instruments in which the 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.
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 the Government National Mortgage Association); securities
that are supported by the right of the issuer to borrow from the U.S. Treasury
(such as securities of
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Federal Home Loan Banks); and securities that are supported only by the credit
of the instrumentality (such as bonds issued by the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation). 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.
CERTAIN INVESTMENT STRATEGIES AND GUIDELINES
================================================================================
Up to 15% 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.
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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. SBMFM, 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.
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 33.33% of the Portfolio's total
assets, taken at value. Loans of portfolio securities will be collateralized by
cash, letters of credit or U.S. government securities, which are maintained at
all times in an amount equal to the current market value of the loaned
securities. Any gain or loss in the market price of the securities loaned that
might occur during the term of the loan would be for the account of the
Portfolio.
Futures and Options on Futures
When deemed advisable by SBMFM, the Portfolio may enter into interest
rate futures contracts, stock index futures contracts and related options that
are traded on a U.S. exchange or board of trade. These transactions will be made
solely for the purpose of hedging against the effects of changes in the value of
portfolio securities due to anticipated changes in interest rates, market
conditions and currency values, as the case may be. The Portfolio will enter
into futures and options on futures to purchase stock indices in anticipation of
future purchases of securities ("long positions"). All futures and options
contracts will be entered into only when the transactions are economically
appropriate to the reduction of risks inherent in the management of the
Portfolio.
An interest rate futures contract provides for the future sale by one
party and the purchase by the other party of a specified amount of a particular
financial instrument (debt security) at a specified price, date, time and place.
Similarly, a foreign currency futures contract provides for the future sale by
one party and the purchase by another party of a certain amount of a particular
currency at a specified price, date, time and place. Stock index futures
contracts are based on indices that reflect the market value of common stock of
the firms included in the indices. An index futures contract is an agreement
pursuant to which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the close of the
last trading day
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of the contract and the price at which the index contract was originally entered
into. An option on an interest rate, stock index or currency futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put) at a specified exercise price at any time
prior to the expiration date of the option.
The use of futures contracts and options on futures contracts as a
hedging device involves several risks. There can be no assurance that there will
be a correlation between price movements in the underlying securities, index or
currency, on the one hand, and price movements in the securities that are the
subject of the hedge, on the other hand. Positions in futures contracts and
options on futures contracts may be closed out only on the exchange or board of
trade on which they were entered into, and there can be no assurance that an
active market will exist for a particular contract or option at any particular
time.
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 than the returns
available in the market on the dates when the investments are actually delivered
to the buyers. The Portfolio will establish a segregated account consisting of
cash, U.S. government securities, 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 are determined by the
SBMFM 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 and Stock Indices
The Portfolio may purchase put and call options that are traded on a
U.S. securities exchange, and also may purchase such options on 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
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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.
The Portfolio may purchase call options on stock indices. The Portfolio
may also write call options and buy put options on stock indices. Options on
stock indices are similar to options on securities. However, options on stock
indices do not involve the delivery of an underlying security; rather, the
options represent the holder's right to obtain from the writer in cash a fixed
multiple of the amount by which the exercise price exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the underlying
index on the exercise date.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the common stocks included in the index. In
purchasing put options on a stock index, the Portfolio seeks to benefit from a
decline in the value of the stocks underlying the index or seeks to hedge
against the risk of loss on securities that it holds. In purchasing call options
on a stock index, the Portfolio seeks to participate in an advancing market in
anticipation of becoming more fully invested in equity securities.
The advisability of using stock index options to hedge against the risk
of marketwide movements will depend on the extent of diversification of the
stock investments of the Fund and the sensitivity of its stock investments to
factors influencing the underlying index. The effectiveness of purchasing or
writing stock index options as a hedging technique will depend upon the extent
to which price movements in the Portfolio's securities investments correlate
with price movements in the stock index selected.
Covered Option Writing
The Portfolio may write put and call options on securities. The
Portfolio realizes fees (referred to as "premiums") for granting the rights
evidenced by the options. A put option embodies the right of its purchaser to
compel the writer of the option to purchase from the option holder an underlying
security at a specified price at any time during the option period. In contrast,
a call option embodies the right of its purchaser to compel the writer of the
option to sell to the option holder an underlying security at a specified price
at any time during the option period. Thus, the purchaser of a put option
written by the Portfolio has the right to compel the Portfolio to purchase from
it the underlying security at the agreed-upon price for a specified time period,
while the purchaser of a call option written by the Portfolio has the right to
purchase from the Portfolio the underlying security owned by the Portfolio at
the agreed-upon price for a specified time period.
Upon the exercise of a put option written by the Portfolio, the
Portfolio may suffer a loss equal to the difference between the price at which
the Portfolio is required to purchase the underlying security plus the premium
received for writing the option and its market value at the time of the option
exercise.
Upon the exercise of a call option written by the Portfolio, the
Portfolio may suffer a loss equal to the difference between the security's
market value at the time of the option exercise less the premium received for
writing the option and the Portfolio's acquisition cost of the security.
The Portfolio will write only covered options. Accordingly, whenever the
Portfolio writes a call option, it will continue to own or have the present
right to acquire the underlying security for as long as it remains obligated as
the writer of the option. To support its obligation to purchase the underlying
security if a put option is
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exercised, the Portfolio will either (a) deposit with PNC Bank, National
Association, the custodian of the Fund's investments ("PNC"), in a segregated
account cash, U.S. government securities, high-grade debt obligations or equity
securities having a value at least equal to the exercise price of the underlying
securities, provided such securities are 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 its
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 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.
Short Sales Against the Box
The Portfolio may make short sales of common stock if, at all times when
a short position is open, the Portfolio owns the stock or owns preferred stocks
or debt securities convertible or exchangeable into the shares of common stock
sold short. Short sales of this kind are referred to as short sales "against the
box." The broker-dealer that executes a short sale generally invests cash
proceeds of the sale until they are paid to the Portfolio. Arrangements may be
made with the broker-dealer to obtain a portion of the interest earned by the
broker on the investment of short sale proceeds. The Portfolio will segregate
the common stock or convertible or exchangeable preferred stock or debt
securities in a special account with its custodian.
SPECIAL CONSIDERATIONS AND RISK FACTORS
================================================================================
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.
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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 when investing 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.
Medium-, Lower-, 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
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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 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 payment of principal or interest.
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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, 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 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
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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 Portfolio will
use the net asset value at the close of trading on the NYSE on the day the
notice of surrender or transfer is received. If the request is received after
the close of trading on the NYSE, the shares will be redeemed at the net asset
value at the close of the next business day. The value of any redeemed shares
may be more or less than their original purchase price.
A detailed description of how to surrender a Contract is included in the
Contract prospectus, which must accompany this prospectus. It is conceivable
that in the future it may be disadvantageous for both variable annuity accounts
and variable life insurance accounts, or for variable accounts of different
insurance companies, to invest simultaneously in the Portfolio, although
currently neither the insurance companies nor the Portfolio foresee any such
disadvantages to either variable annuity or variable life insurance policy of
owners of any insurance company. The Fund's Board of Trustees intends to monitor
events in order to identify any material conflicts between such policy owners
and to determine what action, if any, should be taken in response thereto.
DIVIDENDS AND TAXES
================================================================================
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.
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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 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
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prospective rules and regulations from causing a Contract owner to be considered
the owner of the shares of the Portfolio.
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, the Fund's custodian, transfer agent and
distributor. The day-to-day operations of the Portfolio are delegated to SBMFM.
The identities and backgrounds of the Trustees and officers of the Fund,
together with certain additional information about them, are contained in the
Statement of Additional 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 Advisers 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.
PORTFOLIO MANAGEMENT
================================================================================
John G. Goode is Vice President and Investment Officer of the Fund and
Chairman and Chief Investment Officer of Davis Skaggs Investment Management
division of SBMFM.
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
================================================================================
PNC, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, 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.
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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 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.
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
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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 Index, with the Consumer
Price Index, Dow Jones Industrial Average or NASDAQ, or with investment or
savings vehicles. The performance information also may include evaluations of
the Portfolio published by nationally recognized ranking services and by
financial publications that are nationally recognized, such as Barron's,
Business Week, Forbes, Fortune, Institutional Investor, Investor's Business
Daily, Kiplinger's Personal Finance Magazine, Money, Morningstar Mutual Fund
Values, Mutual Fund Forecaster, The New York Times, Stranger's Investment
Advisor, USA Today, U.S. News & World Report and The Wall Street Journal. Such
comparative performance information will be stated in the same terms in which
the comparative data or indices are stated. Any such advertisement also would
include the standard performance information required by the SEC as described
above. For these purposes, the performance of the Portfolio, as well as the
performance of other mutual funds or indices, do not reflect sales charges, the
inclusion of which would reduce the Portfolio's performance.
The Portfolio may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
A Contract owner's actual return on its investment in this Portfolio
will be affected by Contract charges imposed by the separate accounts of the
participating life insurance companies.
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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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PROSPECTUS
L 12728 Smith Barney Series Fund SB Ed.4-97
