FILE NO.33-75644
811-8372
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM N-1A
__________
POST-EFFECTIVE AMENDMENT NO. 3
TO THE
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
THE INVESTMENT COMPANY ACT OF 1940
__________
SMITH BARNEY/TRAVELERS SERIES FUND INC.
(Exact name of Registrant as specified in the Charter)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices)
(212) 816-6474
(Registrant's telephone number)
Christina T. Sydor
388 Greenwich Street, New York, New York 10013 (22nd floor)
(Name and address of agent for service)
__________
Rule 24f-2(a)(1) Declaration:
Registrant previously registered an indefinite number of its
shares pursuant to Rule 24f-2 of the Investment Company Act
of 1940.
Registrant filed its Rule 24f-2 Notice on December 26, 1995
for its most recent fiscal year ended October 31, 1995.
It is proposed that this Post-Effective Amendment will
become effective February 28, 1996 pursuant to paragraph (a)
(1) of Rule 485.
CROSS REFERENCE SHEET
(as required by Rule 495(a))
Part A
of Form N-1A Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial
Information
"Financial Highlights"
4. General Description of Registrant "Shares of the
Fund"; Cover Page
"Investment Objectives"; "The
Fund's
Investment Program"; "Special
Investment
Techniques and Risk
Considerations"
5. Management of the Fund
"Management"
5A.Management Discussion of Fund
Performance Not
Applicable
6. Capital Stock and Other Securities "Shares of the
Fund"; "Redemption of Shares"
Cover Page; "Dividends,
Distributions and Taxes"
7. Purchase of Securities Being Offered Cover Page;
"Management";
"Determination of Net Asset
Value"
"The Fund's Investment
Program"
8. Redemption or Repurchase
"Redemption of Shares"
9. Pending Legal Proceedings
Not Applicable
Part B Statement of Additional
of Form N-1A Information Caption
10. Cover Page Cover
Page
11. Table of Contents "Table of Contents"
12.General Information and History "The Fund"
13.Investment Objectives and Policies "Investment
Policies"; "Investment Restrictions"
14. Management of the Fund "Directors and Officers"
15.Control Persons and Principal
Holders of Securities See Prospectus - "Shares of
the Fund"
"Voting Rights"; "Directors
and Officers"
16. Investment Advisory and Other
Services See Prospectus
- "Management"
Directors and
Officers"; "Management
Agreements";
"Custodians"
"Independent
Auditors"
17.Brokerage Allocation and Other
Practices See Prospectus
- "Management"
18. Capital Stock and Other
Securities See
Prospectus - "Shares of the
Fund"
See Prospectus -
"Dividends,
Distributions
and Taxes"; "Investment
Policies";"Voting
Rights"
19.Purchase, Redemption and Pricing of
Securities Being Offered
See Prospectus - "The Fund's
Investment
Program";See Prospectus -
"Determination of Net Asset
Value"
"Determination of
Net Asset Value"
"Redemption of
Shares"; "Financial
Statements"
20. Tax Status See
Prospectus - "Dividends,
Distributions
and Taxes"
21. Underwriters See
Prospectus - "Management"
22. Calculation of Performance
Data See Prospectus -
"Performance"
"Performance
Information"
23. Financial Statements
"Financial Statements"
Part C of
Form N-1A
Information required to be included in Part C is set forth
under the appropriate item, so numbered in Part C of this
Registration Statement.
<PAGE>
SMITH BARNEY/TRAVELERS SERIES FUND INC.
388 Greenwich Street
New York, New York 10013
1-800-842-8573
Smith Barney/Travelers Series Fund Inc. (the "Fund"),
the investment
underlying certain variable annuity and variable life
insurance contracts, is an
investment company offering a choice of the following twelve
different
Portfolios.
Smith Barney Income and Growth Portfolio
TBC Managed Income Portfolio
Alliance Growth Portfolio
Putnam Diversified Income Portfolio
AIM Capital Appreciation Portfolio
GT Global Strategic Income Portfolio
American Capital Enterprise Portfolio
Smith Barney High Income Portfolio
Smith Barney International Equity Portfolio
MFS Total Return Portfolio
Smith Barney Pacific Basin Portfolio
Smith Barney Money Market Portfolio
Shares of the Fund are offered only to insurance
company separate accounts
(the "Separate Accounts"), which fund certain variable
annuity and variable life
insurance contracts (the "Contracts"). The Separate Accounts
invest in shares of
one or more of the Portfolios in accordance with allocation
instructions
received from Contract owners. Such allocation rights are
further described in
the accompanying Contract prospectus.
Shares of each Portfolio are offered to Separate
Accounts at their net
asset value, without a sales charge, next determined after
receipt of an order
by an insurance company. The offering of shares of a
Portfolio may be suspended
from time to time and the Fund reserves the right to reject
any specific
purchase order.
Shares of the Smith Barney Money Market Portfolio are
not insured or
guaranteed by the U.S. Government. There is no assurance
that the Portfolio will
be able to maintain a stable net asset value of $1.00 per
share.
THIS PROSPECTUS, WHICH SETS FORTH CONCISE INFORMATION ABOUT
THE FUND THAT
PROSPECTIVE INVESTORS SHOULD KNOW BEFORE INVESTING, SHOULD
BE READ AND RETAINED
FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION,
ALSO REFERRED TO AS
"PART B", DATED FEBRUARY 28, 1996 IS HEREBY INCORPORATED BY
REFERENCE INTO THIS
PROSPECTUS AND IS AVAILABLE FROM THE FUND, WITHOUT CHARGE,
BY WRITING TO THE
FUND AT THE ABOVE ADDRESS OR CALLING THE TELEPHONE NUMBER
LISTED ABOVE.
This Prospectus should be read in conjunction
with the
prospectus for the Contracts.
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 FEBRUARY 28,
1996.
- ------------------------------------------------------------
- --------------------
<PAGE>
TABLE OF CONTENTS
============================================================
====================
FINANCIAL
HIGHLIGHTS..................................................
.... 1
THE FUND'S INVESTMENT
PROGRAM............................................. 4
Smith Barney Income and Growth
Portfolio............................. 4
Alliance Growth
Portfolio............................................ 5
AIM Capital Appreciation
Portfolio................................... 6
American Capital Enterprise
Portfolio................................ 7
Smith Barney International Equity
Portfolio.......................... 8
Smith Barney Pacific Basin
Portfolio................................. 10
TBC Managed Income
Portfolio......................................... 11
Putnam Diversified Income
Portfolio.................................. 13
GT Global Strategic Income
Portfolio................................. 16
Smith Barney High Income
Portfolio................................... 19
MFS Total Return
Portfolio........................................... 20
Smith Barney Money Market
Portfolio.................................. 21
SPECIAL INVESTMENT TECHNIQUES AND RISK
CONSIDERATIONS..................... 23
DIVIDENDS, DISTRIBUTIONS AND
TAXES........................................ 38
REDEMPTION OF
SHARES......................................................
39
PERFORMANCE.................................................
.............. 39
MANAGEMENT..................................................
.............. 40
SHARES OF THE
FUND........................................................
47
DETERMINATION OF NET ASSET
VALUE.......................................... 48
APPENDIX
A...........................................................
..... 49
- ------------------------------------------------------------
- --------------------
<PAGE>
FINANCIAL HIGHLIGHTS
============================================================
====================
The following schedules of each of the portfolios within the
Smith
Barney/Travelers Series Fund Inc. have been audited in
conjunction with the
annual audits of the financial statements of the Fund by
KPMG Peat Marwick LLP,
independent auditors. The 1995 financial statements and the
independent
auditors' report thereon appear in the October 31, 1995
Annual Report to
Shareholders.
For a share of each capital stock outstanding throughout the
period:
<TABLE>
<CAPTION>
Smith Barney Income & Growth Alliance Growth
- ---------------------------- -----------------------
- ------
1995 1994(1) 1995
1994(1)
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
<S>
<C> <C> <C> <C>
Net Asset Value, Beginning of Period......................
$10.14 $10.00 $10.65
$10.00
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Income From Investment Operations:
Net investment income (2)............................
0.28 0.11 0.14 0.06
Net realized and unrealized gain on investment.......
1.76 0.03 2.61 0.59
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Total Income from Investment Operations.........
2.04 0.14 2.75 0.65
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Less Distributions:
Dividends from net investment income.................
(0.06) -- (0.02) --
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Total Distributions.............................
(0.06) -- (0.12) --
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Net Asset Value, End of Period............................
$12.12 $10.14 $13.28
$10.65
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Total Return..............................................
20.21% 1.40%++ 26.19%
6.50%++
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Net Assets, End of Period (000's).........................
$39,364 $6,377 $111,573
$17,086
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Ratios to Average Net Assets:
Expenses (2).........................................
0.73% 0.73%+ 0.90%
0.88%+
Net investment income................................
2.70 2.82%+ 1.24
1.47%+
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Portfolio Turnover Rate...................................
38.39% 2.17% 77.66%
36.66%
============================================================
============================================================
=========
</TABLE>
(1) For the period from June 16, 1994 (commencement of
operations) to
October 31, 1994.
(2) The Manager has waived all of its fees for the period
and reimbursed the
Smith Barney Income and Growth Portfolio for $13,120 in
expenses and the
Alliance Growth Portfolio for $3,500 in expenses. If
such fees were not
waived and expenses not reimbursed, the per share
decrease in net
investment income and the ratio of expenses to average
net assets would
have been $0.05 and 2.08% (annualized), respectively,
for the Smith Barney
Income and Growth Portfolio and $0.03 and 1.76%
(annualized),respectively,
for the Alliance Growth Portfolio.
(+) Annualized.
(++) Not annualized as it may not be representative of the
total return for
the year.
For a share of each capital stock outstanding throughout the
period:
<TABLE>
<CAPTION>
American Capital Enterprise Smith Barney International
Equity
- --------------------------- ---------------------------
- ------
1995 1994(1) 1995
1994(1)
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
<S>
<C> <C> <C> <C>
Net Asset Value, Beginning of Period.....................
$10.38 $10.00 $10.55
$10.00
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Income From Investment Operations:
Net investment income (loss)(2).....................
0.03 0.03 0.03 (0.03)
Net realized and unrealized gain on investment......
2.53 0.35 (0.10) 0.58
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Total Income from Investment Operations........
2.56 0.38 (0.07) 0.55
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Less Distributions:
Dividends from net investment income................
(0.02) -- -- --
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Total Distributions............................
(0.05) -- -- --
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Net Asset Value, End of Period...........................
$12.89 $10.38 $10.48
$10.55
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Total Return.............................................
24.74% 3.80%++ (0.66)%
5.50%++
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Net Assets, End of Period (000's)........................
$32,447 $5,734 $53,538
$13,811
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Ratios to Average Net Assets:
Expenses (2)........................................
0.88% 0.84%+ 1.44%
1.20%+
Net investment income...............................
0.65 0.79%+ 0.25
(0.73)+
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Portfolio Turnover Rate..................................
180.26% 54.74% 28.72% -
- -
============================================================
============================================================
=========
</TABLE>
(1) For the period from June 16, 1994 (commencement of
operations) to
October 31, 1994.
(2) The Manager has waived all of its fees for the period
and reimbursed the
American Capital Enterprise Portfolio for $19,007 in
expenses. If such fees
were not waived and expenses not reimbursed, the per
share decrease in net
investment income and the ratio of expenses to average
net assets would
have been $0.07 and 2.66% (annualized), respectively,
for the American
Capital Enterprise Portfolio and $0.03 and 2.00%
(annualized),
respectively, for the Smith Barney International Equity
Portfolio.
(+) Annualized.
(++) Not annualized as it may not be representative of the
total return for
the year.
- ------------------------------------------------------------
- --------------------
1
<PAGE>
For a share of each capital stock outstanding throughout the
period:
<TABLE>
<CAPTION>
Smith Barney Pacific Basin TBC Managed Income
- --------------------------- ---------------------------
- ------
1995 1994(1) 1995 1994(1)
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
<S>
<C> <C> <C> <C>
Net Asset Value, Beginning of Period
$10.10 $10.00 $10.04 $10.00
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Income (Loss) From Investment Operations:
Net investment income (loss)(2)
(0.02) (0.04) 0.61 0.21
Net realized and unrealized gain (loss) on investment
(1.13) 0.14 0.64 (0.17)
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Total Income from Investment Operations
(1.15) 0.10 1.25 0.04
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Less Distributions:
Dividends from net investment income
- -- -- (0.13) --
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Total Distributions
- -- -- (0.13) --
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Net Asset Value, End of Period
$8.95 $10.10 $11.16 $10.04
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Total Return
(11.58)% 1.00%++ 12.68%
0.40%++
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Net Assets, End of Period (000's)
$7,122 $4,238 $11,279 $3,840
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Ratios to Average Net Assets:
Expenses (2)
1.83% 1.26%+ 0.92% 0.87%+
Net investment income
(0.27) (0.93)+ 6.13 5.67%+
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Portfolio Turnover Rate
27.70% -- 169.51% 41.54%
============================================================
============================================================
=========
</TABLE>
(1) For the period from June 16, 1994 (commencement of
operations) to
October 31, 1994.
(2) The Manager has waived all of its fees for the period
and reimbursed the
Smith Barney Pacific Basin Portfolio for $9,778 in
expenses and the TBC
Managed Income Portfolio for $15,557 in expenses. If
such fees were not
waived and expenses not reimbursed, the per share
decrease in net
investment income and the ratio of expenses to average
net assets would
have been $0.06 and 2.82% (annualized), respectively,
for the Smith Barney
Pacific Basin Portfolio and $0.07 and 2.91%
(annualized), respectively, for
the TBC Managed Income Portfolio.
(+) Annualized.
(++) Not annualized as it may not be representative of the
total return for
the year.
For a share of each capital stock outstanding throughout the
period:
<TABLE>
<CAPTION>
Putnam Diversified Income GT Global Strategic
Income
- --------------------------- -------------------------
- ------
1995 1994(1) 1995 1994(1)
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
<S>
<C> <C> <C> <C>
Net Asset Value, Beginning of Period
$10.18 $10.00 $9.95 $10.00
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Income From Investment Operations:
Net investment income (2)
0.79 0.23 0.74 0.17
Net realized and unrealized gain (loss) on investment
0.58 (0.05) (0.18) (0.22)
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Total Income from Investment Operations
1.37 0.18 0.92 (0.05)
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Less Distributions:
Dividends from net investment income
(0.09) -- (0.10) --
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Total Distributions
(0.09) -- (0.10) --
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Net Asset Value, End of Period
$11.46 $10.18 $10.77 $9.95
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Total Return
13.55% 1.80%++ 9.37%
(0.50)%++
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Net Assets, End of Period (000's)
$31,514 $6,763 $8,397
$2,624
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Ratios to Average Net Assets:
Expenses (2)
0.97% 0.98%+ 1.47% 1.07%+
Net investment income
7.53 6.14%+ 7.36 4.58%+
- ------------------------------------------------------------
- ------------------------------------------------------------
- ---------
Portfolio Turnover Rate
275.71% 20.02% 295.47%
56.34%
============================================================
============================================================
=========
</TABLE>
(1) For the period from June 16, 1994 (commencement of
operations) to
October 31, 1994.
(2) The Manager has waived all of its fees for the period
and reimbursed the
Putnam Diversified Income Portfolio for $19,028 in
expenses and the G.T.
Global Strategic Income Portfolio for $18,556 in
expenses. If such fees
were not waived and expenses not reimbursed, the per
share decrease in net
investment income and the ratio of expenses to average
net assets would
have been $0.07 and 2.92% (annualized), respectively,
for the Putnam
Diversified Income Portfolio and $0.13 and 4.53%
(annualized),
respectively, for the G.T. Global Strategic Income
Portfolio.
(+) Annualized.
(++) Not annualized as it may not be representative of the
total return for
the year.
- ------------------------------------------------------------
- --------------------
2
<PAGE>
For a share of each capital stock outstanding throughout the
period:
<TABLE>
<CAPTION>
Smith Barney High Income MFS Total Return
- --------------------------- ------------------------
- -----
1995 1994(1) 1995 1994(1)
- ------------------------------------------------------------
- ------------------------------------------------------------
- --------
<S>
<C> <C> <C> <C>
Net Asset Value, Beginning of Period
$10.07 $10.00 $9.98 $10.00
- ------------------------------------------------------------
- ------------------------------------------------------------
- --------
Income From Investment Operations:
Net investment income (2)
0.93 0.29 0.45 0.13
Net realized and unrealized gain (loss) on investment
0.48 (0.22) 1.15 (0.15)
- ------------------------------------------------------------
- ------------------------------------------------------------
- --------
Total Income from Investment Operations
1.41 0.07 1.60 (0.02)
- ------------------------------------------------------------
- ------------------------------------------------------------
- --------
Less Distributions:
Dividends from net investment income
(0.22) -- (0.05) --
- ------------------------------------------------------------
- ------------------------------------------------------------
- --------
Total Distributions
(0.22) -- (0.05) --
- ------------------------------------------------------------
- ------------------------------------------------------------
- --------
Net Asset Value, End of Period
$11.26 $10.07 $11.53 $9.98
- ------------------------------------------------------------
- ------------------------------------------------------------
- --------
Total Return
14.30% 0.70%++ 16.12%
(0.20)%++
- ------------------------------------------------------------
- ------------------------------------------------------------
- --------
Net Assets, End of Period (000's)
$20,450 $3,395 $49,363
$8,504
- ------------------------------------------------------------
- ------------------------------------------------------------
- --------
Ratios to Average Net Assets:
Expenses (2)
0.70% 0.69%+ 0.95% 0.93%+
Net investment income
9.54 7.55%+ 4.40 3.51%+
- ------------------------------------------------------------
- ------------------------------------------------------------
- --------
Portfolio Turnover Rate
56.94% 14.74% 103.72% 17.67%
============================================================
============================================================
========
</TABLE>
(1) For the period from June 16, 1994 (commencement of
operations) to
October 31, 1994.
(2) The Manager has waived all of its fees for the period
and reimbursed the
Smith Barney High Income Portfolio for $17,664 in
expenses and the MFS
Total Return Portfolio for $13,857 in expenses. If such
fees were not
waived and expenses not reimbursed, the per share
decrease in net
investment income and the ratio of expenses to average
net assets would
have been $0.07 and 2.60% (annualized), respectively,
for the Smith Barney
High Income Portfolio and $0.06 and 2.51% (annualized),
respectively, for
the MFS Total Return Portfolio.
(+) Annualized.
(++) Not annualized as it may not be representative of the
total return for
the year.
For a share of each capital stock outstanding throughout the
period:
<TABLE>
<CAPTION>
AIM Capital Appreciation Smith Barney Money Market
- ------------------------ ------------------------------
- ----
1995(3) 1995 1994(1)
- ------------------------------------------------------------
- ------------------------------------------------------------
- -------
<S>
<C> <C> <C>
Net Asset Value, Beginning of Period
$10.00 $1.00 $1.00
- ------------------------------------------------------------
- ------------------------------------------------------------
- -------
Income From Investment Operations:
Net investment income (2)
0.02 0.052 0.014
Net realized and unrealized gain(loss) on investment
(0.02) (0.052) (0.014)
- ------------------------------------------------------------
- ------------------------------------------------------------
- -------
Total Income from Investment Operations
- -- 0.052 0.014
- ------------------------------------------------------------
- ------------------------------------------------------------
- -------
Less Distributions:
Dividends from net investment income
- -- (0.052) (0.014)
- ------------------------------------------------------------
- ------------------------------------------------------------
- -------
Total Distributions
- -- (0.052) (0.014)
- ------------------------------------------------------------
- ------------------------------------------------------------
- -------
Net Asset Value, End of Period
$10.00 $1.00 $1.00
- ------------------------------------------------------------
- ------------------------------------------------------------
- -------
Total Return
0.00% 5.35% 1.46%++
- ------------------------------------------------------------
- ------------------------------------------------------------
- -------
Net Assets, End of Period (000's)
$8,083 $37,487 $5,278
- ------------------------------------------------------------
- ------------------------------------------------------------
- -------
Ratios to Average Net Assets:
Expenses (2)
1.00%+ 0.65% 0.66%+
Net investment income
4.07%+ 5.26 3.83%+
- ------------------------------------------------------------
- ------------------------------------------------------------
- -------
Portfolio Turnover Rate
5.91% --
============================================================
============================================================
=======
</TABLE>
(1) For the period from June 16, 1994 (commencement of
operations) to
October 31, 1994.
(2) The Manager has waived all of its fees for the period
and reimbursed the
Smith Barney Money Market Portfolio for $15,423 in
expenses. If such fees
were not waived and expenses not reimbursed, the per
share decrease in net
investment income and the ratio of expenses to average
net assets would
have been $0.005 and 2.11% (annualized), respectively.
(3) For the period from October __, 1995 (commencement of
operations) to
October 31, 1995.
(+) Annualized.
(++) Not annualized as it may not be representative of the
total return for
the year.
- ------------------------------------------------------------
- --------------------
3
<PAGE>
THE FUND'S INVESTMENT PROGRAM
============================================================
====================
The Fund consists of twelve investment portfolios, each
with its own
investment objective and policies as described in more
detail below. Of course,
no assurance can be given that a Portfolio's objective will
be achieved.
Investors should realize that risk of loss is inherent in
the ownership of any
securities and that shares of each Portfolio will fluctuate
with the market
value of its securities. Additional information about each
Portfolio's
investment policies and investment risks can be found herein
under "Special
Investment Techniques and Risk Considerations" and in the
Statement of
Additional Information.
The investment objectives and certain investment
restrictions designated as
such in the Statement of Additional Information are
fundamental and may not be
changed by the Directors without shareholder approval. Each
Portfolio's
investment policies, however, are not fundamental and may be
changed by the
Directors without shareholder approval.
Smith Barney Income and Growth Portfolio
Investment Objectives
The investment objectives of the Smith Barney Income
and Growth Portfolio
are current income and long-term growth of income and
capital. The Portfolio
attempts to achieve its objectives by investing primarily,
but not exclusively,
in common stocks. The Portfolio is managed by Smith Barney
Mutual Funds
Management Inc. ("SBMFM" or the "Manager") (See "Management-
- -Smith Barney Mutual
Funds Management Inc.").
Investment Policies
The Smith Barney Income and Growth Portfolio invests
primarily in common
stocks offering a current return from dividends and in
interest-paying debt
obligations (such as U.S. Government securities, investment
grade bonds and
debentures) and high quality short-term debt obligations
(such as commercial
paper and repurchase agreements collateralized by U.S.
Government securities
with broker/dealers or other financial institutions). The
Portfolio may also
purchase preferred stocks and convertible securities. In the
selection of common
stock investments, emphasis is generally placed on issues
with established
dividend records as well as potential for price
appreciation. From time to time,
however, a portion of the assets may be invested in non-
dividend paying stocks.
Under unusual economic or market conditions as determined by
the Manager, for
defensive purposes the Portfolio may temporarily invest all
or a major portion
of its assets in short-term U.S. Government securities. A
higher percentage of
debt securities may also be held when deemed advisable by
the Manager. 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 objectives.
The Portfolio may make investments in foreign
securities, though management
currently intends to limit such investments to 5% of the
Portfolio's assets, and
an additional 10% of its assets may be invested in sponsored
American Depositary
Receipts, which are certificates issued by U.S. banks
representing the right to
receive securities of a foreign issuer deposited with that
bank or a
correspondent bank. The Portfolio will ordinarily purchase
foreign securities
that are traded in the U.S. It may, ho wever, also purchase
the securities of
foreign issuers directly in foreign markets. The Portfolio
may also lend up to
20% of the value of its total assets and may purchase or
sell securities on a
when-issued or delayed delivery basis.
- ------------------------------------------------------------
- --------------------
4
<PAGE>
Alliance Growth Portfolio
Investment Objective
The investment objective of the Alliance Growth
Portfolio is to provide
long-term growth of capital. Current income is only an
incidental consideration.
The Portfolio attempts to achieve its objective by investing
primarily in equity
securities of companies with a favorable outlook for
earnings and whose rate of
growth is expected to exceed that of the U.S. economy over
time. The Portfolio
is managed by SBMFM; Alliance Capital Management L.P. serves
as the Portfolio's
Sub-Adviser.
Investment Policies
The Alliance Growth Portfolio invests primarily in
common stocks and
securities convertible into common stocks such as
convertible bonds, convertible
preferred stocks and warrants convertible into common
stocks. Because the values
of fixed-income securities are expected to vary inversely
with changes in
interest rates generally, when the Sub-Adviser expects a
general decline in
interest rates, the Portfolio may also invest for capital
growth in fixed-income
securities. The Portfolio may invest up to 25% of its total
assets in fixed-
income securities rated at the time of purchase below
investment grade, that is,
securities rated Ba or lower by Moody's Investors Service,
Inc. ("Moody's") or
BB or lower by Standard & Poor's Ratings Group ("S&P"), or
in unrated fixed-
income securities determined by the Sub-Adviser to be of
comparable quality. The
Portfolio will generally invest in securities with a minimum
rating of Caa- by
Moody's or CCC- by S&P or in unrated securities judged by
the Sub-Adviser to be
of comparable quality.
The Portfolio may invest without limit in securities
that are not publicly
traded in the U.S., although the Portfolio generally will
not invest more than
15% of its total assets in such securities. The Portfolio
may also invest a
portion of its assets in developing countries or countries
with new or
developing capital markets.
The Portfolio may invest in securities that are not
publicly traded,
including securities sold pursuant to Rule 144A under the
Securities Act of 1933
("Rule 144A Securities"). Investment in non-publicly traded
securities is
restricted to 5% of the Portfolio's total assets (not
including Rule 144A
Securities, to the extent permitted by applicable law) and
is also subject to
the Portfolio's restriction against investing more than 15%
of net assets in
"illiquid securities". To the extent permitted by applicable
law, Rule 144A
Securities will not be treated as illiquid for purposes of
the foregoing
restriction so long as such securities meet liquidity
guidelines established by
the Fund's Board of Directors.
The Portfolio may invest in high-yield, high-risk,
fixed-income and
convertible securities rated at the time of purchase Ba or
lower by Moody's or
BB or lower by S&P, or, if unrated, judged by the Sub-
Adviser to be of
comparable quality. The Portfolio will generally invest in
securities with a
minimum rating of Caa- by Moody's or CCC- by S&P or in
unrated securities judged
by the Sub-Adviser to be of comparable quality. However,
from time to time, the
Portfolio may invest in securities rated in the lowest
grades of Moody's (C) or
S&P (D) or in unrated securities judged by the Sub-Adviser
to be of comparable
quality, if the Sub-Adviser determines that there are
prospects for an upgrade
or a favorable conversion into equity securities (in the
case of convertible
securities). Securities rated Ba or lower (and comparable
unrated securities)
are commonly referred to as "junk bonds." Securities rated D
by S&P are in
default. See "Lower-Quality and Non-Rated Securities." For a
description of the
ratings referred to above, See Appendix A.
The Portfolio may also invest in zero-coupon bonds and
payment-in-kind
bonds. It may also buy and sell stock index futures
contracts ("index futures")
and may buy options on index futures and on stock indices
for
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5
<PAGE>
hedging purposes. The Portfolio may buy and sell call and
put options on index
futures or on stock indices in addition to, or as an
alternative to, purchasing
or selling index futures or, to the extent permitted by
applicable law, to earn
additional income. The Portfolio may also, for hedging
purposes, purchase and
sell futures contracts, options thereon and options with
respect to U.S.
Treasury securities, including U.S. Treasury bills, notes
and bonds. The
Portfolio may also seek to increase its current return by
writing covered call
and put options on securities it owns or in which it may
invest.
The Portfolio may lend portfolio securities amounting
to not more than 25%
of its total assets and may enter into repurchase agreements
on up to 25% of its
total assets. It may also purchase securities for future
delivery, which may
increase its overall investment exposure and involves a risk
of loss if the
value of the securities declines prior to the settlement
date. For temporary
defensive purposes, the Portfolio may invest all or a major
part of its assets
in money market instruments and repurchase agreements. To
the extent the
Portfolio's assets are invested for temporary defensive
purposes, they will not
be invested in a manner designed to achieve the Portfolio's
investment
objective.
AIM Capital Appreciation Portfolio
Investment Objective
The investment objective of the AIM Capital
Appreciation Portfolio is to
seek capital appreciation. The Portfolio is managed by
SBMFM; A I M Capital
Management, Inc. serves as the Portfolio's Sub-Adviser.
Investment Policies
The AIM Capital Appreciation Portfolio aggressively
seeks to increase
shareholders' capital by investing principally in common
stocks, with emphasis
on medium-sized and smaller emerging growth companies.
Management of the
Portfolio will be particularly interested in companies that
are likely to
benefit from new or innovative products, services or
processes that should
enhance such companies' prospects for future growth in
earnings. As a result of
this policy, the market prices of many of the securities
purchased and held by
the Portfolio may fluctuate widely. Any income received from
securities held by
the Portfolio will be incidental, and an investor should not
consider a purchase
of shares of the Portfolio as equivalent to a complete
investment program. The
Portfolio primarily purchases securities of two basic
categories of companies:
(a) "core" companies, which management considers to have
experienced above-
average and consistent long-term growth in earnings and to
have excellent
prospects for outstanding future growth, and (b) "earnings
acceleration"
companies, which management believes are currently enjoying
a dramatic increase
in profits.
The Portfolio may invest, for temporary or defensive
purposes, all or a
substantial portion of its assets in investment grade (high
quality) corporate
bonds, commercial paper, or U.S. Government securities. To
the extent the
Portfolio's assets are invested for temporary defensive
purposes, they will not
be invested in a manner designed to achieve the Portfolio's
investment
objective.
The Portfolio may also invest up to 15% of its net
assets in illiquid
securities, including repurchase agreements with maturities
in excess of seven
days. In addition, the Portfolio may purchase domestic stock
index futures
contracts. It may also write (sell) covered call options on
no more than 25% of
the value of its net assets. A portion of the Portfolio's
assets may also be
held, from time to time, in cash, repurchase agreements, or
other debt
securities (including U.S. Government securities), when such
positions are
deemed advisable in light of economic or market conditions.
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6
<PAGE>
American Capital Enterprise Portfolio
Investment Objective
The investment objective of the American Capital
Enterprise Portfolio is
capital appreciation through investments in securities
believed by the Sub-
Adviser to have above-average potential for capital
appreciation. Any income
received on such securities is incidental to the objective
of capital
appreciation. The Portfolio is managed by SBMFM; American
Capital Asset
Management, Inc., serves as the Portfolio's Sub-Adviser.
Investment Policies
The American Capital Enterprise Portfolio invests
primarily in growth
common stocks. Such securities generally include those of
companies with
established records of growth in sales or earnings, and
companies with new
products, new services, or new processes. The Portfolio may
also invest in
companies in cyclical industries during periods when their
securities appear
attractive to the Sub-Adviser for capital appreciation. In
addition to common
stocks of companies, the Portfolio may invest in warrants
and preferred stocks,
and in investment companies. The Portfolio may also invest
up to 15% of the
value of its total assets in securities of foreign
governments and companies.
The Portfolio generally holds a portion of its assets
in investment grade
short-term debt securities in order to provide liquidity.
The Portfolio may also
hold investment grade corporate or government bonds. The
market prices of such
bonds can be expected to vary inversely with changes in
prevailing interest
rates. Such investments may be increased when deemed
appropriate by the Sub-
Adviser for temporary defensive purposes. Short-term
investments may include
repurchase agreements with domestic banks or broker-dealers.
The Portfolio's primary approach is to seek what the
Sub-Adviser believes
to be unusually attractive growth investments on an
individual company basis.
The Portfolio may invest in securities that have above
average price volatility.
Because prices of common stocks and other securities
fluctuate, the value of an
investment in the Portfolio will vary upon the Portfolio's
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.
The Portfolio expects to utilize options, futures
contracts and options
thereon in several different ways, depending upon the status
of its Portfolio
and the Sub-Adviser's expectations concerning the securities
markets.
In times of stable or rising stock prices, the
Portfolio generally seeks to
obtain maximum exposure to the stock market, i.e., to be
"fully invested."
Nevertheless, even when the Portfolio is fully invested,
prudent management
requires that at least a small portion of assets be
available as cash to honor
redemption requests and for other short term needs. The
Portfolio may also have
cash on hand that has not yet been invested. The portion of
the Portfolio's
assets that is invested in cash equivalents does not
fluctuate with stock market
prices, so that, in times of rising market prices, the
Portfolio may
underperform the market in proportion to the amount of cash
equivalents in its
portfolio. By purchasing stock index futures contracts,
however, the Portfolio
can "equitize" the cash portion of its assets and obtain
equivalent performance
to investing 100% of its assets in equity securities.
If the Sub-Adviser forecasts a market decline, the
Portfolio may take a
temporary defensive position, reducing its exposure to the
stock market by
increasing its cash position with respect to all or a major
part of its assets.
To the extent the Portfolio's assets are invested for
temporary defensive
purposes, they will not be invested in a manner designed to
achieve the
Portfolio's investment objective. By selling stock index
futures contracts
instead
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7
<PAGE>
of portfolio securities, a similar result can be achieved to
the extent that the
performance of the stock index futures contracts correlates
to the performance
of the Portfolio's securities. Sale of futures contracts
could frequently be
accomplished more rapidly and at less cost than the actual
sale of securities.
Once the desired hedged position has been effected, the
Portfolio could then
liquidate securities in a more deliberate manner, reducing
its futures position
simultaneously to maintain the desired balance, or it could
maintain the hedged
position.
As an alternative to selling stock index futures
contracts, the Portfolio
can purchase stock index puts (or stock index futures puts)
to hedge the
Portfolio's risk in a declining market. Since the value of a
put increases as
the index declines below a specified level, the Portfolio's
value is protected
against a market decline to the degree the performance of
the index correlates
with the performance of its investment portfolio. If the
market remains stable
or advances, the Portfolio can refrain from exercising the
put and its portfolio
will participate in the advance, having incurred only the
premium cost for the
put.
The Portfolio may invest in a separate investment
company, American Capital
Small Capitalization Fund, Inc. ("Small Cap Fund"), that
invests in a broad
selection of small capitalization securities. The shares of
the Small Cap Fund
are available only to investment companies advised by the
Sub-Adviser. The Sub-
Adviser believes that the use of the Small Cap Fund provides
the Portfolio with
the most effective exposure to the performance of the small
capitalization
sector of the stock market while at the same time minimizing
costs. The Sub-
Adviser charges no advisory fee for managing the Small Cap
Fund, nor are there
any sales load or other charges associated with distribution
of its shares.
Other expenses incurred by the Small Cap Fund are borne by
it, and thus
indirectly by the Portfolio.
The securities of small and medium sized companies that
the Small Cap Fund
may invest in may be subject to more abrupt or erratic
market movements than
securities of larger, more established companies or the
market averages in
general. In addition, small capitalization companies
typically are subject to a
greater degree of change in earnings and business prospects
than are larger,
more established companies. In light of these
characteristics of small
capitalization companies and their securities, the Small Cap
Fund may be subject
to greater investment risk than that assumed through
investment in the equity
securities of larger capitalization companies.
The Portfolio will be deemed to own a pro rata portion
of each investment
of the Small Cap Fund. For example, if the Portfolio's
investment in the Small
Cap Fund were $10 million, and the Small Cap Fund had five
percent of its assets
invested in the electronics industry, the Portfolio would be
considered to have
an investment of $500,000 in the electronics industry.
Smith Barney International Equity
Portfolio
Investment Objective
The investment objective of the Smith Barney
International Equity Portfolio
is total return on its assets from growth of capital and
income. The Portfolio
seeks to achieve its objective by investing at least 65% of
its assets in a
diversified portfolio of equity securities of established
non-U.S. issuers. The
Portfolio is managed by SBMFM.
Investment Policies
Under normal market conditions, the Smith Barney
International Equity
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 its assets
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8
<PAGE>
in bonds, notes and debt securities (consisting of
securities issued in
Eurocurrency markets or obligations of the United States or
foreign governments
and their political subdivisions) of established non-U.S.
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 percent 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-U.S. companies
that, in the opinion of the Manager, have potential for
growth of capital.
However, there is no requirement that the Portfolio invests
exclusively in
common stocks or other equity securities, and, when the
Manager believes that
the return on debt securities will equal or exceed the
return on common stocks,
the Portfolio may, in seeking its objective of total return,
substantially
increase its holdings (up to a maximum of 35% of its assets)
in debt securities.
In determining whether the Portfolio will be invested for
capital appreciation
or for income or any combination of both, the Manager
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 normally 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 U.S., such as the
Far East (e.g., Japan,
Hong Kong, Singapore, Malaysia), Western Europe (e.g.,
United Kingdom, Germany,
the Netherlands, France, Italy, Switzerland), Eastern Europe
(e.g. Hungary,
Poland, The Czech Republic and the countries of the former
Soviet Union),
Central and South America (e.g., Mexico, Chile and
Venezuela), Australia, Canada
and such other areas and countries as the Manager may
determine from time to
time. However, under unusual economic or market conditions
as determined by the
Manager, 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 Manager ordinarily
considers the following
factors: prospects for relative economic growth between
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 Manager 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 Manager 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 portfolio securities will
ordinarily be traded on a
stock exchange or other market in the country in which the
issuer is principally
based, but may also be traded on markets in other countries
including, in many
cases, the United States securities exchanges and over-the-
counter markets.
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9
<PAGE>
In order to protect the dollar equivalent value of its
portfolio securities
against declines resulting from currency value fluctuations
and changes in
interest rate or other market changes, the Portfolio may
enter into the
following hedging transactions: forward foreign currency
contracts, interest
rate and currency swaps and financial instrument and market
index futures
contracts and related options contracts. In addition, the
Portfolio may engage
in leveraging, enter into repurchase agreements and lend
portfolio securities.
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 equivalents.
Smith Barney Pacific Basin Portfolio
Investment Objective
The investment objective of the Smith Barney Pacific
Basin Portfolio is
long-term capital appreciation through investment primarily
in equity securities
of companies in Australia, Hong Kong, India, Indonesia,
Japan, Malaysia, New
Zealand, Pakistan, Papua New Guinea, the People's Republic
of China, the
Philippines, Singapore, South Korea, Sri Lanka, Taiwan,
Thailand and Vietnam and
other such countries as the Manager may determine from time
to time ("Asian
Pacific Countries"). The Portfolio is managed by SBMFM.
Investment Policies
The Smith Barney Pacific Basin Portfolio's investments
will primarily
consist of (i) securities traded principally on stock
exchanges in the Asia
Pacific Countries, (ii) securities of companies that derive
50% or more of their
total revenue from either goods produced, sales made, or
services performed in
the Asian Pacific Countries and (iii) securities (including
American Depository
Receipts) of companies organized under the laws of an Asian
Pacific Country that
are publicly traded on recognized securities exchanges
outside of the Asian
Pacific Countries.
The Portfolio will normally invest at least 80% of its
total assets in
equity securities of companies in the Asia Pacific
Countries, consisting of the
securities listed above. For the purposes of the foregoing
limitation equity
securities include common stocks, preferred stocks,
securities convertible into
common or preferred stocks and warrants. The Portfolio may
also invest up to 20%
of its total assets in debt securities and other types of
investments if the
Manager believes they would help achieve the Portfolio's
investment objective.
The Portfolio has no predetermined policy on the allocation
of funds for
investment among such countries or securities.
Under unusual economic or market conditions as
determined by the Manager,
for defensive purposes the Portfolio may temporarily invest
all or a major
portion of its assets in U.S. Government securities or debt
or equity securities
of companies incorporated in and having their principal
business activities in
the U.S. 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 Manager ordinarily
considers the following
factors: prospects for relative economic growth between
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
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10
<PAGE>
investment, the Manager 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 Manager 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 portfolio securities will
ordinarily be traded on a
stock exchange or other market in the country in which the
issuer is principally
based, but may also be traded on markets in other countries
including, in many
cases, the U.S. securities exchanges and over-the-counter
markets. The Portfolio
may invest in companies, large or small, whose earnings are
believed to be in a
relatively strong growth trend, or in companies in which
significant further
growth is not anticipated but whose market value per share
is thought to be
undervalued. It may also invest in small and relatively less
well-known
companies. Debt securities in which the Portfolio may invest
will generally be
rated at the time of purchase at least Baa by Moody's or BBB
by S&P, and in any
event the Portfolio will not invest in debt securities rated
less than Baa by
Moody's and BBB by S&P if as a result more than 5% of the
Portfolio's assets
would be invested in such securities. Debt securities rated
Baa or BBB have
speculative characteristics and adverse economic conditions
may lead to a
weakened capacity to pay interest and repay principal. For a
description of
these ratings, see Appendix A.
In order to protect the dollar equivalent value of its
portfolio securities
against declines resulting from currency value fluctuations
and changes in
interest rate or other market changes, the Portfolio may
enter into the
following hedging transactions: forward foreign currency
contracts, interest
rate and currency swaps and financial instrument and market
index futures
contracts and related options contracts. In addition, the
Portfolio may engage
in leveraging, enter into repurchase agreements, lend
portfolio securities and
invest in "illiquid securities".
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 equivalents.
TBC Managed Income Portfolio
Investment Objective
The investment objective of the TBC Managed Income
Portfolio is to seek
high current income consistent with what the Sub-Adviser
believes to be prudent
risk of capital through investments in the following types
of securities:
corporate debt obligations, such as bonds, debentures,
obligations convertible
into common stocks and money market instruments; preferred
stocks; and
obligations issued or guaranteed by the U.S. Government and
its agencies or
instrumentalities. The Portfolio is managed by SBMFM; The
Boston Company Asset
Management, Inc. serves as the Portfolio's Sub-Adviser.
Investment Policies
U.S. Government securities in which the TBC Managed
Income Portfolio may
invest are limited to obligations issued or guaranteed as to
both principal and
interest by the U.S. Government or backed by the full faith
and credit of the
U.S. Government or its agencies or instrumentalities. Under
normal market
conditions, (1) at least 65% of the Portfolio's total assets
will be invested in
U.S. Government securities and in investment-grade corporate
debt obligations
rated within the four highest ratings of Moody's or S&P or
in
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11
<PAGE>
unrated obligations of comparable quality; and (2) at least
65% of the
Portfolio's total assets will be invested in debt
obligations having maturities
of 10 years or less. It should be noted that obligations
rated in the lowest of
the top four ratings (Baa by Moody's or BBB by S&P) are
considered to have some
speculative characteristics. Unrated securities will be
considered of
investment-grade if deemed by the Sub-Adviser to be
comparable in quality to
instruments so rated, or if other outstanding obligations of
the issuers of
such securities are rated Baa/BBB or better. For a
description of the ratings
referred to above, see Appendix A.
The Portfolio may invest up to 35% of its total assets
in obligations rated
below the four highest ratings of Moody's or S&P, with no
minimum rating
required. Such securities, which are considered to have
speculative
characteristics, include securities rated in the lowest
rating categories of
Moody's or S&P (commonly referred to as "junk bonds"), which
are extremely
speculative and may be in default with respect to payment of
principal or
interest. Further information about low rated securities is
provided below under
"Lower-Quality and Non-Rated Securities."
The Portfolio may also invest up to 35% of its total
assets in fixed-income
obligations having maturities longer than 10 years, up to
25% of its total
assets in convertible debt obligations and preferred stocks,
and up to 20% of
its total assets in securities of foreign issuers, including
foreign
governments. The Portfolio will not invest in common stocks,
and any common
stocks received through conversion of convertible debt
obligations will be sold
in an orderly manner. Changes in interest rates will affect
the value of the
Portfolio's portfolio investments.
When, in the opinion of the Sub-Adviser, a "defensive"
investment posture
is warranted, the Portfolio is permitted to invest
temporarily and without
limitation in high-grade, short-term money market
instruments, consisting
exclusively of U.S. Government securities, bank certificates
of deposit and time
deposits, bankers' acceptances, prime commercial paper, and
high-grade, short-
term corporate securities and repurchase agreements with
respect to these
instruments. To this extent, the Portfolio may not achieve
its investment
objective.
Bank certificates of deposit and bankers' acceptances
in which the
Portfolio may invest are limited to U.S. dollar-denominated
instruments of
domestic banks, including their branches located outside the
United States, and
of domestic branches of foreign banks. In addition, the
Portfolio may invest in
U.S. dollar-denominated, non-negotiable time deposits issued
by foreign branches
of domestic banks and London branches of foreign banks; and
negotiable
certificates of deposit issued by London branches of foreign
banks. The
foregoing investments may be made provided that the bank has
capital, surplus
and undivided profits (as of the date of its most recently
published annual
financial statements) in excess of $100 million as of the
date of investment.
Investments in obligations of foreign branches of domestic
banks, foreign banks,
and domestic branches of foreign banks involve risks that
are different from
investments in securities of domestic banks, and are
discussed in more detail
under "Foreign Securities."
The Portfolio is permitted to enter into repurchase
agreements with respect
to U.S. Government securities, to purchase portfolio
securities on a when-issued
basis, to purchase or sell portfolio securities for delayed-
delivery, and to
lend its portfolio securities. In addition, the Portfolio
may invest up to 25%
of its total assets in securities representing interests in
pools of assets such
as mortgage loans, motor vehicle installment purchase
obligations and credit
card receivables ("asset backed securities"), which include
classes of
obligations collateralized by mortgage loans or mortgage-
pass through
certificates ("CMOs"). The Portfolio is authorized to borrow
money for temporary
administrative purposes and to pledge its assets in
connection with such
borrowings. Finally, the Portfolio may invest up to 15% of
its net assets in
illiquid securities (excluding Rule 144A Securities). See
"Special Techniques
and Risk Considerations" for additional information about
the foregoing
securities.
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<PAGE>
Putnam Diversified Income Portfolio
Investment Objective
The Putnam Diversified Income Portfolio seeks high
current income
consistent with preservation of capital. The Portfolio is
managed by SBMFM;
Putnam Investment Management, Inc. serves as the Portfolio's
Sub-Adviser.
Investment Policies
Basic investment strategy. The Putnam Diversified
Income Portfolio
will allocate its investments among the following
three sectors of the
fixed-income securities markets:
* a U.S. Government Sector, consisting primarily of
securities of the
U.S. Government, its agencies and
instrumentalities and related
options, futures and repurchase agreements;
* a High Yield Sector, consisting of high yielding,
lower-rated, higher
risk U.S. and foreign fixed-income securities; and
* an International Sector, consisting of obligations
of foreign
governments, their agencies and instrumentalities,
other fixed-income
securities denominated in foreign currencies, and
related options and
futures.
The Portfolio may invest significantly in lower rated
and unrated U.S. and
foreign bonds whose credit quality is generally considered
the equivalent of
U.S. corporate debt securities, commonly known as "junk
bonds." Investments of
this type are subject to a greater risk of loss of principal
and interest.
Purchasers should carefully assess the risks associated with
an investment in
this Portfolio.
The Sub-Adviser believes that diversifying the
Portfolio's investments
among these sectors, as opposed to investing in any one
sector, will better
enable the Portfolio to preserve capital while pursuing its
objective of high
current income. Historically, the markets for U.S.
Government securities, lower-
rated, high yielding U.S. corporate fixed-income securities,
and debt securities
of foreign issuers have tended to behave independently and
have at times moved
in opposite directions. For example, U.S. Government
securities have generally
been affected negatively by inflationary concerns resulting
from increased
economic activity. High yield U.S. corporate fixed-income
securities, on the
other hand, have generally benefitted from increased
economic activity due to
improvement in the credit quality of corporate issuers. The
reverse has
generally been true during periods of economic decline.
Similarly, U.S.
Government securities have often been negatively affected by
a decline in the
value of the dollar against foreign currencies, while the
bonds of foreign
issuers held by U.S. investors have generally benefitted
from such decline. The
Sub-Adviser believes that, when financial markets exhibit
such a lack of
correlation, a pooling of investments among these markets
may produce greater
preservation of capital and lower volatility over the long
term than would be
obtained by investing exclusively in any one of the markets.
The Sub-Adviser will determine the amount of assets to
be allocated to each
of the three market sectors in which the Portfolio will
invest based on its
assessment of the maximum level of current income that can
be achieved from a
portfolio which is invested in all three sectors without
incurring undue risks
to principal value. In making this determination, the Sub-
Adviser will rely in
part on quantitative analytical techniques that measure
relative risks and
opportunities of each market sector based on current and
historical market data
for each sector, as well as on its own assessment of
economic and market
conditions. The Sub-Adviser will
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13
<PAGE>
continuously review this allocation of assets and make such
adjustments as it
deems appropriate, although there are no fixed limits on
allocations among
sectors, including investment in the High Yield Sector.
Because of the
importance of sector diversification to the Portfolio's
investment policies, the
Sub-Adviser expects that a substantial portion of the
Portfolio's assets will
normally be invested in each of the three market sectors
described below. See
"Defensive Strategies." The Portfolio's assets allocated to
each of these market
sectors will be managed in accordance with particular
investment policies, which
are described below. At times, the Portfolio may hold a
portion of its assets in
cash and money market instruments.
U.S. Government Sector. The Portfolio will invest
assets allocated to the
U.S. Government Sector primarily in U.S. Government
securities and engage in
options, futures, and repurchase transactions with respect
to such securities.
The Portfolio may also enter into forward commitments for
the purchase of U.S.
Government securities and make secured loans of its
portfolio securities with
respect to U.S. Government securities. In purchasing
securities for the U.S.
Government Sector, the Sub-Adviser may take full advantage
of the entire range
of maturities of U.S. Government securities and may adjust
the average maturity
of the investments held in the portfolio from time to time,
depending on its
assessment of relative yields of securities of different
maturities and its
expectations of future changes in interest rates. Under
normal market
conditions, the Portfolio will invest at least 20% of its
net assets in U.S.
Government securities. The Portfolio may also invest assets
allocated to the
U.S. Government Sector in a variety of debt securities,
including asset-backed
and mortgage-backed securities, such as CMOs, that are
issued by private U.S.
issuers. With respect to the U.S. Government Sector, the
Portfolio will only
invest in privately issued debt securities that are rated at
the time of
purchase at least A by Moody's or S&P, or in unrated
securities that the Sub-
Adviser determines are of comparable quality. The rating
services' descriptions
of these rating categories are included in Appendix A. The
Portfolio will not
necessarily dispose of a security if its rating is reduced
below these levels,
although the Sub-Adviser will monitor the investment to
determine whether
continued investment in the security will assist in meeting
the Portfolio's
investment objective.
High Yield Sector. The Portfolio will invest assets
allocated to the High
Yield Sector primarily in high yielding, lower-rated higher
risk U.S. and
foreign corporate fixed-income securities, including debt
securities,
convertible securities and preferred stocks. Subject to the
foregoing sentence,
the Portfolio may also purchase securities of foreign
governmental issuers and
equity securities. As described below, however, the
Portfolio may invest all or
any part of the High Yield Sector portfolio in higher-rated
and unrated fixed-
income securities. The Portfolio will not necessarily invest
in the highest
yielding securities available if in the Sub-Adviser's
opinion the differences in
yield are not sufficient to justify the higher risks
involved. In addition, the
Portfolio may invest up to 15% of its net assets in
securities that are not
publicly traded and for which market quotations are not
readily available. The
Portfolio may also invest in "zero-coupon" bonds and
"payment-in-kind" bonds.
At times, a substantial portion of the Portfolio's
assets may be invested
in securities as to which the Portfolio, by itself or
together with other funds
and accounts managed by the Sub-Adviser and its affiliates,
holds a major
portion or all of such securities. Under adverse market or
economic conditions
or in the event of adverse changes in the financial
condition of the issuer, the
Portfolio could find it more difficult to sell such
securities when the Sub-
Adviser believes it advisable to do so or may be able to
sell such securities
only at prices lower than if such securities were more
widely held. Under such
circumstances, it may also be more difficult to determine
the fair value of such
securities for purposes of computing the Portfolio's net
asset value. In order
to enforce its rights in the event of a default under such
securities, the
Portfolio may be required to take possession of and manage
assets securing the
issuer's obligations on such securities, which may increase
the Portfolio's
operating expenses and adversely affect the Portfolio's net
asset value.
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14
<PAGE>
The High Yield Sector may invest in any security which
is rated, at the
time of purchase, at least Caa as determined by Moody's or
CCC as determined by
S&P's or in any unrated security which the Sub-Adviser
determines is at least of
comparable quality, although up to 5% of the net assets of
the Portfolio be
invested in securities rated below such quality, or in
unrated securities that
the Sub-Adviser determines are of comparable quality.
Securities rated below Caa
by Moody's or CCC by S&P's are of poor standing and may be
in default. The
rating services' descriptions of these rating categories,
including the
speculative characteristics of the lower categories, are
included in Appendix A.
International Sector. The Portfolio will invest the
assets allocated to the
International Sector in debt obligations and other fixed-
income securities
denominated in non-U.S. currencies. These securities
include:
* debt obligations issued or guaranteed by foreign,
national,
provincial, state or other governments with taxing
authority, or by
their agencies or instrumentalities;
* debt obligations of supranational entities
(described below); and
* debt obligations and other fixed-income securities
of foreign and U.S.
corporate issuers.
When investing in the International Sector, the
Portfolio will purchase
only debt securities of issuers whose long-term debt
obligations are rated A or
better at the time of purchase by Moody's or S&P or in
unrated securities that
the Sub-Adviser determines are at least of comparable
quality.
In the past, yields available from securities
denominated in foreign
currencies have often been higher than those of securities
denominated in U.S.
dollars. Although the Portfolio has the flexibility to
invest in any country
where the Sub-Adviser sees potential for high income, it
presently expects to
invest primarily in securities of issuers in industrialized
Western European
countries (including Scandinavian countries) and in Canada,
Japan, Australia,
and New Zealand. The Sub-Adviser will consider expected
changes in foreign
currency exchange rates in determining the anticipated
returns of securities
denominated in foreign currencies. The Sub-Adviser does not
believe that the
credit risk inherent in the obligations of stable foreign
governments is
significantly greater than in those of U.S. Government
securities.
The obligations of foreign governmental entities,
including supranational
issuers, have various kinds of government support.
Obligations of foreign
governmental entities include obligations issued or
guaranteed by national,
provincial, state or other governments with taxing power or
by their agencies.
These obligations may or may not be supported by the full
faith and credit of a
foreign government.
Supranational entities include international
organizations designated or
supported by governmental entities to promote economic
reconstruction or
development and international banking institutions and
related government
agencies. Examples include the International Bank for
Reconstruction and
Development (the World Bank), the European Steel and Coal
Community, the Asian
Development Bank, and the Inter-American Development Bank.
The governmental
members or "stockholders" usually make initial capital
contributions to the
supranational entity and in many cases are committed to make
additional capital
contributions if the supranational entity is unable to repay
its borrowing. Each
supranational entity's leading activities are limited to a
percentage of its
total capital (including "callable capital" contributed by
members at the
entity's call), reserves, and net income.
Defensive Strategies. At times, the Sub-Adviser may
judge that conditions
in the securities market make pursuing the Portfolio's basic
investment strategy
inconsistent with the best interests of its shareholders. At
such
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15
<PAGE>
times, the Sub-Adviser may temporarily use alternative
strategies, primarily
designed to reduce fluctuations in the value of the
Portfolio's assets. In
implementing these "defensive" strategies, depending on the
circumstances, the
Portfolio may temporarily reduce or suspend its option
writing activities, shift
its portfolio emphasis to higher-rated securities in the
High Yield Sector,
hedge currency risks in the International Sector, or
generally reduce the
average maturity of its holdings in any or all of the
Sectors. Under unusual
market conditions, the Portfolio could invest up to 100% of
its assets in short-
term U.S. Government securities when the risks of investing
in the other Sectors
are perceived to outweigh the possible benefits of sector
diversification. The
Portfolio may also increase the portion of its assets
invested in cash or money
market instruments for such defensive purposes or for
liquidity purposes. To the
extent the Portfolio's assets are invested for temporary
defensive purposes,
they will not be invested in a manner designed to achieve
the Portfolio's
investment objective.
The Portfolio may also purchase securities of issuers
located in emerging
markets, invest in sovereign debt, Brady Bonds, loan
participations and
assignments and enter into dollar roll transactions. It may
also engage in the
writing of covered call and put options with respect to
foreign fixed-income
securities, foreign currencies, and related futures in order
to supplement the
Fund's portfolio income. See "Special Investment Techniques
and Risk
Considerations" below and in the Statement of Additional
Information.
GT Global Strategic Income Portfolio
Investment Objectives
The investment objectives of the GT Global Strategic
Income Portfolio are
primarily to seek high current income and secondarily to
seek capital
appreciation. The Portfolio is managed by SBMFM; LGT Asset
Management, Inc.
(formerly known as "G.T. Capital Management, Inc.") serves
as the Portfolio's
Sub-Adviser.
The Portfolio invests significantly in lower-quality
and unrated foreign
governmental bonds whose credit quality is generally
considered the equivalent
of U.S. corporate debt securities commonly known as "junk
bonds." Investments of
this type are subject to a greater risk of loss of principal
and interest.
Purchasers should carefully assess the risks associated with
an investment in
this Portfolio.
Investment Policies
The G.T. Global Strategic Income Portfolio allocates
its assets among debt
securities of issuers in three separate investment areas:
(1) the United States,
(2) developed foreign countries, and (3) emerging markets.
The Portfolio selects
particular debt securities in each sector based on their
relative investment
merits. Within each area, the Portfolio selects debt
securities from those
issued by governments, their agencies and instrumentalities;
central banks; and
commercial banks and other corporate entities. Debt
securities in which the
Portfolio may invest include bonds, notes, debentures, and
other similar
instruments. The Portfolio normally invests at least 50% of
its total assets in
U.S. and foreign debt and other fixed income securities
that, at the time of
purchase, are rated at least investment grade or, if
unrated, are determined by
the Sub-Adviser to be of comparable quality. No more than
50% of the Portfolio's
total assets may be invested in securities rated below
investment grade, which
involve a high degree of risk and are predominantly
speculative. See "Lower-
Quality and Non-Rated Securities." The Portfolio may also
invest in securities
that are in default as to payment of principal and/or
interest.
For purposes of the Portfolio's operations, "emerging
markets" will consist
of all countries determined by G.T. Capital to have
developing or emerging
economies and markets. These countries generally are
expected to include every
country in the world except the United States, Canada,
Japan, Australia, New
Zealand and
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16
<PAGE>
most countries in Western Europe. The Portfolio will
consider investment in but
not be limited to the following emerging markets: Algeria,
Argentina, Bolivia,
Botswana, Brazil, Chile, China, Columbia, Costa Rica, Czech
Republic, Ecuador,
Egypt, Finland, Greece, Hong Kong, Hungary, India,
Indonesia, Israel, Ivory
Coast, Jamaica, Jordan, Kenya, Malaysia, Mexico, Morocco,
Nicaragua, Nigeria,
Pakistan, Panama, Peru, Philippines, Poland, Portugal,
Russia, Singapore,
Slovakia, Slovenia, South Africa, South Korea, Sri Lanka,
Taiwan, Thailand,
Turkey, Uruguay, Venezuela, Vietnam and Zimbabwe.
As used in this Prospectus and the Statement of
Additional Information, an
issuer in an emerging market is an entity: (i) for which the
principal
securities trading market is an emerging market, as defined
above; (ii) that
(alone or on a consolidated basis) derives 50% or more of
its total revenue from
either goods produced, sales made or services performed in
emerging markets; or
(iii) organized under the laws of, and with a principal
office in, an emerging
market.
The Portfolio's investments in emerging market
securities may consist
substantially of Brady Bonds (see "Brady Bonds" below) and
other sovereign debt
securities issued by emerging market governments. "Sovereign
debt securities"
are those issued by emerging market governments that are
traded in the markets
of developed countries or groups of developed countries. See
"Sovereign Debt".
The Sub-Adviser may invest in debt securities of emerging
market issuers that it
determines to be suitable investments for the Portfolio
without regard to
ratings. Currently, the substantial majority of emerging
market debt securities
are considered to have a credit quality below investment
grade. Because the
Portfolio's investment in debt securities rated below
investment grade is
limited to 50% of the Portfolio's total assets, the
Portfolio's investment in
emerging market debt securities is therefore limited to 50%
of its total assets
as well. See "Securities of Emerging Markets".
The Portfolio also may consider making carefully
selected investments in
below-investment grade debt securities of corporate issuers
in the United States
and in developed foreign countries, subject to the overall
50% limitation. The
Portfolio also may invest in bank loan participations and
assignments, which are
fixed and floating rate loans arranged through private
negotiations between
foreign entities. See "Loan Participations and Assignments".
The Portfolio may
invest up to 15% of its net assets in illiquid securities.
The Portfolio also
may borrow for investment purposes up to 33 1/3% of its
total assets. See
"Borrowing and Leverage".
Temporary Defensive Strategies. The Portfolio retains
the flexibility to
respond promptly to changes in market and economic
conditions. Accordingly, with
the intent of preserving shareholders' capital and
consistent with the
Portfolio's investment objective, the Sub-Adviser may employ
a temporary
defensive investment strategy if it determines such a
strategy to be warranted.
Pursuant to such a defensive strategy, the Portfolio
temporarily may hold cash
(U.S. dollars, foreign currencies or multinational currency
units) and/or invest
up to 100% of its assets in high quality debt securities or
money market
instruments of U.S. or foreign issuers, and most or all of
the Portfolio's
investments may be made in the United States and denominated
in U.S. dollars. To
the extent the Portfolio adopts a temporary defensive
investment posture, it
will not be invested so as to achieve directly its
investment objectives.
In addition, pending investment of proceeds from new
sales of Portfolio
shares or to meet ordinary daily cash needs, the Portfolio
temporarily may hold
cash (U.S. dollars, foreign currencies or multinational
currency units) and may
invest any portion of its assets in high quality foreign or
domestic money
market instruments.
Asset Allocation. The Portfolio invests in debt
obligations allocated among
diverse markets and denominated in various currencies,
including U.S. dollars,
or in multinational currency units such as European Currency
Units. The
Portfolio may purchase securities that are issued by the
government or a company
or financial institution of one country but denominated in
the currency of
another country (or a multinational
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17
<PAGE>
currency unit). The Portfolio is designed for investors who
wish to accept the
risks entailed in such investments, which are different from
those associated
with a portfolio consisting entirely of securities of U.S.
issuers denominated
in U.S. dollars.
The Sub-Adviser selectively will allocate the assets of
the Portfolio in
securities of issuers in countries and in currency
denominations where the
combination of fixed income market returns, the price
appreciation potential of
fixed income securities and currency exchange rate movements
will present
opportunities primarily for high current income and
secondarily for capital
appreciation. In doing so, the Sub-Adviser intends to take
full advantage of the
different yield, risk and return characteristics that
investment in the fixed
income markets of different countries can provide for U.S.
investors.
Fundamental economic strength, credit quality and currency
and interest rate
trends will be the principal determinants of the emphasis
given to various
country, geographic and industry sectors within the
Portfolio. Securities held
by the Portfolio may be invested in without limitation as to
maturity.
The Sub-Adviser generally evaluates currencies on the
basis of fundamental
economic criteria (e.g., relative inflation and interest
rate levels and trends,
growth rate forecasts, balance of payments status and
economic policies) as well
as technical and political data. If the currency in which a
security is
denominated appreciates against the U.S. dollar, the dollar
value of the
security will increase. Conversely, if the exchange rate of
the foreign currency
declines, the dollar value of the security will decrease.
However, the Portfolio
may seek to protect itself against such negative currency
movements through the
use of investment techniques that include currency, options
and futures
transactions.
The Portfolio may also purchase securities on a "when-
issued basis" and may
purchase or sell securities on a "forward commitment" basis
in order to hedge
against anticipated changes in interest rates and prices.
The Portfolio may
invest up to 15% of its net assets in illiquid securities
and is authorized to
borrow money from banks in an amount up to 33-1/3% of its
total assets
(including the amount borrowed), less all liabilities and
indebtedness other
than the borrowings and may use the proceeds for investment
purposes. The
Portfolio will borrow for investment purposes only when the
Sub-Adviser believes
that such borrowings will benefit the Portfolio, after
taking into account
considerations such as the cost of the borrowing and the
likely investment
returns on the securities purchased with the borrowed
monies. In addition, the
Portfolio may borrow money for temporary or emergency
purposes or payments in an
amount not exceeding 5% of the value of its total assets
(not including the
amount borrowed) provided that the total amount borrowed by
the Portfolio for
any purpose does not exceed 33-1/3% of its total assets. The
Portfolio may also
enter into repurchase agreements, reverse repurchase
agreements and dollar roll
transactions and may make loans of its portfolio securities,
invest in zero-
coupon and other deep discount securities, invest in
commercial paper that is
indexed to certain specific foreign currency exchange rates,
enter into interest
rate, currency and index swaps and may purchase or sell
related caps, floors and
collars and other derivative instruments. See "Special
Investment Techniques and
Risk Considerations" for a description of these types of
securities.
At a Special Meeting of the Shareholders of the
Portfolio held on November
10, 1995, the shareholders approved changing the Portfolio's
subclassification
from a diversified to a non-diversified company under the
Investment Company Act
of 1940, as amended (the "1940 Act").
As a "non-diversified" company under the 1940 Act, the
Portfolio will have
the ability to invest more than 5% of its assets in the
securities of any
issuer. However, the Portfolio intends to comply with
Subchapter M of the
Internal Revenue Code that limits the aggregate value of all
holdings (except
U.S. Government and cash items, as defined in the Code) that
exceed 5% of the
Portfolio's total assets to an aggregate amount of 50% of
such assets. Also,
holdings of a single issuer (with the same exceptions) may
not exceed 25% of the
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18
<PAGE>
Portfolio's total assets. These limits are measured at the
end of each quarter.
Under the Subchapter M limits, "non-diversification" allows
up to 50% of a
Portfolio's total assets to be invested in as few as two
single issuers. In the
event of decline of creditworthiness or default upon the
obligations of one or
more such issuers exceeding 5%, an investment in the
Portfolio will entail
greater risk than in a portfolio having a policy of
"diversification" because a
high percentage of the Portfolio's assets may be invested in
securities of one
or two issuers. Furthermore, a high percentage of
investments among few issuers
may result in a greater degree of fluctuation in the market
value of the assets
of the Portfolio, and consequently a greater degree of
fluctuation of the
Portfolio's net asset value, because the Portfolio will be
more susceptible to
economic, political or regulatory developments affecting
these securities than
would be the case with a portfolio composed of varied
obligations of more
issuers.
Smith Barney High Income Portfolio
Investment Objectives
The primary investment objective of the Smith Barney
High Income Portfolio
is to seek high current income. Capital appreciation is a
secondary objective.
The Portfolio is managed by SBMFM.
Investment Policies
The Smith Barney High Income Portfolio will seek to
achieve its investment
objectives by investing, under normal circumstances, at
least 65% of its assets
in high-yielding corporate debt obligations and preferred
stock. Although the
Portfolio may invest in securities of any maturity, under
current market
conditions the Portfolio intends that its portfolio will
have an average
remaining maturity of between five and ten years. The
Manager may adjust the
Portfolio's average maturity when, based on interest rate
trends and other
market conditions, it deems it appropriate to do so. Up to
35% of the
Portfolio's assets may be invested in common stock or common
stock equivalents,
including convertible securities, options, warrants and
rights. Equity
investments may be made in securities of companies of any
size depending on the
relative attractiveness of the company and the economic
sector in which it
operates. Fixed income securities purchased by the Portfolio
will generally be
rated in the lower rating categories of nationally
recognized securities rating
organizations, as low as C by Moody's or D by S&P, or in non-
rated income
securities that the Manager determines to be of comparable
quality. The
Portfolio will not purchase securities rated lower than B by
both Moody's and
S&P, if, immediately after such purchase, more than 10% of
the Portfolio's total
assets are invested in such securities.
The Portfolio invests significantly in lower rated and
unrated corporate
debt securities, commonly known as "junk bonds." Investments
of this type are
subject to a greater risk of loss of principal and interest.
Purchasers should
carefully assess the risks associated with an investment in
this Portfolio. See
"Lower-Quality and Non-Rated Securities".
The Portfolio may invest in securities rated higher
than Ba by Moody's and
BB by S&P without limitation when the difference in yields
between quality
classifications is relatively narrow.
For temporary defensive purposes when the Manager
anticipates adverse
market conditions, the Portfolio may invest all or a major
portion of its assets
in securities rated higher than Ba by Moody's and BB by S&P.
Investments in
higher rated issues may serve to lessen a decline in net
asset value but may
also affect the amount of current income produced by the
Portfolio, since the
yields from such issues are usually lower than those from
lower rated issues. A
general description of Moody's and S&P's ratings of
corporate bonds is set forth
in Appendix A. The Portfolio may also invest without
limitation in money market
instruments, including
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19
<PAGE>
commercial paper of domestic and foreign corporations,
certificates of deposit,
bankers' acceptances and other obligations of banks,
repurchase agreements and
short-term obligations issued or guaranteed by the United
States government or
its agencies. The yield on these securities will tend to be
lower than the yield
on other securities to be purchased by the Portfolio. To the
extent the
Portfolio's assets are invested for temporary defensive
purposes, they will not
be invested in a manner designed to achieve the Portfolio's
investment
objective.
The Portfolio may lend portfolio securities equal in
value to not more than
20% of its total assets and purchase or sell securities on a
when-issued or
delayed-delivery basis. The Portfolio does not intend to
leverage its
investments although it reserves the right to do so. The
Portfolio may hedge
against possible declines in the value of its investments by
entering into
interest rate futures contracts and related options, swaps
and other financial
instruments.
The Portfolio may invest up to 20% of its assets in the
securities of
foreign issuers that are denominated in currencies other
than the U.S. dollar
and may invest without limitation in securities of foreign
issuers that are
denominated in U.S. dollars.
In connection with the investment objectives and
policies described above,
the Portfolio may, but is not required to, utilize various
investment techniques
to earn income, facilitate portfolio management and mitigate
risk. These
investment techniques utilize interest rate and currency
futures contracts, put
and call options on such futures contracts, currency
exchange transactions,
illiquid securities, securities of unseasoned issuers and
securities of foreign
governments and corporations including those of developing
countries. Any or all
of such investment techniques available to the Manager may
be used at any time
and there is no particular strategy that dictates the use of
one technique
rather than another, since the use of any investment
technique is a function of
numerous variables including market conditions.
MFS Total Return Portfolio
Investment Objectives
The primary investment objective of the MFS Total
Return Portfolio is to
obtain above-average income (compared to a portfolio
entirely invested in equity
securities) consistent with the prudent employment of
capital. While current
income is the primary objective, the Portfolio believes that
there should also
be a reasonable opportunity for growth of capital and
income, since many
securities offering a better than average yield may also
possess growth
potential. Thus, in selecting securities for its portfolio,
the Portfolio
considers each of these objectives. Generally, at least 40%
of the Portfolio's
assets are invested in equity securities. The Portfolio is
managed by SBMFM;
Massachusetts Financial Services Company serves as the
Portfolio's Sub-Adviser.
Investment Policies
The MFS Total Return Portfolio's policy is to invest in
a broad list of
securities, including short-term obligations. The list may
be diversified not
only by companies and industries, but also by type of
security. Fixed income
securities and equity securities (which include: common and
preferred stocks;
securities such as bonds, warrants or rights that are
convertible into stock;
and depository receipts for those securities) may be held by
the Portfolio. Some
fixed income securities may also have a call on common stock
by means of a
conversion privilege or attached warrants. The Portfolio may
vary the percentage
of assets invested in any one type of security in accordance
with the Sub-
Adviser's interpretation of economic and money market
conditions, fiscal and
monetary policy and underlying security values. The
Portfolio's debt investments
may consist of both "investment grade" securities (rated Baa
or better by
Moody's or BBB or better by S&P or Fitch Investors
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20
<PAGE>
Service, Inc. ("Fitch")) and securities that are unrated or
are in the lower
rating categories (rated Ba or lower by Moody's or BB or
lower by S&P or Fitch)
(commonly known as "junk bonds") including up to 20% of its
assets in
nonconvertible fixed income securities that are in these
lower rating categories
and comparable unrated securities. See "Lower-Quality and
Non-Rated
Securities"). Generally, most of the Portfolio's long-term
debt investments will
consist of "investment grade" securities. See Appendix A to
this Prospectus for
a description of these ratings. It is not the Portfolio's
policy to rely
exclusively on ratings issued by established credit rating
agencies but rather
to supplement such ratings with the Sub-Adviser's own
independent and ongoing
review of credit quality.
The Portfolio invests significantly in lower-rated and
unrated corporate
debt securities, commonly known as "junk bonds." Investments
of this type are
subject to a greater risk of loss of principal and interest.
Purchasers should
carefully assess the risks associated with an investment in
this Portfolio. See
"Lower-Quality and Non-Rated Securities".
Up to 20% of the Portfolio's total assets may be
invested in foreign
securities. The Portfolio may also invest in American
Depository Receipts. The
Portfolio may also invest in U.S. Government securities,
mortgage pass-through
securities, corporate asset-backed securities, zero-coupon
bonds, deferred
interest bonds and payment-in-kind bonds. In addition, the
Portfolio may enter
into repurchase agreements and mortgage dollar roll
transactions, may lend its
portfolio securities, purchase securities on a when-issued
or forward delivery
basis, enter into swap transactions and invest in indexed
securities and loan
participations. The Portfolio may invest up to 15% of its
net assets in illiquid
securities and may also invest in restricted securities,
including Rule 144A
Securities. Finally, the Portfolio may engage in various
options and futures
transactions including options on securities, options on
stock indexes, options
on foreign currencies, stock index and foreign currency
futures contracts,
options on futures contracts, forward foreign currency
exchange contracts and
yield curve options. See "Special Investment Techniques and
Risk Considerations"
for additional information about these types of securities.
In addition, when the Sub-Adviser believes that
investing for defensive
purposes is appropriate, such as during periods of unusual
or unfavorable market
or economic conditions, or in order to meet anticipated
redemption requests, up
to 100% of the Portfolio's assets may be temporarily
invested in cash (including
foreign currency) or cash equivalents including, but not
limited to, obligations
of banks (including certificates of deposit, bankers'
acceptances and repurchase
agreements) with assets of $1 billion or more, commercial
paper, short-term
notes, obligations issued or guaranteed by the U.S. or any
foreign government or
any of their agencies, authorities or instrumentalities and
repurchase
agreements.
Smith Barney Money Market Portfolio
Investment Objectives
The investment objectives of the Smith Barney Money
Market Portfolio are
maximum current income and preservation of capital. The
Portfolio is managed by
SBMFM.
Investment Policies
The Smith Barney Money Market Portfolio seeks to
achieve its objectives by
investing in bank obligations and high quality commercial
paper, corporate
obligations and municipal obligations, in addition to U.S.
Government securities
and related repurchase agreements. Shares of the Portfolio
are not insured or
guaranteed by the U.S. Government. The Portfolio has adopted
certain investment
policies to assure that, to the extent reasonably
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21
<PAGE>
possible, the Portfolio's price per share will not change
from $1.00, although
no assurance can be given that this goal will be achieved on
a continuous basis.
In order to minimize fluctuations in market price the
Portfolio will not
purchase a security with a remaining maturity of greater
than 13 months (or that
is deemed to have a remaining maturity of greater than 13
months) or maintain a
dollar-weighted average portfolio maturity in excess of 90
days (securities used
as collateral for repurchase agreements are not subject to
these restrictions).
The Portfolio's investments will be limited to U.S. dollar-
denominated
instruments that its Board of Directors determines present
minimal credit risks
and which are "Eligible Securities" at the time of
acquisition by the Portfolio.
The term Eligible Securities includes securities rated by
the "Requisite NRSROs"
in one of the two highest short-term rating categories,
securities of issuers
that have received such ratings with respect to other short-
term debt securities
and comparable unrated securities. "Requisite NRSROs" means
(a) any two
nationally recognized statistical rating organizations
("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. The NRSROs
currently designated as
such by the Securities and Exchange Commission (the "SEC")
are S&P, Moody's,
Fitch Investors Services, Inc., Duff and Phelps Inc., IBCA
Limited and its
affiliate, IBCA, Inc. and Thomson BankWatch. See Appendix A
for a discussion of
the ratings categories of the NRSROs.
The Portfolio may enter into repurchase agreements
collateralized by U.S.
Government securities with any broker/dealer or other
financial institution that
is deemed creditworthy by the Manager, under guidelines
approved by the Fund's
Board of Directors. The Portfolio will not enter into a
repurchase agreement on
behalf of the Portfolio if, as a result thereof, more than
10% of the
Portfolio's net assets (taken at current value) at that time
would be subject to
repurchase agreements maturing in more than seven days.
The following are also permitted investments for the
Portfolio:
High Quality Commercial Paper. The Portfolio's purchase
of commercial paper
is restricted to direct obligations of issuers that at the
time of purchase are
Eligible Securities that are rated by at least one NRSRO in
the highest category
for short-term debt securities or comparable unrated
securities. The Portfolio
may invest without limit in the commercial paper of foreign
issuers.
High Quality Corporate Obligations. Obligations of
corporations that are:
(1) rated AA or better by S&P or Aa or better by Moody's or
(2) issued by an
issuer that has a class of short-term debt obligations that
are comparable in
priority and security with the obligation and that have been
rated in one of the
two highest rating categories for short-term debt
obligations. The Portfolio
will only invest in corporate obligations with remaining
maturities of 13 months
or less.
Bank Obligations. Obligations (including certificates
of deposit, bankers'
acceptances and fixed time deposits) and securities backed
by letters of credit
of U.S. banks or other U.S. financial institutions that are
members of the
Federal Reserve System or the Federal Deposit Insurance
Corporation ("FDIC")
(including obligations of foreign branches of such members)
if either: (a) the
principal amount of the obligation is insured in full by the
FDIC, or (b) the
issuer of such obligation has capital, surplus and undivided
profits in excess
of $100 million or total assets of $1 billion (as reported
in its most recently
published financial statements prior to the date of
investment). Under current
FDIC regulations, the maximum insurance payable as to any
one certificate of
deposit is $100,000; therefore, certificates of deposit in
denominations greater
than $100,000 that are purchased by the Smith Barney Money
Market Portfolio will
not be fully insured. The Portfolio currently intends to
limit its investment in
fixed time deposits with a maturity of from two business to
seven calendar days
to up to 5% of its net assets and will invest in such time
deposits only if,
when combined with other illiquid assets of the Portfolio,
not more than 10% of
its assets would be invested in all such instruments.
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22
<PAGE>
The Portfolio may also invest in securities of foreign
branches of U.S. banks.
Such investments involve considerations that are not
ordinarily associated with
investing in domestic certificates of deposit. (See "Foreign
Securities.") The
Portfolio may invest in instruments issued by domestic
banks, including those
issued by their branches outside the United States and
subsidiaries located in
Canada, and instruments issued by foreign banks through
their branches located
in the United States and the United Kingdom. In addition,
the Portfolio may
invest in fixed time deposits of foreign banks issued
through their branches
located in Grand Cayman Island, Nassau, Tokyo and Toronto.
The purchase of obligations of foreign banks will
involve similar
investment and risk considerations that are applicable to
investing in
obligations of foreign branches of U.S. banks. (See "Foreign
Securities.") These
factors will be carefully considered by the Manager in
selecting investments for
the Portfolio.
High Quality Municipal Obligations. Debt obligations of
states, cities,
counties, municipalities, municipal agencies and regional
districts rated SP-1+
or A-1 or AA or better by S&P or MIG 2, VMIG 2, or Prime-1
or Aa or better by
Moody's or, if not rated, are determined by the Sub-Adviser
to be of comparable
quality. At certain times, supply/demand imbalances in the
tax-exempt market
cause municipal obligations to yield more than taxable
obligations of equivalent
credit quality and maturity length. The purchase of these
securities could
enhance the Portfolio's yield. The Portfolio will not invest
more than 10% of
its total assets in municipal obligations.
The Portfolio may, to a limited degree, engage in short-
term trading to
attempt to take advantage of short-term market variations,
or may dispose of the
portfolio security prior to its maturity if it believes such
disposition
advisable or it needs to generate cash to satisfy
redemptions. In such cases,
the Portfolio may realize a gain or loss.
As a matter of fundamental policy, the Portfolio may
borrow money from
banks for temporary purposes but only in an amount up to 10%
of the value of its
total assets and may pledge its assets in an amount up to
10% of the value of
its total assets only to secure such borrowings. The
Portfolio will borrow money
only to accommodate requests for the redemption of shares
while effecting an
orderly liquidation of portfolio securities or to clear
securities transactions
and not for leveraging purposes. The Portfolio may also lend
its portfolio
securities to brokers, dealers and other financial
organizations. Such loans, if
and when made, may not exceed 20% of the Portfolio's total
assets, taken at
value.
Notwithstanding any of the foregoing investment
restrictions, the Smith
Barney Money Market Portfolio may invest up to 100% of its
assets in U.S.
Government securities.
SPECIAL INVESTMENT TECHNIQUES AND RISK
CONSIDERATIONS
============================================================
====================
Foreign Securities. Each of the Portfolios may purchase
securities issued
by foreign governments, corporations or banks. The Smith
Barney Money Market
Portfolio may also purchase securities of foreign branches
of U.S. banks and of
domestic and foreign branches of foreign banks. Investments
in foreign
securities involve risks that are different in some respects
from investments in
securities of U.S. issuers, such as the risk of fluctuations
in the value of the
currencies in which they are denominated, the risk of
adverse political, social,
economic and diplomatic developments, the possible
imposition of exchange
controls or other foreign governmental laws or restrictions
and, with respect to
certain countries, the possibility of expropriation of
assets, nationalization
or confiscatory taxation or limitations on the removal of
funds or other assets
of the Portfolios. Securities of some foreign companies and
banks are less
liquid and more volatile than securities
- ------------------------------------------------------------
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23
<PAGE>
of comparable domestic companies and banks. Non-U.S.
securities markets, while
growing in volume have, for the most part, substantially
less volume than U.S.
markets, and there is generally less government supervision
and regulation of
exchanges, brokers and issuers than there is in the U.S.
Dividend and interest
income from non-U.S. securities will generally be subject to
withholding taxes
by the country in which the issuer is located and may not be
recoverable by the
Portfolio or the investors. There also may be less publicly
available
information about foreign issuers than domestic issuers, and
foreign issuers
generally are not subject to the uniform accounting,
auditing and financial
reporting standards, practices and requirements applicable
to domestic issuers.
Delays may be encountered in settling securities
transactions in certain foreign
markets, and the Portfolios will incur costs in converting
foreign currencies
into U.S. dollars. Custody and transaction charges are
generally higher for
foreign securities. There is also a risk of the adoption of
government
regulations that might adversely affect the payment of
principal and interest on
securities held by a Portfolio. In addition, a Portfolio may
encounter greater
difficulties in invoking legal processes abroad than would
be the case in the
U.S. Finally, changes in foreign currency exchange rates
will, to the extent a
Portfolio does not adequately hedge against such
fluctuations, affect the value
of securities in its portfolio and the unrealized
appreciation or depreciation
of investments so far as U.S. investors are concerned.
Securities of Emerging Markets. Because of the special
risks associated
with investing in emerging markets, an investment in the
Putnam Diversified
Income, GT Global Strategic Income or Smith Barney High
Income Portfolios,
should be considered speculative. Investors are strongly
advised to consider
carefully the special risks involved in emerging markets,
which are in addition
to the usual risks of investing in developed foreign markets
around the world.
Investing in emerging markets involves risks relating
to potential
political and economic instability within such markets and
the risks of
expropriation, nationalization, confiscation of assets and
property, the
imposition of restrictions on foreign investments and the
repatriation of
capital invested. In Eastern Europe, for example, upon the
accession to power of
Communist regimes in the past, the governments of a number
of Eastern European
countries expropriated a large amount of property. The
claims of many property
owners against those governments were never finally settled.
There can be no
assurance that any investments that a Portfolio might make
in an emerging market
would not be expropriated, nationalized or otherwise
confiscated at some time in
the future. In the event of such expropriation,
nationalization or other
confiscation in any emerging market, each Portfolio could
lose its entire
investment in that market. Many emerging market countries
have also experienced
substantial, and in some periods extremely high, rates of
inflation for many
years. Inflation and rapid fluctuations in inflation rates
have had and may
continue to have negative effects on the economics and
securities of certain
emerging market countries.
Economies in emerging markets generally are dependent
heavily upon
international trade and, accordingly, have been and may
continue to be affected
adversely by trade barriers, exchange controls, managed
adjustments in relative
currency values and other protectionist measures imposed or
negotiated by the
countries with which they trade. These economies also have
been and may continue
to be affected adversely by economic conditions in the
countries in which they
trade.
The securities markets of emerging countries are
substantially smaller,
less developed, less liquid and more volatile than the
securities markets of the
United States and other more developed countries. Disclosure
and regulatory
standards in many respects are less stringent than in the
United States and
other major markets. There also may be a lower level of
monitoring and
regulation of emerging securities markets and the activities
of investors in
such markets, and enforcement of existing regulations has
been extremely
limited.
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24
<PAGE>
In addition, brokerage commissions, custodial services
and other costs
relating to investment in foreign markets generally are more
expensive than in
the United States, particularly with respect to emerging
markets. Such markets
have different settlement and clearance procedures. In
certain markets there
have been times when settlements have been unable to keep
pace with the volume
of securities transactions, making it difficult to conduct
such transactions.
The inability of a Portfolio to make intended securities
purchases due to
settlement problems could cause it to miss attractive
investment opportunities.
Inability to dispose of a portfolio security caused by
settlement problems could
result either in losses to a Portfolio due to subsequent
declines in value of
the portfolio security or, if the Portfolio has entered into
a contract to sell
the security, could result in possible liability to the
purchaser.
The risk also exists that an emergency situation may
arise in one or more
emerging markets as a result of which trading of securities
may cease or may be
substantially curtailed and prices for the portfolio
securities in such markets
may not be readily available. Section 22(e) of the
Investment Company Act of
1940, as amended (the "1940 Act") permits a registered
investment company to
suspend redemption of its shares for any period during which
an emergency
exists, as determined by the SEC. Accordingly, if a
Portfolio believes that
appropriate circumstances warrant, it will promptly apply to
the SEC for a
determination that an emergency exists within the meaning of
Section 22(a) of
the 1940 Act. During the period commencing from a
Portfolio's identification of
such conditions until the date of SEC action, the portfolio
securities in the
affected markets will be valued at fair value as determined
in good faith by or
under the direction of the Board of Directors.
Sovereign Debt. The TBC Managed Income, the Putnam
Diversified Income and
the GT Global Strategic Income Portfolios may each invest in
sovereign debt
securities of emerging market governments including Brady
Bonds. Investments in
such securities involve special risks. The issuer of the
debt or the
governmental authorities that control the repayment of the
debt may be unable or
unwilling to repay principal or interest when due in
accordance with the terms
of such debt. Periods of economic uncertainty may result in
the volatility of
market prices of sovereign debt, and in turn a Portfolio's
net asset value, to a
greater extent than the volatility inherent in domestic
fixed income securities.
A sovereign debtor's willingness or ability to repay
principal and pay
interest in a timely manner may be affected by, among other
factors, its cash
flow situation, the extent of its foreign reserves, the
availability of
sufficient foreign exchange on the date a payment is due,
the relative size of
the debt service burden to the economy as a whole, the
sovereign debtor's policy
toward principal international lenders and the political
constraints to which a
sovereign debtor may be subject. Emerging market governments
could default on
their sovereign debt. Such sovereign debtors also may be
dependent on expected
disbursements from foreign governments, multilateral
agencies and other entities
abroad to reduce principal and interest arrearages on their
debt. The commitment
on the part of these governments, agencies and others to
make such disbursements
may be conditioned on a sovereign debtor's implementation of
economic reforms
and/or economic performance and the timely service of such
debtor's obligations.
Failure to implement such reforms, achieve such levels of
economic performance
or repay principal or interest when due, may result in the
cancellation of such
third parties' commitments to lend funds to the sovereign
debtor, which may
further impair such debtor's ability or willingness to
timely service its debts.
The occurrence of political, social or diplomatic
changes in one or more of
the countries issuing sovereign debt could adversely affect
a Portfolio's
investments. Emerging markets are faced with social and
political issues and
some of them have experienced high rates of inflation in
recent years and have
extensive internal debt. Among other effects, high inflation
and internal debt
service requirements may adversely affect the cost and
availability of future
domestic sovereign borrowing to finance governmental
programs, and may have
other adverse social, political and economic consequences.
Political changes or
a deterioration of a country's
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25
<PAGE>
domestic economy or balance of trade may affect the
willingness of countries to
service their sovereign debt. Although management intends to
manage each
Portfolio in a manner that will minimize the exposure to
such risks, there can
be no assurance that adverse political changes will not
cause a Portfolio to
suffer a loss of interest or principal on any of its
holdings.
In recent years, some of the emerging market countries
in which each
Portfolio expects to invest have encountered difficulties in
servicing their
sovereign debt obligations. Some of these countries have
withheld payments of
interest and/or principal of sovereign debt. These
difficulties have also led to
agreements to restructure external debt obligations -- in
particular, commercial
bank loans, typically by rescheduling principal payments,
reducing interest
rates and extending new credits to finance interest payments
on existing debt.
In the future, holders of emerging market sovereign debt
securities may be
requested to participate in similar rescheduling of such
debt. Certain emerging
market countries are among the largest debtors to commercial
banks and foreign
governments. Currently, Brazil, Mexico and Argentina are
among the largest
debtors among developing countries. At times certain
emerging market countries
have declared moratoria on the payment of principal and
interest on external
debt; such a moratorium is currently in effect in certain
emerging market
countries. There is no bankruptcy proceeding by which a
creditor may collect in
whole or in part sovereign debt on which an emerging market
government has
defaulted.
The ability of emerging market governments to make
timely payments on their
sovereign debt securities is likely to be influenced
strongly by a country's
balance of trade and its access to trade and other
international credits. A
country whose exports are concentrated in a few commodities
could be vulnerable
to a decline in the international prices of one or more of
such commodities.
Increased protectionism on the part of a country's trading
partners could also
adversely affect its exports. Such events could diminish a
country's trade
account surplus, if any. To the extent that a country
receives payments for its
exports in currencies other than hard currencies, its
ability to make hard
currency payments could be affected.
Investors should also be aware that certain sovereign
debt instruments in
which the Portfolios may invest involve great risk. As noted
above, sovereign
debt obligations issued by emerging market governments
generally are deemed to
be the equivalent in terms of quality to securities rated
below investment grade
by Moody's and S&P. Such securities are regarded as
predominantly speculative
with respect to the issuer's capacity to pay interest and
repay principal in
accordance with the terms of the obligations and involve
major risk exposure to
adverse conditions. Some of such securities, with respect to
which the issuer
currently may not be paying interest or may be in payment
default, may be
comparable to securities rated D by S&P or C by Moody's. The
Portfolios may have
difficulty disposing of and valuing certain sovereign debt
obligations because
there may be a limited trading market for such securities.
Because there is no
liquid secondary market for many of these securities, each
Portfolio anticipates
that such securities could be sold only to a limited number
of dealers or
institutional investors.
Brady Bonds. The Putnam Diversified Income and the GT
Global Strategic
Income Portfolios may each invest in "Brady Bonds," which
are debt
restructurings that provide for the exchange of cash and
loans for newly issued
bonds. Brady Bonds have been issued by the governments of
Argentina, Brazil,
Costa Rica, Ecuador, Mexico, Nigeria, Poland, Uruguay,
Venezuela and the
Philippines. In addition, Peru and Panama have announced
intentions to issue
Brady Bonds. Approximately $139 billion in principal amount
of Brady Bonds has
been issued as of the date of this Prospectus, the largest
proportion having
been issued by Mexico and Venezuela. Brady Bonds issued by
Mexico and Venezuela
currently are rated below investment grade. As of the date
of this Prospectus,
the Portfolios are not aware of the occurrence of any
payment defaults on Brady
Bonds. Investors should recognize, however, that Brady Bonds
have been issued
only recently and, accordingly, do not have a long payment
history. Brady Bonds
may be collateralized or uncollateralized, are issued in
various currencies
(primarily the U.S. dollar) and are actively traded in the
secondary market for
Latin American debt.
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26
<PAGE>
The Salomon Brothers Brady Bond Index provides a benchmark
that can be used to
compare returns of emerging market Brady Bonds with returns
in other bond
markets, e.g., the U.S. bond market.
The Portfolios may invest in either collateralized or
uncollateralized
Brady Bonds. U.S. dollar-denominated, collateralized Brady
Bonds which may be
fixed rate par bonds or floating rate discount bonds, are
collateralized in full
as to principal by U.S. Treasury zero coupon bonds having
the same maturity as
the bonds. Interest payments on such bonds generally are
collateralized by cash
or securities in an amount that, in the case of fixed rate
bonds, is equal to at
least one year of rolling interest payments or, in the case
of floating rate
bonds, initially is equal to at least one year's rolling
interest payments based
on the applicable interest rate at that time and is adjusted
at regular
intervals thereafter.
Loan Participations and Assignments. The Putnam
Diversified Income, the GT
Global Strategic Income Portfolio and the MFS Total Return
Portfolio may each
invest a portion of its assets in loan participations
("Participations"). By
purchasing a Participation, a Portfolio acquires some or all
of the interest of
a bank or other lending institution in a loan to a corporate
or government
borrower. The Participations typically will result in the
Portfolio having a
contractual relationship only with the lender not the
borrower. A Portfolio will
have the right to receive payments of principal, interest
and any fees to which
it is entitled only from the lender selling the
Participation and only upon
receipt by the lender of the payments from the borrower. In
connection with
purchasing Participations, a Portfolio generally will have
no right to enforce
compliance by the borrower with the terms of the loan
agreement relating to the
loan, nor any rights of set-off against the borrower, and a
Portfolio may not
directly benefit from any collateral supporting the loan in
which it has
purchased the Participation. As a result, a Portfolio will
assume the credit
risk of both the borrower and the lender that is selling the
Participation. In
the event of the insolvency of the lender selling a
Participation, a Portfolio
may be treated as a general creditor of the lender and may
not benefit from any
set-off between the lender and the borrower. Each Portfolio
will acquire
Participations only if the lender interpositioned between
the Portfolio and the
borrower is determined by management to be creditworthy.
The Putnam Diversified Income and the GT Global
Strategic Income Portfolio
may also invest in assignments of portions of loans from
third parties
("Assignments"). When it purchases Assignments from lenders,
the Portfolio will
acquire direct rights against the borrower on the loan.
However, since
Assignments are arranged through private negotiations
between potential
assignees and assignors, the rights and obligations acquired
by the Portfolio as
the purchaser of an Assignment may differ from, and be more
limited than, those
held by the assigning lender.
The Portfolios may have difficulty disposing of
Assignments and
Participations. The liquidity of such securities is limited
and, each Portfolio
anticipates that such securities could be sold only to a
limited number of
institutional investors. The lack of a liquid secondary
market could have an
adverse impact on the value of such securities and on each
Portfolio's ability
to dispose of particular Assignments or Participations when
necessary to meet
the Portfolio's liquidity needs or in response to a specific
economic event,
such as a deterioration in the creditworthiness of the
borrower. The lack of a
liquid secondary market for Assignments and Participations
also may make it more
difficult for the Portfolio to assign a value to those
securities for purposes
of valuing the Portfolio's portfolio and calculating its net
asset value.
Lower-Quality and Non-Rated Securities. The Alliance
Growth, TBC Managed
Income, Putnam Diversified Income, GT Global Strategic
Income, Smith Barney High
Income and MFS Total Return Portfolios may each invest in
lower-quality
securities. Investments in lower-rated securities are
subject to special risks,
including a greater risk of loss of principal and non-
payment of interest. An
investor should carefully consider the following factors
before investing in
these Portfolios.
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27
<PAGE>
Generally, lower-quality securities offer a higher
return potential than
higher-rated securities but involve greater volatility of
price and greater risk
of loss of income and principal, including the possibility
of default or
bankruptcy of the issuers of such securities. Lower-quality
securities and
comparable non-rated securities will likely have large
uncertainties or major
risk exposure 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 occurrence
of adverse
conditions and uncertainties would likely reduce the value
of securities held by
a Portfolio, with a commensurate effect on the value of the
Portfolio's shares.
The markets in which lower-quality securities or
comparable non-rated
securities are traded generally are more limited than those
in which higher-
quality 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 restrict the ability of a Portfolio to
obtain accurate
market quotations for purposes of valuing securities and
calculating net asset
value or to sell securities at their fair value. The public
market for lower-
quality securities and comparable non-rated securities is
relatively new and has
not fully weathered a major economic recession. Any such
economic downturn could
adversely affect the ability of issuers' lower-quality
securities to repay
principal and pay interest thereon.
While the market values of lower-quality securities and
comparable non-
rated securities tend to react less to fluctuations in
interest rate levels than
do those of higher-quality securities, 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,
lower-quality securities and comparable non-rated securities
generally present a
higher degree of credit risk. Issuers of lower-quality
securities and comparable
non-rated 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 an 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
lower-quality
securities and comparable non-rated securities generally are
unsecured and
frequently are subordinated to the prior payment of senior
indebtedness. A
Portfolio may incur additional expenses to the extent that
it is required to
seek recovery upon a default in the payment of principal or
interest on its
portfolio holdings.
Fixed-income securities, including lower-quality
securities and comparable
non-rated securities, frequently have call and buy-back
features that permit
their issuers to call or repurchase the securities from
their holders, such as
the Portfolios. If an issuer exercises these rights during
periods of declining
interest rates, a Portfolio may have to replace the security
with a lower
yielding security, resulting in a decreased return to the
Portfolio.
In general, the ratings of nationally recognized
statistical rating
organizations represent the opinions of these agencies as to
the quality of
securities that they rate. Such ratings, however, are
relative and subjective,
and are not absolute standards of quality and do not
evaluate the market value
risk of the securities. It is possible that an agency might
not change its
rating of a particular issue to reflect subsequent events.
These ratings will be
used by each Portfolio as initial criteria for the selection
of portfolio
securities, but each Portfolio also will rely upon the
independent advice of the
Manager or the Sub-Adviser, as the case may be, to evaluate
potential
investments.
In light of these risks, management will take various
factors into
consideration in evaluating the creditworthiness of an
issue, whether rated or
non-rated. These factors may include, among others, 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.
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Securities Lending. Each Portfolio except the American
Capital Enterprise
Portfolio may seek to increase its net investment income by
lending portfolio
securities to unaffiliated brokers, dealers and other
financial institutions,
provided such loans are callable at any time and are
continuously secured by
cash or U.S. Government securities or other high grade
liquid debt securities
equal to no less than the market value, determined daily, of
the securities
loaned. The risks in lending portfolio securities consist of
possible delay in
receiving additional collateral or in the recovery of the
securities or possible
loss of rights in the collateral should the borrower fail
financially.
Repurchase Agreements. Each Portfolio may on occasion
enter into repurchase
agreements, wherein the seller agrees to repurchase a
security from the
Portfolio at an agreed-upon future date, normally the next
business day. The
resale price is greater than the purchase price, which
reflects the agreed-upon
rate of return for the period the Portfolio holds the
security and which is not
related to the coupon rate on the purchased security. Each
Portfolio requires
continual maintenance of the market value of the collateral
in amounts at least
equal to the resale price, thus risk is limited to the
ability of the seller to
pay the agreed-upon amount on the delivery date; however, if
the seller
defaults, realization upon the collateral by the Portfolio
may be delayed or
limited or the Portfolio might incur a loss if the value of
the collateral
securing the repurchase agreement declines and might incur
disposition costs in
connection with liquidating the collateral. Repurchase
agreements are considered
loans by the Portfolios. The Portfolios will only enter into
repurchase
agreements with broker/dealers or other financial
institutions that are deemed
creditworthy by management, under guidelines approved by the
Board of Directors.
Reverse Repurchase Agreements. The GT Global Strategic
Income Portfolio may
enter into reverse repurchase agreements with the same
parties with whom it may
enter into repurchase agreements. Under a reverse repurchase
agreement, the
Portfolio will sell securities and agree to repurchase them
at a particular
price at a future date. At the time the Portfolio enters
into a reverse
repurchase agreement, it will establish and maintain a
segregated account with
an approved custodian containing cash or liquid high grade
securities that have
a value no less than the repurchase price, including accrued
interest. Reverse
repurchase agreements involve the risk that the market value
of the securities
retained in lieu of sale by the Portfolio may decline below
the price of the
securities the Portfolio has sold but is obliged to
repurchase. In the event the
buyer of securities under a reverse repurchase agreement
files for bankruptcy or
becomes insolvent, such buyer or its trustee or receiver may
receive an
extension of time to determine whether to enforce the
Portfolio's obligation to
repurchase the securities, and the Portfolio's use of the
proceeds of the
reverse repurchase agreements may effectively be restricted
pending such
decision. Reverse repurchase agreements will be treated as
borrowings and will
be considered in the Portfolio's overall borrowing
limitation. The Portfolio may
enter into reverse repurchase agreements, although it does
not currently intend
to do so with respect to more than 5% of its total assets.
Dollar Roll Transactions. The TBC Managed Income, the
Putnam Diversified
Income and the GT Global Strategic Income Portfolios may
each enter into "dollar
rolls", in which a Portfolio sells fixed income securities
for delivery in the
current month and simultaneously contracts to repurchase
substantially similar
(same type, coupon and maturity) securities on a specified
future date. The MFS
Total Return Portfolio may enter into similar transactions
pursuant to which the
Portfolio sells mortgage-backed securities for delivery in
the future (generally
within 30 days). During the roll period, a Portfolio would
forego principal and
interest paid on such securities. The Portfolio would be
compensated by the
difference between the current sales price and the forward
price for the future
purchase, as well as by the interest earned on the cash
proceeds of the initial
sale. Since a Portfolio will receive interest on the
securities in which it
invests the transaction proceeds, such transactions may
involve leverage.
However, since such securities must satisfy the quality
requirements of
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<PAGE>
the Portfolio and will mature on or before the settlement
date on the
transaction, management believes that such transactions do
not present the risks
to the Portfolios that are associated with other types of
leverage. The MFS
Total Return Portfolio will only enter into covered rolls,
where there is an
offsetting cash position or a cash equivalent security
position which matures on
or before the forward settlement date of the dollar roll
transaction. Dollar
roll transactions are considered borrowings by the
Portfolios and will be
subject to each Portfolio's overall borrowing limitation.
Dollar roll
transactions are considered speculative.
When-Issued, Delayed Delivery and Forward Commitment
Securities. The Smith
Barney Income and Growth, Alliance Growth, TBC Managed
Income, Putnam
Diversified Income, GT Global Strategic Income, Smith Barney
High Income and MFS
Total Return Portfolios may each purchase or sell securities
on a when-issued,
delayed delivery or forward commitment basis. Such
transactions arise when
securities are purchased or sold by a Portfolio with payment
and delivery taking
place in the future in order to secure what is considered to
be an advantageous
price and yield to the Portfolio at the time of entering
into the transaction.
Purchasing such securities involves the risk of loss if the
value of the
securities declines prior to settlement date. The sale of
securities for delayed
delivery involves the risk that the prices available in the
market on the
delivery date may be greater than those obtained in the sale
transaction. Each
Portfolio's custodian will maintain, in a segregated account
on behalf of the
Portfolio, cash, U.S. Government securities or other liquid
high-grade debt
obligations having a value equal to or greater than the
Portfolio's purchase
commitments; the custodian will likewise segregate
securities sold on a delayed
basis.
Convertible Securities. Each Portfolio except the Smith
Barney Money Market
Portfolio can invest in convertible securities. Convertible
securities are
fixed-income securities that may be converted at either a
stated price or stated
rate into underlying shares of common stock. Convertible
securities have general
characteristics similar to both fixed-income and equity
securities. Although to
a lesser extent than with fixed-income securities, the
market value of
convertible securities tends to decline as interest rates
increase and,
conversely, tends to increase as interest rates decline. In
addition, because of
the conversion feature, the market value of convertible
securities tends to vary
with fluctuations in the market value of the underlying
common stocks and,
therefore, also will react to variations in the general
market for equity
securities.
Convertible securities are investments which provide
for a stable stream of
income with generally higher yields than common stocks.
There can be no
assurance of current income because the issuers of the
convertible securities
may default on their obligations. Synthetic convertible
securities differ from
convertible securities in certain respects, including that
each component of a
synthetic convertible security has a separate market value
and responds
differently to market fluctuations. Investing in synthetic
convertible
securities involves the risk normally involved in holding
the securities
comprising the synthetic convertible security.
Short Sales Against the Box. The American Capital
Enterprise, the GT Global
Strategic Income, the AIM Capital Appreciation and the Smith
Barney High Income
Portfolios may each make short sales of securities in order
to reduce market
exposure and/or to increase its income if, at all times when
a short position is
open, the Portfolio owns an equal or greater amount of such
securities or owns
preferred stock, debt or warrants convertible or
exchangeable into an equal or
greater number of the shares of the securities sold short.
Short sales of this
kind are referred to as short sales "against the box."
Securities of Unseasoned Issuers. Securities in which
the Smith Barney High
Income Portfolio may invest may lack a significant operating
history and be
dependent on products or services without an established
market share.
Borrowing and Leverage. Each Portfolio may borrow from
banks, on a secured
or unsecured basis. If the Portfolio borrows and uses the
proceeds to make
additional investments, income and appreciation from
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30
<PAGE>
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". Only
the Smith Barney
International Equity, Smith Barney Pacific Basin and GT
Global Strategic Income
Portfolios will utilize leverage.
In addition, the AIM Capital Appreciation Portfolio
may, but has no current
intention to, engage in leverage. Should the Portfolio
engage in leverage,
immediately after such borrowing the value of its assets,
including the amount
borrowed, less liabilities, must be equal to at least 300%
of the amount
borrowed, plus all outstanding borrowings.
Leverage creates an opportunity for increased returns
to shareholders of a
Portfolio but, at the same time, creates special risk
considerations. For
example, leverage may exaggerate changes in the net asset
value of a Portfolio's
shares and in the Portfolio's yield. Although the principal
or stated value of
such borrowings will be fixed, the portfolio assets may
change in value during
the time the borrowing is outstanding. Leverage will create
interest or dividend
expenses for a 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 exceeds the interest and other charges 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 a Portfolio.
Illiquid and Restricted Securities. Each Portfolio may
purchase securities
that are not registered ("restricted securities") under the
Securities Act of
1933, as amended (the "1933 Act"), but can be offered and
sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act
("Rule 144A"). Each
Portfolio may also invest a portion of its assets in
illiquid investments, which
include repurchase agreements maturing in more than seven
days and restricted
securities. The Board of Directors may determine, based upon
a continuing review
of the trading markets for the specific restricted security,
that such
restricted securities are liquid. The Board of Directors has
adopted guidelines
and delegated to management the daily function of
determining and monitoring
liquidity of restricted securities available pursuant to
Rule 144A. The Board,
however, retains sufficient oversight and is ultimately
responsible for the
determinations. Since it is not possible to predict with
assurance exactly how
the market for Rule 144A restricted securities will develop,
the Board will
carefully monitor each Portfolio's investments in these
securities, focusing on
such important factors, among others, as valuation,
liquidity and availability
of information. Investments in restricted securities could
have the effect of
increasing the level of illiquidity in a Portfolio to the
extent that qualified
institutional buyers become for a time uninterested in
purchasing these
restricted securities. The Portfolios may also purchase
restricted securities
that are not registered under Rule 144A.
Zero-Coupon Bonds, Deferred Interest Bonds and Payment-
in-Kind Bonds. The
Alliance Growth, the TBC Managed Income, Putnam Diversified
Income, GT Global
Strategic Income and MFS Total Return Portfolios may each
invest in zero-coupon
and payment-in-kind bonds. The MFS Total Return and Putnam
Diversified Income
Portfolios also may each invest in deferred interest bonds.
Zero-coupon and
deferred interest bonds are issued at a significant discount
from their
principal amount. While zero-coupon bonds do not require the
periodic payment of
interest, deferred interest bonds provide for a period of
delay before the
regular payment of interest begins. Payment-in-kind bonds
allow the issuer, at
its option, to make current interest payments on the bonds
either in cash or in
additional bonds. The value of zero-coupon bonds is subject
to greater
fluctuation in market value in response to changes in market
interest rates than
bonds of
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31
<PAGE>
comparable maturity which pay interest currently. Both zero-
coupon and payment-
in-kind bonds allow an issuer to avoid the need to generate
cash to meet current
interest payments. Accordingly, such bonds may involve
greater credit risks than
bonds that pay interest currently. Even though such bonds do
not pay current
interest in cash, the Portfolio is nonetheless required to
accrue interest
income on such investments and to distribute such amounts at
least annually to
shareholders. Accordingly, for a Portfolio to continue to
qualify for tax
treatment as a regulated investment company and to avoid
certain excise taxes,
the Portfolio may be required to distribute as a dividend an
amount that is
greater than the total amount of cash it actually receives.
These distributions
must be made from the Portfolio's cash assets or, if
necessary, from the
proceeds of sales of portfolio securities. The Portfolio
will not be able to
purchase additional income-producing securities with cash
used to make such
distributions and its current income ultimately may be
reduced as a result.
Futures, Options and Currency Transactions. Consistent
with its investment
objective and policies, each of the Alliance Growth, AIM
Capital Appreciation,
American Capital Enterprise, Smith Barney International
Equity, Smith Barney
Pacific Basin, Putnam Diversified Income, GT Global
Strategic Income, Smith
Barney High Income and MFS Total Return Portfolios may enter
into contracts for
the purchase or sale for future delivery of fixed-income
securities, foreign
currencies or contracts based on financial indices including
interest rates or
an index of U.S. Government or foreign government securities
or equity or fixed-
income securities ("futures contracts"), and may buy and
write put and call
options to buy or sell futures contracts ("options on
futures contracts"). When
a Portfolio buys or sells a futures contract it incurs a
contractual obligation
to receive or deliver the underlying instrument (or a cash
payment based on the
difference between the underlying instrument's closing price
and the price at
which the contract was entered into) at a specified price on
a specified date.
An option on a futures contract gives a Portfolio the right
(but not the
obligation) to buy or sell a futures contract at a specified
price on or before
a specified date.
The Portfolios will not enter into transactions in
futures contracts and
options on futures contracts for speculation and will not
enter into such
transactions other than to hedge against potential changes
in interest or
currency exchange rates or the price of a security or a
securities index which
might correlate with or otherwise adversely affect either
the value of the
Portfolio's securities or the prices of securities which the
Portfolio is
considering buying at a later date. The Smith Barney
International Equity, Smith
Barney Pacific Basin, MFS Total Return and Smith Barney High
Income Portfolios,
however, may enter into futures contracts and options on
futures contracts for
non-hedging purposes, provided that the aggregate initial
margin and premiums on
such non-hedging positions does not exceed 5% of the
liquidation value of a
Portfolio's assets.
Although futures contracts by their terms call for the
delivery or
acquisition of the underlying commodities or a cash payment
based on the value
of the underlying commodities, in most cases the contractual
obligation is
offset before the delivery date of the contract by buying,
in the case of a
contractual obligation to sell, or selling, in the case of a
contractual
obligation to buy, an identical futures contract on a
commodities exchange. Such
a transaction cancels the obligation to make or take
delivery of the
commodities. Since all transactions in the futures market
are made through a
member of, and are offset or fulfilled through a
clearinghouse associated with,
the exchange on which the contracts are traded, a Portfolio
will incur brokerage
fees when it buys or sells futures contracts.
A Portfolio will not (1) enter into any futures
contracts or options on
futures contracts if immediately thereafter the aggregate
margin deposits on all
outstanding futures contracts positions held by the
Portfolio and premiums paid
on outstanding options on futures contracts, after taking
into account
unrealized profits and losses, would exceed 5% of the market
value of the total
assets of the Portfolio or (2) enter into any futures
contracts or options on
futures contracts if the aggregate amount of the Portfolio's
commitments under
outstanding futures contracts positions and options on
futures contracts written
by the Portfolio would exceed
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<PAGE>
the market value of the total assets of the Portfolio. See
the Statement of
Additional Information for further discussion of the use,
risks and costs
associated with futures contracts and options on futures
contracts.
Forward Currency Transactions. The Alliance Growth,
Smith Barney
International Equity, Smith Barney Pacific Basin, Putnam
Diversified Income, GT
Global Strategic Income, Smith Barney High Income and MFS
Total Return
Portfolios may each enter into forward foreign currency
exchange contracts
("forward currency contracts") to attempt to minimize the
risk to the Portfolio
from adverse changes in the relationship between the U.S.
dollar and other
currencies. A forward currency contract is an obligation to
buy or sell an
amount of a specified currency for an agreed price (which
may be in U.S. dollars
or a foreign currency) at a future date which is
individually negotiated between
currency traders and their customers. A Portfolio may enter
into a forward
currency contract, for example, when it enters into a
contract to buy or sell a
security denominated in a foreign currency in order to "lock
in" the U.S.
dollar price of the security ("transaction hedge").
Additionally, when a
Portfolio believes that a foreign currency in which the
portfolio securities are
denominated may suffer a substantial decline against the
U.S. dollar, the
Portfolio may enter into a forward currency contract to sell
an amount of that
foreign currency approximating the value of some or all of
the portfolio
securities denominated in that currency, or, when the
Portfolio believes that
the U.S. dollar may suffer a substantial decline against a
foreign currency, the
Portfolio may enter into a forward currency contract to buy
that foreign
currency for a fixed U.S. dollar amount ("position hedge").
A Portfolio also
may enter into a forward currency contract with respect to a
currency where the
Portfolio is considering the purchase of investments
denominated in that
currency but has not yet done so ("anticipatory hedge"). In
any of these
circumstances the Portfolio may, alternatively, enter into a
forward currency
contract with respect to a different foreign currency when
the Portfolio
believes that the U.S. dollar value of that currency will
correlate with the
U.S. dollar value of the currency in which portfolio
securities of, or being
considered for purchase by, the Portfolio are denominated
("cross hedge"). A
Portfolio may invest in forward currency contracts with
stated contract values
of up to the value of the Portfolio's assets. The MFS Total
Return Portfolio may
also enter into forward currency contracts for non-hedging
purposes, subject to
applicable law.
A Portfolio also may enter into forward contracts to
buy or sell at a later
date instruments in which the Portfolio may invest directly
or on financial
indices based on those instruments. The market for those
types of forward
contracts is developing and it is not currently possible to
identify instruments
on which forward contracts might be created in the future.
See the Statement of
Additional Information for further discussion of the use,
risks and costs of
forward contracts.
A Portfolio may also enter into currency swaps where
each party exchanges
one currency for another on a particular date and agrees to
reverse the exchange
on a later date at a specific exchange rate.
Currency Risks. The Portfolios that invest
substantially in securities
denominated in currencies other than the U.S. dollar, or
that hold foreign
currencies, will be affected favorably or unfavorably by
exchange control
regulations or changes in the exchange rates between such
currencies and the
U.S. dollar. Changes in currency exchange rates will
influence the value of each
Portfolio's shares and also may affect the value of
dividends and interest
earned by the Portfolios and gains and losses realized by
the Portfolios.
Currencies generally are evaluated on the basis of
fundamental economic criteria
(e.g., relative inflation and interest rate levels and
trends, growth rate
forecasts, balance of payments status and economic policies)
as well as
technical and political data. The exchange rates between the
U.S. dollar and
other currencies are determined by supply and demand in the
currency exchange
markets, the international balance of payments, governmental
intervention,
speculation and other economic and political conditions. If
the currency in
which a security is denominated appreciates against the U.S.
dollar, the dollar
value of the security will increase. Conversely, a decline
in the exchange rate
of the currency would adversely affect the value of the
security expressed in
U.S. dollars.
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<PAGE>
Options on Securities and on Foreign Currencies. In an
effort to reduce
fluctuations in net asset value or to increase its portfolio
return, the
Portfolios may write covered put and call options and may
buy put and call
options and warrants on securities traded on U.S. and
foreign securities
exchanges. The AIM Capital Appreciation Portfolio may write
(sell) only covered
call options. The purpose of such transactions is to hedge
against changes in
the market value of portfolio securities caused by
fluctuating interest rates,
fluctuating currency exchange rates and changing market
conditions, and to close
out or offset existing positions in such options or futures
contracts as
described below. A Portfolio may write and buy options on
the same types of
securities that the Portfolio could buy directly and may buy
options on
financial indices as described above with respect to futures
contracts. There
are no specific limitations on the writing and buying
options on securities.
A put option gives the holder the right, upon payment
of a premium, to
deliver a specified amount of a security to the writer of
the option on or
before a fixed date at a predetermined price. A call option
gives the holder the
right, upon payment of a premium, to call upon the writer to
deliver a specified
amount of a security on or before a fixed date at a
predetermined price.
A call option is "covered" if a Portfolio owns the
underlying security
covered by the call. If a "covered" call option expires
unexercised, the writer
realizes a gain in the amount of the premium received. If
the covered call
option is exercised, the writer realizes either a gain or
loss from the sale or
purchase of the underlying security with the proceeds to the
writer being
increased by the amount of the premium. Prior to its
expiration, a call option
may be closed out by means of a purchase of an identical
option. Any gain or
loss from such transaction will depend on whether the amount
paid is more or
less than the premium received for the option plus related
transaction costs. A
Portfolio also may write a covered call option to cross-
hedge if the Portfolio
does not own the underlying security. The option is designed
to provide a hedge
against a decline in value in another security which the
Portfolio owns or has
the right to acquire.
In purchasing an option, the Portfolio would be in a
position to realize a
gain if, during the option period, the price of the
underlying security
increased (in the case of a call) or decreased (in the case
of a put) by an
amount in excess of the premium paid and would realize a
loss if the price of
the underlying security did not increase (in the case of a
call) or decrease (in
the case of a put) during the period by more than the amount
of the premium. If
a put or call option bought by the Portfolio were permitted
to expire without
being sold or exercised, the Portfolio would lose the amount
of the premium.
Although they entitle the holder to buy equity
securities, warrants on and
options to purchase equity securities do not entitle the
holder to dividends or
voting rights with respect to the underlying securities, nor
do they represent
any rights in the assets of the issuer of those securities.
If a put or call option written by a Portfolio were
exercised, the
Portfolio would be obligated to buy or sell the underlying
security at the
exercise price. Writing a put option involves the risk of a
decrease in the
market value of the underlying security, in which case the
option could be
exercised and the underlying security would then be sold by
the option holder to
the Portfolio at a higher price than its current market
value. Writing a call
option involves the risk of an increase in the market value
of the underlying
security, in which case the option could be exercised and
the underlying
security would then be sold by the Portfolio to the option
holder at a lower
price than its current market value. Those risks could be
reduced by entering
into an offsetting transaction. The Portfolio retains the
premium received from
writing a put or call option whether or not the option is
exercised.
A Portfolio may buy put and call options and may write
covered put and call
options on foreign currencies to hedge against declines in
the U.S. dollar value
of foreign currency-denominated securities held by the
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Portfolio and against increases in the U.S. dollar cost of
foreign currency-
denominated securities being considered for purchase by the
Portfolio. As in the
case of other options, however, the writing of an option on
a foreign currency
will constitute only a partial hedge, up to the amount of
the premium received,
and the Portfolio could be required to buy or sell foreign
currencies at
disadvantageous exchange rates, thereby incurring losses.
The purchase of an
option on a foreign currency may constitute an effective
hedge against
fluctuations in exchange rates, although, in the event of
rate movements adverse
to the Portfolio's options position, the option may expire
worthless and the
Portfolio will lose the amount of the premium. There is no
specific percentage
limitation on a Portfolio's investments in options on
foreign currencies.
A Portfolio may buy or write options in privately
negotiated transactions
on the types of securities and indices based on the types of
securities in which
the Portfolio is permitted to invest directly. The Portfolio
will effect such
transactions only with investment dealers and other
financial institutions (such
as commercial banks or savings and loan institutions) deemed
creditworthy, and
only pursuant to procedures adopted by management for
monitoring the
creditworthiness of those entities. To the extent that an
option bought or
written by the Portfolio in a negotiated transaction is
illiquid, the value of
an option bought or the amount of the Portfolio's
obligations under an option
written by the Portfolio, as the case may be, will be
subject to the Portfolio's
limitation on illiquid investments. In the case of illiquid
options, it may not
be possible for the Portfolio to effect an offsetting
transaction at a time when
management believes it would be advantageous for the
Portfolio to do so. See the
Statement of Additional Information for a further discussion
of the use, risks
and costs of option trading.
Swaps and Swap-Related Products. As one way of managing
its exposure to
different types of investments, each of the Smith Barney
International Equity,
Smith Barney Pacific Basin, GT Global Strategic Income,
Smith Barney High Income
and MFS Total Return Portfolios may enter into interest rate
swaps, currency
swaps and other types of available swap agreements, such as
caps, collars and
floors. Swaps involve the exchange by a Portfolio with
another party of cash
payments based upon different interest rate indexes,
currencies, and other
prices or rates, such as the value of mortgage prepayment
rates. For example, in
the typical interest rate swap, a Portfolio might exchange a
sequence of cash
payments based on a floating rate index for cash payments
based on a fixed rate.
Payments made by both parties to a swap transaction are
based on a principal
amount determined by the parties.
A Portfolio may also purchase and sell caps, floors and
collars. In a
typical cap or floor agreement, one party agrees to make
payments only under
specified circumstances, usually in return for payment of a
fee by the
counterparty. For example, the purchase of an interest rate
cap entitles the
buyer, to the extent that a specified index exceeds a
predetermined interest
rate, to receive payments of interest on a contractually-
based principal amount
from the counterparty selling such interest rate cap. The
sale of an interest
rate floor obligates the seller to make payments to the
extent that a specified
interest rate falls below an agreed-upon level. A collar
arrangement combines
elements of buying a cap and selling a floor.
Swap agreements will tend to shift a Portfolio's
investment exposure from
one type of investment to another. For example, if a
Portfolio agreed to
exchange payments in dollars for payments in foreign
currency, in each case
based on a fixed rate, the swap agreement would tend to
decrease the Portfolio's
exposure to U.S. interest rates and increase its exposure to
foreign currency
and interest rates. Caps and floors have an effect similar
to buying or writing
options. Depending on how they are used, swap agreements may
increase or
decrease the overall volatility of a Portfolio's investments
and its share price
and yield.
Swap agreements are sophisticated hedging instruments
that typically
involve a small investment of cash relative to the magnitude
of risks assumed.
As a result, swaps can be highly volatile and may have a
- ------------------------------------------------------------
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35
<PAGE>
considerable impact on a Portfolio's performance. Swap
agreements are subject to
risks related to the counterparty's ability to perform, and
may decline in value
if the counterparty's creditworthiness deteriorates. A
Portfolio may also suffer
losses if it is unable to terminate outstanding swap
agreements or reduce its
exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized
activities which
involve certain risks. See the Statement of Additional
Information for a further
discussion on the risks involved in these activities.
Special Investment Considerations and Risks With
Respect to Futures,
Options and Currency Transactions and Swaps and Swap-Related
Products. The
successful use of the investment practices described above
with respect to
futures contracts, options on futures contracts, forward
contracts, options on
securities and on foreign currencies, and swaps and swap-
related products draws
upon skills and experience which are different from those
needed to select the
other instruments in which the Portfolio invests. Should
interest or exchange
rates or the prices of securities or financial indices move
in an unexpected
manner, a Portfolio may not achieve the desired benefits of
futures, options,
swaps and forwards or may realize losses and thus be in a
worse position than if
such strategies had not been used. Unlike many exchange-
traded futures contracts
and options on futures contracts, there are no daily price
fluctuation limits
with respect to options on currencies, forward contracts and
other negotiated or
over-the-counter instruments, and adverse market movements
could therefore
continue to an unlimited extent over a period of time. In
addition, the
correlation between movements in the price of the securities
and currencies
hedged or used for cover will not be perfect and could
produce unanticipated
losses.
With respect to interest rate swaps, each Portfolio
recognizes that such
arrangements are relatively illiquid and will include the
principal amount of
the obligations owed to it under a swap as an illiquid
security for purposes of
the Portfolio's investment restrictions except to the extent
a third party (such
as a large commercial bank) has guaranteed the Portfolio's
ability to offset the
swap at any time.
A Portfolio's ability to dispose of its positions in
the foregoing
instruments will depend on the availability of liquid
markets in the
instruments. Markets in a number of the instruments are
relatively new and still
developing, and it is impossible to predict the amount of
trading interest that
may exist in those instruments in the future. Particular
risks exist with
respect to the use of each of the foregoing instruments and
could result in such
adverse consequences to the Portfolio as the possible loss
of the entire premium
paid for an option bought by the Portfolio, the inability of
the Portfolio, as
the writer of a covered call option, to benefit from the
appreciation of the
underlying securities above the exercise price of the option
and the possible
need to defer closing out positions in certain instruments
to avoid adverse tax
consequences. As a result, no assurance can be given that
the Portfolio will be
able to use those instruments effectively for the purposes
set forth above. See
the Statement of Additional Information for a further
discussion of the use,
risks and costs of these instruments.
In connection with its transactions in futures,
options, swaps and
forwards, each Portfolio may be required to place assets in
a segregated account
with the Portfolio's custodian bank to ensure that the
Portfolio will be able to
meet its obligations under these instruments. Assets held in
a segregated
account generally may not be disposed of for so long as the
Portfolio maintains
the positions giving rise to the segregation requirement.
Segregation of a large
percentage of the Portfolio's assets could impede
implementation of the
Portfolio's investment policies or the Portfolio's ability
to meet redemption
requests or other current obligations.
Mortgage-Backed Securities. The TBC Managed Income,
Putnam Diversified
Income and MFS Total Return Portfolios may invest in
mortgage-backed securities,
which represent pools of mortgage loans
- ------------------------------------------------------------
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36
<PAGE>
assembled for sale to investors by various governmental
agencies and government-
related organizations, such as Government National Mortgage
Association
("GNMA"), Federal National Mortgage Association ("FNMA") and
Federal Home Loan
Mortgage Corporation ("FHLMC"), as well as by private
issuers such as commercial
banks, savings and loan institutions, mortgage bankers and
private mortgage
insurance companies. Mortgage-backed securities provide a
monthly payment
consisting of interest and principal payments. Additional
payment may be made
out of unscheduled repayments of principal resulting from
the sale of the
underlying residential property, refinancing or foreclosure,
net of fees or
costs that may be incurred. Prepayments of principal on
mortgage-backed
securities may tend to increase due to refinancing of
mortgages as interest
rates decline. Prompt payment of principal and interest on
GNMA mortgage pass
through certificates is backed by the full faith and credit
of the United
States. FNMA guaranteed mortgage pass-through certificates
are solely the
obligations of those entities but are supported by the
discretionary authority
of the U.S Government to purchase the agencies' obligations.
Mortgage pools
created by private organizations generally offer a higher
rate of interest than
governmental and government-related pools because there are
no direct or
indirect guarantees of payments in the former pools. Timely
payment of interest
and principal in these pools, however, may be supported by
various forms of
private insurance or guarantees, including individual loan,
title, pool and
hazard insurance. There can be no assurance that the private
insurers can meet
their obligations under the policies.
Collateralized mortgage obligations are a type of bond
secured by an
underlying pool of mortgages or mortgage pass-through
certificates that are
structured to direct payments on underlying collateral to
different series of
classes of the obligations.
To the extent that each Portfolio purchases mortgage-
related securities at
a premium, mortgage foreclosures and prepayments of
principal (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
response to market interest rates.
Other Asset-Backed Securities. The TBC Managed Income,
Putnam Diversified
Income and MFS Total Return Portfolios may invest in asset-
backed securities
arising through the grouping by governmental, government-
related and private
organizations of loans, receivables and other assets
originated by various
lenders. Interests in pools of these assets differ from
other forms of debt
securities, which normally provide for periodic payment of
interest in fixed
amounts with principal paid at maturity or specified call
dates. Instead, asset-
backed securities provide periodic payments which generally
consist of both
interest and principal payments.
The estimated life of an asset-backed security varies
with the prepayment
experience with respect to the underlying debt instruments.
The rate of such
prepayments, and hence the life of an asset-backed security,
will be primarily a
function of current market interest rates, although other
economic and
demographic factors may be involved. For example, falling
interest rates
generally result in an increase in the rate of prepayments
of mortgage loans
while rising interest rates generally decrease the rate of
prepayments. An
acceleration in prepayments in response to sharply falling
interest rates will
shorten the security's average maturity and limit the
potential appreciation in
the security's value relative to a conventional debt
security. Consequently,
asset-backed securities are not as effective in locking in
high long-term
yields. Conversely, in periods of sharply rising rates,
prepayments generally
slow, increasing the security's average life and its
potential for price
depreciation.
- ------------------------------------------------------------
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37
<PAGE>
U.S. Government Securities. Each Portfolio may invest
in U.S. Government
securities, which are debt obligations issued or guaranteed
as to payment of
principal and interest by the U.S. Government (including
Treasury bills, notes
and bonds, certain mortgage participation certificates and
collateralized
mortgage obligations) or by its agencies and
instrumentalities (such as GNMA,
the Student Loan Marketing Association, the Tennessee Valley
Authority, the Bank
for Cooperatives, the Farmers Home Administration, Federal
Farm Credit Banks,
Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Land Banks,
the Export-Import Bank of the U.S., the Federal Housing
Administration, FHLMC,
the U.S. Postal Service, the Federal Financing Bank and
FNMA). Some of these
securities (such as Treasury bills) are supported by the
full faith and credit
of the U.S. Treasury; others (such as obligations of the
Federal Home Loan Bank)
are supported by the right of the issuer to borrow from the
Treasury; while
still others (such as obligations of FNMA and the Student
Loan Marketing
Association) are supported only by the credit of the
instrumentality.
Indexed Commercial Paper. The GT Global Strategic
Income Portfolio may
invest without limitation in commercial paper which is
indexed to certain
specific foreign currency exchange rates. The terms of such
commercial paper
provide that its principal amount is adjusted upwards or
downwards (but not
below zero) at maturity to reflect changes in the exchange
rate between two
currencies while the obligation is outstanding. The
Portfolio will purchase such
commercial paper with the currency in which it is
denominated and, at maturity,
will receive interest and principal payments thereon in that
currency, but the
amount of principal payable by the issuer at maturity will
change in proportion
to the change (if any) in the exchange rate between the two
specified currencies
between the date the instrument is issued and the date the
instrument matures.
While such commercial paper entails the risk of loss of
principal, the potential
for realizing gains as a result of changes in foreign
currency exchange rates
enables the Portfolio to hedge against a decline in the U.S.
dollar value of
investments denominated in foreign currencies while seeking
to provide an
attractive money market rate of return. The Portfolio will
not purchase such
commercial paper for speculation. The staff of the SEC is
currently considering
whether the purchase of this type of commercial paper by
mutual funds such as
the Portfolio would result in the issuance of a "senior
security" within the
meaning of the 1940 Act. The Portfolio believes that such
investments do not
involve the creation of such a senior security but,
nevertheless, has
undertaken, pending the resolution of this issue by the SEC
staff, to establish
a segregated account with respect to its investments in this
type of commercial
paper and to maintain in such account cash not available for
investment or U.S.
Government securities or liquid, high grade debt securities
having a value equal
to the aggregate, outstanding principal amount of the
commercial paper of this
type that is held by the Portfolio.
Portfolio Turnover. Although it is anticipated that
most investments of
each Portfolio will be long-term in nature, the rate of
portfolio turnover will
depend upon market and other conditions, and it will not be
a limiting factor
when management believes that portfolio changes are
appropriate. Each
Portfolio's historical portfolio turnover rates are included
in the Financial
Highlights tables above. A higher rate of portfolio turnover
may result in
higher transaction costs, including brokerage commissions.
DIVIDENDS, DISTRIBUTIONS AND TAXES
============================================================
====================
Each Portfolio of the Fund intends to qualify as a
"regulated investment
company" under Subchapter M of the Internal Revenue Code
(the "Code"). To
qualify, each Portfolio must meet certain tests, including
distributing at least
90% of its investment company taxable income, and deriving
less than 30% of its
gross income from the sale or other disposition of certain
investments held for
less than three months. Each Portfolio except the Smith
Barney Money Market
Portfolio intends at least annually to declare and make
distributions of
substantially all of its taxable income and net taxable
capital gains to its
shareowners (i.e. the Separate Accounts). The Smith Barney
Money Market
Portfolio intends to declare daily and pay monthly
substantially all of its
taxable income and to make distributions of net realized
capital gains, if any,
at least annually. Such distributions are automatically
reinvested in additional
shares of the Portfolio at net asset value and are
- ------------------------------------------------------------
- --------------------
38
<PAGE>
includable in gross income of the Separate Accounts holding
such shares. See the
accompanying Contract prospectus for information regarding
the federal income
tax treatment of distributions to the Separate Accounts and
to holders of the
Contracts.
Each Portfolio of the Fund is also subject to asset
diversification
regulations promulgated by the U.S. Treasury Department
under the Code. The
regulations generally provide that, as of the end of each
calendar quarter or
within 30 days thereafter, no more than 55% of the total
assets of each
Portfolio may be represented by any one investment, no more
than 70% by any two
investments, no more than 80% by any three investments, and
no more than 90% by
any four investments. For this purpose all securities of the
same issuer are
considered a single investment. If a Portfolio should fail
to comply with these
regulations, Contracts invested in that Portfolio would not
be treated as
annuity, endowment or life insurance contracts under the
Code.
REDEMPTION OF SHARES
============================================================
====================
The redemption price of the shares of each Portfolio
will be the net asset
value next determined after receipt by the Fund of a
redemption order from a
Separate Account, which may be more or less than the price
paid for the shares.
The Fund will ordinarily make payment within one business
day, though redemption
proceeds must be remitted to a Separate Account on or before
the seventh day
following receipt of proper tender, except on a day on which
the New York Stock
Exchange is closed or as permitted by the SEC in
extraordinary circumstances.
The Fund anticipates that, in accordance with regulatory
changes, beginning on
or about June 1, 1995, the proceeds will be remitted on or
before the third
business day after receipt of proper tender. Payment to the
Contract owner is
described in the accompanying Contract prospectus.
PERFORMANCE
============================================================
====================
From time to time the Fund may include a Portfolio's
total return, average
annual total return, yield and current distribution return
in advertisements
and/or other types of sales literature. These figures are
based on historical
earnings and are not intended to indicate future
performance. In addition, these
figures will not reflect the deduction of the charges that
are imposed on the
Contracts by the Separate Account (see Contract prospectus)
which, if reflected,
would reduce the performance quoted. Total return is
computed for a specified
period of time assuming reinvestment of all income dividends
and capital gains
distributions at net asset value on the ex-dividend dates at
prices calculated
as stated in this Prospectus, then dividing the value of the
investment at the
end of the period so calculated by the initial amount
invested and subtracting
100%. The standard average annual total return, as
prescribed by the SEC, is
derived from this total return, which provides the ending
redeemable value. Such
standard total return information may also be accompanied
with nonstandard total
return information over different periods of time by means
of aggregate,
average, year-by-year, or other types of total return
figures. The yield of a
Portfolio refers to the net investment income earned by
investments in the
Portfolio over a thirty-day period. This net investment
income is then
annualized, i.e., the amount of income earned by the
investments during that
thirty-day period is assumed to be earned each 30-day period
for twelve periods
and is expressed as a percentage of the investments. The
yield quotation is
calculated according to a formula prescribed by the SEC to
facilitate comparison
with yields quoted by other investment companies. The Fund
calculates current
distribution return for each Portfolio by dividing the
distributions from
investment income declared during the most recent period by
the net asset value
on the last day of the period for which current distribution
return is
presented. A Portfolio's current distribution return may
vary from time to time
depending on market conditions, the composition of its
investment portfolio and
operating expenses. These factors and possible differences
in the methods used
in calculating current distribution return, and the charges
that are imposed on
the Contracts by the Separate Account, should be considered
when comparing the
Portfolio's current distribution return to yields published
for other investment
companies and other investment vehicles.
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39
<PAGE>
MANAGEMENT
============================================================
====================
Smith Barney Mutual Funds Management Inc.
Smith Barney Mutual Funds Management Inc. ("SBMFM")
manages the investment
operations of each Portfolio pursuant to management
agreements entered into by
the Fund on behalf of each Portfolio. Under each management
agreement SBMFM is
responsible for furnishing or causing to be furnished to
each Portfolio advice
and assistance with respect to the acquisition, holding or
disposal of
investments and recommendations with respect to other
aspects and affairs of
each Portfolio, bookkeeping, accounting and administrative
services, office
space and equipment, and the services of the officers and
employees of the Fund.
The Fund and SBMFM have also entered into subadvisory
agreements on behalf
of each of the Alliance Growth Portfolio, the AIM Capital
Appreciation
Portfolio, the American Capital Enterprise Portfolio, the
TBC Managed Income
Portfolio, the Putnam Diversified Income Portfolio, the GT
Global Strategic
Income Portfolio and the MFS Total Return Portfolio (see
"The Sub-Advisers"
below). Pursuant to each subadvisory agreement, each sub-
investment adviser
("Sub-Adviser") is responsible for the day to day operations
and investment
decisions for the respective Portfolio and is authorized, in
its discretion and
without prior consultation with SBMFM, to: (a) manage the
Portfolio's assets in
accordance with the Portfolio's investment objective(s) and
policies as stated
in the Prospectus and the Statement of Additional
Information; (b) make
investment decisions for the Portfolio; (c) place purchase
and sale orders for
portfolio transactions on behalf of the Portfolio; and (d)
employ professional
portfolio managers and securities analysts who provide
research services to the
Portfolio.
By written agreement the research and other departments
and staff of Smith
Barney Inc. ("Smith Barney") furnish SBMFM with information,
advice and
assistance and are available for consultation on the Fund's
Portfolios, thus
Smith Barney may also be considered an investment adviser to
the Fund. Smith
Barney's services are paid for by SBMFM on the basis of
direct and indirect
costs to Smith Barney of performing such services; there is
no charge to the
Fund for such services.
For the services provided by SBMFM, each Portfolio pays
SBMFM an annual
management fee calculated at a rate equal to the following
percentage of its
average daily net assets, paid monthly.
<TABLE>
<S>
<C>
Smith Barney Income and Growth Portfolio
0.65%
Alliance Growth Portfolio
0.80%
AIM Capital Appreciation Portfolio
0.80%
American Capital Enterprise Portfolio
0.70%
Smith Barney International Equity Portfolio
0.90%
Smith Barney Pacific Basin Portfolio
0.90%
TBC Managed Income Portfolio
0.65%
Putnam Diversified Income Portfolio
0.75%
G.T. Global Strategic Income Portfolio
0.80%
Smith Barney High Income Portfolio
0.60%
MFS Total Return Portfolio
0.80%
Smith Barney Money Market Portfolio
0.60%
</TABLE>
Although the management fee paid by each of the
Alliance Growth Portfolio,
the AIM Capital Appreciation Portfolio, the American Capital
Enterprise
Portfolio, the Smith Barney International Equity Portfolio,
the Smith Barney
Pacific Basin Portfolio, the Putnam Diversified Income
Portfolio, the GT Global
Strategic Income Portfolio and the MFS Total Return
Portfolio is greater than
that paid by most mutual funds, management has determined
that each fee is
comparable to the fee charged by other investment advisers
of mutual funds that
have similar investment objectives and policies.
- ------------------------------------------------------------
- --------------------
40
<PAGE>
Each management agreement further provides that all
other expenses not
specifically assumed by SBMFM under the management agreement
on behalf of a
Portfolio are borne by the Fund. Expenses payable by the
Fund include, but are
not limited to, all charges of custodians and shareholder
servicing agents,
expenses of preparing, printing and distributing all
prospectuses, proxy
material, reports and notices to shareholders, all expenses
of shareholders' and
directors' meetings, filing fees and expenses relating to
the registration and
qualification of the Fund's shares and the Fund under
federal and state
securities laws and maintaining such registrations and
qualifications (including
the printing of the Fund's registration statements), fees of
auditors and legal
counsel, costs of performing portfolio valuations, out-of-
pocket expenses of
directors and fees of directors who are not "interested
persons" as defined in
the 1940 Act, interest, taxes and governmental fees, fees
and commissions of
every kind, expenses of issue, repurchase or redemption of
shares, insurance
expense, association membership dues, all other costs
incident to the Fund's
existence and extraordinary expenses such as litigation and
indemnification
expenses. Direct expenses are charged to each of the Fund's
Portfolios; general
corporate expenses are allocated on the basis of relative
net assets.
SBMFM, which until recently operated under the name,
Smith, Barney
Advisers, Inc., was incorporated in 1968 under the laws of
Delaware. It is a
wholly-owned subsidiary of Smith Barney Holdings Inc., the
parent company of
Smith Barney. Smith Barney Holdings Inc. is a wholly-owned
subsidiary of
Travelers Group Inc. ("Travelers"), which is a 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,
Smith Barney and
Smith Barney Holdings Inc. are each located at 388 Greenwich
Street, New York,
New York 10013. SBMFM also acts as investment manager to
numerous other
investment companies having aggregate assets as of the date
of this Prospectus
in excess of $60 billion. Smith Barney serves as investment
manager of the
Inefficient-Market Fund, Inc., a closed-end investment
company. Smith Barney
also advises profit-sharing and pension accounts. Smith
Barney and its
affiliates may in the future act as investment advisers for
other accounts.
Portfolio Management by SBMFM. SBMFM serves as the
investment adviser to
Smith Barney Income and Growth Portfolio, Smith Barney
International Equity
Portfolio, Smith Barney Pacific Basin Portfolio, Smith
Barney High Income
Portfolio and Smith Barney Money Market Portfolio. SBMFM
will manage the day to
day operations of each such Portfolio pursuant to a
management agreement entered
into by the Fund on behalf of each Portfolio. Under each
management agreement,
SBMFM will (a) manage the Portfolio's assets in accordance
with the Portfolio's
investment objective(s) and policies as stated in the
Prospectus and the
Statement of Additional Information; (b) make investment
decisions for the
Portfolio; (c) place purchase and sale orders for portfolio
transactions on
behalf of the Portfolio; (d) employ professional portfolio
managers and
securities analysts who provide research services to the
Portfolio; and (e)
administer the Portfolio's corporate affairs and, in
connection therewith,
furnish the Portfolio with office facilities and with
clerical, bookkeeping and
recordkeeping services at such office facilities. In
providing those services,
SBMFM will conduct a continual program of investment,
evaluation and, if
appropriate, sale and reinvestment of each Portfolio's
assets.
Bruce D. Sargent, a Vice President of the Fund, is the
portfolio manager of
the Smith Barney Income and Growth Portfolio. Mr. Sargent co-
manages the day to
day operations of the Smith Barney Income and Growth
Portfolio and has been
involved in equity investing for over 25 years. He currently
manages over $1
billion of assets.
Ayako Weissman, Managing Director of Smith Barney,
serves as co-manager of
the Smith Barney Income and Growth Portfolio. Ms. Weissman
has been involved in
equity investing for Smith Barney for over 8 years and
currently manages over
$250 million of assets.
- ------------------------------------------------------------
- --------------------
41
<PAGE>
The Smith Barney International Equity Portfolio and the
Smith Barney
Pacific Basin Portfolio are each managed by Maurits E.
Edersheim and a team of
seasoned international equity portfolio managers, who
collectively have over 125
years of experience and who are responsible for the day to
day operations of
these Portfolios, including making all investment decisions.
Mr. Edersheim is
Chairman and Advisory Director of Smith Barney World Funds,
Inc. and is Deputy
Chairman of Smith Barney International Incorporated. Prior
to joining Smith
Barney in 1990, Mr. Edersheim was Deputy Chairman and
Director of Drexel Burnham
Lambert Incorporated ("Drexel Burnham"). Mr. James Conheady
and Mr. Jeffrey
Russell, both Vice Presidents of the Fund and Managing
Directors of Smith Barney
are members of the international equity team. Together, Mr.
Conheady and Mr.
Russell currently manage in excess of $2.8 billion in global
equity assets for
other investment companies and managed accounts. Prior to
joining Smith Barney
in February 1990, Mr. Conheady was a First Vice President
and Mr. Russell was a
Vice President of Drexel Burnham.
Mr. John C. Bianchi, a Managing Director of the
Greenwich Street Advisors
division of SBMFM, is responsible for the management of the
Smith Barney High
Income Portfolio. Mr. Bianchi has more than fourteen years
of investment
advisory experience. He joined Greenwich Street Advisors in
1985. Prior thereto,
Mr. Bianchi was employed as a Senior Investment Analyst at
Metropolitan Life
Insurance Company, where he worked in all sectors of the
bond market,
specializing in high grade and high yield corporate bonds
and notes.
The Sub-Advisers:
Alliance Capital Management L.P. Alliance Capital
Management L.P.
("Alliance Capital") will serve as Sub-Adviser to the
Alliance Growth Portfolio
and will manage the day to day operations of the Portfolio
pursuant to a
subadvisory agreement. Pursuant to the subadvisory agreement
SBMFM will pay
Alliance Capital an annual fee calculated at the rate of
0.375% of the
Portfolio's average daily net assets, paid monthly.
Alliance Capital is a Delaware limited partnership with
principal offices
at 1345 Avenue of the Americas, New York, New York 10105. It
is a major
international investment manager, supervising client
accounts with assets as of
October 31, 1994 totaling more than $123 billion. Alliance
Capital serves its
clients, who primarily are major corporate employee benefit
funds, public
employee retirement systems, investment companies,
foundations and endowment
funds, with a staff of more than 1,400 employees operating
out of five domestic
offices and the overseas offices of five subsidiaries. The
49 registered
investment companies managed by Alliance Capital comprising
93 separate
investment portfolios currently have over one million
shareholders.
Alliance Capital Management Corporation ("ACMC") the
sole general partner
of Alliance Capital, is an indirect wholly-owned subsidiary
of The Equitable
Life Assurance Society of the United States, one of the
largest life insurance
companies in the United States, which is itself a wholly-
owned subsidiary of The
Equitable Companies Incorporated, a holding company
controlled by AXA, a member
of a large French insurance group. AXA is indirectly
controlled by a group of
five mutual insurance companies.
Tyler Smith, who is a Senior Vice President of Alliance
Capital, is the
portfolio manager of the Alliance Growth Portfolio and is
principally
responsible for the Portfolio's investment program. Prior to
joining Alliance
Capital in July 1993, Mr. Smith was employed by Equitable
Capital Management
Corporation ("Equitable Capital"), or its affiliates for
more than 20 years.
A I M Capital Management, Inc. A I M Capital
Management, Inc. ("AIM
Capital") will serve as Sub-Adviser to the AIM Capital
Appreciation Portfolio
and will manage the day to day operations of the Portfolio
pursuant to a
subadvisory agreement. Pursuant to the subadvisory agreement
SBMFB will pay AIM
Capital an annual fee calculated at the rate of 0.375% of
the Portfolio's
average daily net assets, paid monthly.
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42
<PAGE>
AIM Capital is a Texas corporation and is located at 11
Greenway Plaza,
Suite 1919, Houston, TX 77046-1173. AIM Capital is a wholly-
owned subsidiary of
A I M Advisors, Inc. ("AIM"), which is a wholly-owned
subsidiary of A I M
Management Group Inc. ("AIM Management"). AIM Management is
a holding company
engaged in the financial services business. AIM acts as
manager or adviser to 37
investment company portfolios. As of June 9, 1995, the total
assets of the
investment company portfolios advised or managed by AIM or
its affiliates were
approximately $31.8 billion.
AIM Capital uses a team approach and a disciplined
investment process in
providing investment advisory services to all of its
accounts, including the AIM
Capital Appreciation Portfolio. AIM Capital's investment
staff consists of
approximately 93 individuals. While individual members of
AIM Capital's
investment staff are assigned primary responsibility for the
day to day
management of each of AIM Capital's accounts, all accounts
are reviewed on a
regular basis by AIM Capital's Investment Policy Committee
to ensure that they
are being invested in accordance with the account's and AIM
Capital's investment
policies.
Jonathan C. Schoolar, David P. Barnard and Robert M.
Kippes are primarily
responsible for the day to day management of the AIM Capital
Appreciation
Portfolio. Mr. Schoolar, a chartered financial analyst, is
Senior Vice President
and Director of AIM Capital, Vice President of AIM and
Senior Vice President of
AIM Equity Funds, Inc. and has been associated with AIM
and/or its affiliates
since 1986 and has eleven years of experience as an
investment professional. Mr.
Barnard is Vice President of AIM Capital and Vice President
of AIM Equity Funds,
Inc. Mr. Barnard has been associated with AIM and/or its
affiliates since 1982
and has 21 years of experience as an investment
professional. Mr. Kippes is Vice
President of AIM Capital. Mr. Kippes has been associated
with AIM and/or its
affiliates since 1989 and has six years of experience as an
investment
professional.
American Capital Asset Management, Inc. American
Capital Asset Management,
Inc. ("ACAM") will serve as Sub-Adviser to the American
Capital Enterprise
Portfolio and will manage the day to day operations of the
Portfolio pursuant to
a subadvisory agreement. Pursuant to the subadvisory
agreement, SBMFM will pay
ACAM an annual fee calculated at the rate of .325% of the
Portfolios's average
daily net assets, paid monthly.
ACAM, which is located at 2800 Post Oak Boulevard,
Houston, Texas 77056, is
a wholly-owned subsidiary of American Capital Management &
Research, Inc., an
indirect wholly-owned subsidiary of VKM Holding, Inc.
Together with its
predecessors, ACAM has been in the investment advisory
business since 1926. It
presently manages the assets of 45 investment company
portfolios with total net
assets of over $16.8 billion at October 31, 1994.
Jeff New is responsible for the day-to-day management
of the Portfolio. Mr.
New has been an associate portfolio manager with American
Capital since April,
1990. Prior to that he was a securities analyst with Texas
Commerce Investment
Management Company.
LGT Asset Management, Inc. LGT Asset Management, Inc.
("LGT Asset
Management") (formerly known as "G.T. Capital Management,
Inc.") serves as Sub-
Adviser to the GT Global Strategic Income Portfolio pursuant
to a subadvisory
agreement. Pursuant to the subadvisory agreement, SBMFM pays
LGT Asset
Management an annual fee calculated at the rate of 0.375% of
the Portfolio's
average daily net assets, paid monthly.
LGT Asset Management, organized in 1973, provides
investment management
and/or administration services to all the GT Global Mutual
Funds as well as to
other institutional, corporate and individual clients. The
offices of LGT Asset
Management are located at 50 California Street, San
Francisco, California 94111.
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43
<PAGE>
LGT Asset Management is the U.S. member of the GT
Group, an international
investment advisory organization established in 1969 for the
purpose of
rendering international portfolio management services to
both institutional and
individual clients. Since the GT Group was established, it
has gained a
reputation as a leader in identifying and investing in
emerging and established
markets around the world. As of December 1, 1994, aggregate
assets under GT
Group management exceeded $23 billion, of which more than
$22 billion was
invested in the securities of non-U.S. issuers. Of the GT
Group's total assets,
more than $6 billion was invested in the securities of
issuers in emerging
markets.
In addition to the San Francisco office, the GT Group
maintains fully
staffed investment offices in London, Hong Kong, Tokyo,
Singapore and Sydney.
Many of LGT Asset Management's investment managers are
natives of countries in
which they invest and have the advantage of being close to
the financial markets
they follow and speaking the languages of local corporate
and government
leaders. LGT Asset Management's experienced management team
is situated to react
quickly to changes in foreign markets which are in time
zones different from
those in the U.S.
LGT Asset Management and other companies in the GT
Group are subsidiaries
of BIL GT Group Limited ("BIL GT Group"), a financial
services holding company.
BIL GT Group in turn is controlled by the Prince of
Liechtenstein Foundation,
which serves as the parent organization for the various
business enterprises of
the Princely Family of Liechtenstein. Its principal business
address is
Harrengasse 12, FL-9490, Vaduz, Liechtenstein.
In managing the GT Global Strategic Income Portfolio,
LGT Asset Management
employs a team approach, taking advantage of the resources
of its various
investment offices around the world in seeking to achieve
the Portfolio's
objectives. In addition, in managing the Portfolio, these
individuals utilize
the research and related work of other members of LGT Asset
Management's
investment staff. Gary Kreps, Simon Nocera and Donald
Mattersdorff are
responsible for the day-to-day management of the Portfolio.
Mr. Kreps has been
employed by LGT Asset Management since 1992 as Chief
Investment Officer-Global
Fixed Income Investments. From 1988 to 1992, Mr. Kreps
served as Senior Vice
President for Global Fixed Income at Putnam Management Co.
(Boston). Mr. Nocera
has been a Portfolio Manager and Economist at LGT Asset
Management since 1992.
From 1991 to 1992, he was Senior Vice President and Director
of Global Fixed
Income at The Putnam Companies. Prior thereto, Mr. Nocera
held a position as a
Financial Economist at the International Monetary Fund. Mr.
Mattersdorff joined
G.T. Capital in 1994 as a Global Fixed Income portfolio
manager. From 1993 to
1994 he was a Senior Trader in Global Fixed Income at
Cargill Financial
Services. Prior thereto, he was a Vice President and Global
Fixed Income
portfolio manager at The Putnam Companies.
Massachusetts Financial Services Company. Massachusetts
Financial Services
Company ("MFS") serves as Sub-Adviser to the MFS Total
Return Portfolio pursuant
to a subadvisory agreement. Pursuant to the subadvisory
agreement SBMFM pays MFS
an annual fee calculated at the rate of 0.375% of the
Portfolio's average daily
net assets.
MFS also serves as investment adviser to each of the
funds in the MFS
Family of Funds and to MFS/Sun Life Series Trust, MFS
Institutional Trust, MFS
Municipal Income Trust, MFS Variable Insurance Trust, MFS
Union Standard Trust,
MFS Government Markets Income Trust, MFS Multimarket Income
Trust, MFS
Intermediate Income Trust, MFS Charter Income Trust, MFS
Special Value Trust,
Sun Growth Variable Annuity Portfolio, Inc. and seven
variable accounts, each of
which is a registered investment company established by Sun
Life Assurance
Company of Canada (U.S.)("Sun Life of Canada (U.S.)") in
connection with the
sale of Compass-2 and Compass-3 combination fixed/variable
annuity contracts.
MFS Asset Management, Inc., a subsidiary of the Sub-Adviser,
provides investment
advice to substantial private clients.
- ------------------------------------------------------------
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44
<PAGE>
MFS is located at 500 Boylston Street, Boston,
Massachusetts 02116. MFS is
America's oldest mutual fund organization. MFS and its
predecessor organizations
have a history of money management dating from 1924 and the
founding of the
first mutual fund in the United States, Massachusetts
Investors Trust. Net
assets under the management of the MFS organization were
approximately $33.2
billion on behalf of approximately 1.6 million investors
accounts as of November
30, 1994. As of such date, the MFS organization managed
approximately $18.2
billion of assets in fixed income securities. MFS is a
subsidiary of Sun Life of
Canada (U.S.) which in turn is a subsidiary of Sun Life
Assurance Company of
Canada ("Sun Life"). Sun Life, a mutual life insurance
company, is one of the
largest international life insurance companies and has been
operating in the
U.S. since 1895, establishing a headquarters office here in
1973. The executive
officers of MFS report to the Chairman of Sun Life.
Richard E. Dahlberg, a Senior Vice President of MFS
serves as portfolio
manager of the MFS Total Return Portfolio. Mr. Dahlberg has
over 34 years of
experience and currently manages over $3.7 billion of
assets.
Putnam Investment Management, Inc. Putnam Investment
Management, Inc.
("Putnam Management") will serve as Sub-Adviser to the
Putnam Diversified Income
Portfolio pursuant to a subadvisory agreement. Pursuant to
the subadvisory
agreement SBMFM pays Putnam Management an annual fee
calculated at the rate of
0.35% of the Portfolio's average daily net assets, paid
monthly.
Putnam Management principal offices are located at One
Post Office Square,
Boston, Massachusetts 02109. Putnam is wholly-owned
subsidiary of Putnam
Investments, Inc., a holding company which is in turn wholly
owned by Marsh &
McLennan Companies, Inc., a publicly owned holding company
whose principal
businesses are international insurance and reinsurance
brokerage, employee
benefit consulting and investment management.
Putnam has been managing mutual funds since 1937. The
firm serves as the
investment manager for the funds in the Putnam family, with
approximately $68
billion in assets in over three million shareholder accounts
as of October 31,
1994. The Putnam Advisory Company, Inc., an affiliate,
manages domestic and
foreign institutional accounts and foreign mutual funds.
Another affiliate,
Putnam Fiduciary Trust Company, provides investment advice
to institutional
clients under its banking and fiduciary powers. Putnam and
its affiliates
managed over $96 billion in assets as of October 31, 1994.
Rosemary H. Thomsen, Senior Vice President of Putnam
Management, D. William
Kohli, Senior Vice President of Putnam Management and Neil
J. Powers, Vice
President of Putnam Management are primarily responsible for
the day-to-day
management of the Portfolio. Mr. Kohli has been employed by
Putnam Management
since September, 1994. Prior to September, 1994, Mr. Kohli
was Executive Vice
President and Co-Director of Global Bond Management and
Senior Portfolio Manager
from 1988 to 1993 at Franklin Advisors/Templeton Investment
Counsel.
The Boston Company Asset Management, Inc. The Boston
Company Asset
Management, Inc. ("TBCAM") will serve as Sub-Adviser to the
TBC Managed Income
Portfolio pursuant to a subadvisory agreement. Pursuant to
the subadvisory
agreement SBMFM will pay TBCAM an annual fee calculated at
the rate of 0.30% of
the Portfolio's average daily net assets, paid monthly.
TBCAM is located at One Boston Place, Boston,
Massachusetts 02108. TBCAM is
a wholly-owned subsidiary of The Boston Company, Inc., a
financial services
holding company, which is an indirect wholly-owned
subsidiary of Mellon Bank
Corporation ("Mellon"). TBCAM provides investment management
and investment
advisory services to accounts having total assets at October
31, 1994 of $15.7
billion.
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45
<PAGE>
Mellon is a publicly-owned multibank holding company
registered under the
Federal Bank Holding Company Act of 1956 and is the twenty-
fourth largest bank
holding company in the United States, based on total assets
as of October 31,
1994 of $36.6 billion. Through its subsidiaries Mellon
provides a comprehensive
range of financial products and services in domestic and
selected international
markets, including domestic retail banking, worldwide
commercial banking, trust
banking, investment management, commercial financial
services, equipment
leasing, data processing, residential real estate financing,
commercial and
consumer real estate financing, stock transfer services,
cash management,
mortgage servicing and trust and investment management
services.
The Portfolio is managed by a team of portfolio
managers consisting of
three individuals, Almond G. Goduti, Jr., William R. Leach
and Arthur J.
MacBride, III. Almond Goduti, Vice President of TBCAM, is a
member of the Fixed
Income Strategy Committee and is also responsible for the
taxable fixed income
investment portfolio of Boston Safe Deposit and Trust
Company. Mr. Goduti began
his career with The Boston Company in 1984 as a Portfolio
Manager in the
Personal Trust Division. He holds a BS in Finance and
Computer Science from
Boston College.
Mr. Leach is a Senior Vice President of TBCAM and is
Chairman of the Fixed
Income Strategy Committee. He is also responsible for the
investment and
research of mortgage derivatives and convertible securities.
Prior to joining
The Boston Company in 1988, Mr. Leach was Vice President of
Fixed Income
Investments for Beneficial Standard Life Insurance Company,
a subsidiary of
CalFed Inc. Mr. Leach graduated from Pomona College,
Claremont, with a BA in
Economics. He also holds a Master of Science degree in
Industrial Administration
(MSIA) from Carnegie-Mellon University in Pittsburgh. He is
a member of the Los
Angeles Society of Financial Analysts and has taught fixed
income analysis for
LASFA's CFA Review course at the University of Southern
California from 1988 to
1991.
Prior to joining The Boston Company in 1988, Mr.
MacBride, a Senior Vice
President of TBCAM, was a Principal and the National Sales
Manager at
Manufacturers Hanover Securities Corporation, where he was
responsible for the
sale of all fixed income securities. Previously, he did
corporate
finance/underwriting work in both the U.S. and Europe. In
London and Toronto, he
worked extensively on the Eurobond Market (coupon and
currency swaps). He is a
graduate from Franklin and Marshall College and holds a MBA
from Fordham
University.
Portfolio Transactions and Distribution
SBMFM and each Sub-Adviser are subject to the
supervision and direction of
the Fund's Board of Directors and manage the applicable
Portfolio in accordance
with its investment objective and policies, make investment
decisions for the
Portfolio, place orders to purchase and sell securities and
employ professionals
who provide research services. All orders for transactions
in securities on
behalf of a Portfolio are made by management, with broker-
dealers selected by
management, including affiliated brokers. In placing orders
management will seek
to obtain the most favorable price and execution available.
In selecting broker-
dealers, management may consider research and brokerage
services furnished to it
and its affiliates.
Smith Barney distributes shares of the Fund as
principal underwriter. In
addition, the Fund's Board of Directors has determined that
transactions for the
Fund may be executed through Smith Barney or any broker-
dealer affiliate of
Smith Barney (each, an "Affiliated Broker") if, in the
judgement of management,
the use of an Affiliated Broker is likely to result in price
and execution at
least as favorable to the Fund as those obtainable through
other qualified
broker-dealers, and if, in the transaction, the Affiliated
Broker charges the
Fund a fair and reasonable rate consistent with that charged
to comparable
unaffiliated customers in similar
- ------------------------------------------------------------
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46
<PAGE>
transactions. The Fund will not deal with Smith Barney in
any transaction in
which Smith Barney acts as principal. In addition, the
Alliance Growth Portfolio
may not deal with Donaldson, Lufkin & Jenrette ("DLJ") (an
affiliate of Alliance
Capital) in any transaction in which DLJ acts as principal.
SHARES OF THE FUND
============================================================
====================
General
The Fund, an open-end managed investment company, was
incorporated in
Maryland on February 22, 1994. The Fund has an authorized
capital of
6,000,000,000 shares with a par value of $.00001 per share.
The Board of
Directors has authorized the issuance of twelve series of
shares, each
representing shares in one of twelve separate Portfolios -
the Smith Barney
Income and Growth Portfolio, the Alliance Growth Portfolio,
the AIM Capital
Appreciation Portfolio, the American Capital Enterprise
Portfolio, the Smith
Barney International Equity Portfolio, the Smith Barney
Pacific Basin Portfolio,
the TBC Managed Income Portfolio, the Putnam Diversified
Income Portfolio, the
GT Global Strategic Income Portfolio, the Smith Barney High
Income Portfolio,
the MFS Total Return Portfolio and the Smith Barney Money
Market Portfolio. The
Directors also have the power to create additional series of
shares. The assets
of each Portfolio will be segregated and separately managed
and a shareowner's
interest is in the assets of the Portfolio in which he or
she holds shares.
Voting Rights
The Fund offers its shares only for purchase by
insurance company separate
accounts. Thus, the insurance company is technically the
shareholder of the Fund
and, under the 1940 Act, is deemed to be in control of the
Fund. Nevertheless,
with respect to any Fund shareholder meeting, an insurance
company will solicit
and accept timely voting instructions from its
contractowners who own units in a
separate account investment division which corresponds to
shares in the Fund in
accordance with the procedures set forth in the accompanying
prospectus for the
applicable contract issued by the insurance company and to
the extent required
by law. Shares of the Fund attributable to contractowner
interests for which no
voting instructions are received will be voted by an
insurance company in
proportion to the shares for which voting instructions are
received.
Each share of a Portfolio represents an equal
proportionate interest in
that Portfolio with each other share of the same Portfolio
and is entitled to
such dividends and distributions out of the net income of
that Portfolio as are
declared in the discretion of the Directors. Shareowners are
entitled to one
vote for each share held and will vote by individual
Portfolio except to the
extent required by the 1940 Act. The Fund is not required to
hold annual
shareowner meetings, although special meetings may be called
for the Fund as a
whole, or a specific Portfolio, for purposes such as
electing or removing
Directors, changing fundamental policies or approving a
management contract.
Shareowners may cause a meeting of shareowners to be held
upon a vote of 10% of
the Fund's outstanding shares for the purpose of voting on
the removal of
Directors.
Availability of the Fund
Investment in the Fund is only available to owners of
either variable
annuity or variable life insurance contracts issued by
insurance companies
through their separate accounts. It is possible that in the
future it may become
disadvantageous for both variable annuity and variable life
insurance separate
accounts to be invested simultaneously in the Fund. However,
the Fund does not
currently foresee any disadvantages to the contractowners of
the different
contracts which are funded by such separate accounts. The
Board monitors events
for the existence of any material irreconcilable conflict
between or among such
owners, and each
- ------------------------------------------------------------
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47
<PAGE>
insurance company will take whatever remedial action may be
necessary to resolve
any such conflict. Such action could include the sale of
Fund shares by one or
more of the insurance company separate accounts which fund
these contracts,
which could have adverse consequences to the Fund. Material
irreconcilable
conflicts could result from, for example: (a) changes in
state insurance laws;
(b) changes in U.S. federal income tax laws; or (c)
differences in voting
instructions between those given by variable annuity
contractowners and those
given by variable life insurance contractowners. If the
Board were to conclude
that separate series of the Fund should be established for
variable annuity and
variable life separate accounts, each insurance company
would bear the attendant
expenses. Should this become necessary, contractowners would
presumably no
longer have the economies of scale resulting from a larger
combined mutual fund.
DETERMINATION OF NET ASSET VALUE
============================================================
====================
The net asset value of each Portfolio's shares is
determined as of the
close of regular trading on the New York Stock Exchange
("NYSE"), which is
currently 4:00 P.M. New York City time on each day that the
NYSE is open, by
dividing the Portfolio's net assets by the number of its
shares outstanding.
Securities owned by a Portfolio for which market quotations
are readily
available are valued at current market value or, in their
absence, at fair
value. Securities traded on an exchange are valued at last
sales price on the
principal exchange on which each such security is traded, or
if there were no
sales on that exchange on the valuation date, the last
quoted sale, up to the
time of valuation, on the other exchanges. If instead there
were no sales on the
valuation date with respect to these securities, such
securities are valued at
the mean of the latest published closing bid and asked
prices. Over-the-counter
securities are valued at last sales price or, if there were
no sales that day,
at the mean between the bid and asked prices. Options,
futures contracts and
options thereon that are traded on exchanges are also valued
at last sales
prices as of the close of the principal exchange on which
each is listed or if
there were no such sales on the valuation date, the last
quoted sale, up to the
time of valuation, on other exchanges. In the absence of any
sales on the
valuation date, valuation shall be the mean of the latest
closing bid and asked
prices. Fixed income obligations are valued at the mean of
bid and asked prices
based on market quotations for those securities or if no
quotations are
available, then for securities of similar type, yield and
maturity. Securities
with a remaining maturity of 60 days or less are valued at
amortized cost where
the Board of Directors has determined that amortized cost is
fair value.
Premiums received on the sale of call options will be
included in the
Portfolio's net assets, and current market value of such
options sold by a
Portfolio will be subtracted from that Portfolio's net
assets. Any other
investments of a Portfolio, including restricted securities
and listed
securities for which there is a thin market or that trade
infrequently (i.e.,
securities for which prices are not readily available), are
valued at a fair
value determined by the Board of Directors in good faith.
This value generally
is determined as the amount that a Portfolio could
reasonably expect to receive
from an orderly disposition of these assets over a
reasonable period of time but
in no event more than seven days. The value of any security
or commodity
denominated in a currency other than U.S. dollars will be
converted into U.S.
dollars at the prevailing market rate as determined by
management.
Foreign securities trading may not take place on all
days on which the NYSE
is open. Further, trading takes place in various foreign
markets on days on
which the NYSE is not open. Accordingly, the determination
of the net asset
value of a Portfolio may not take place contemporaneously
with the determination
of the prices of investments held by such Portfolio. Events
affecting the values
of investments that occur between the time their prices are
determined and 4:00
P.M. on each day that the NYSE is open will not be reflected
in a Portfolio's
net asset value unless management under the supervision of
the Fund's Board of
Directors, determines that the particular event would
materially affect the net
asset value. As a result, a Portfolio's net asset value may
be significantly
affected by such trading on days when a shareholder has no
access to such
Portfolio.
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48
<PAGE>
APPENDIX A
============================================================
====================
RATINGS ON DEBT OBLIGATIONS
BOND (AND NOTES) RATINGS
Moody's Investors Service, Inc.
Aaa - Bonds that are rated "Aaa" are judged to be of
the best quality. They
carry the smallest degree of investment risk and are
generally referred to as
"gilt edged." Interest payments are protected by a large or
by an exceptionally
stable margin and principal is secure. While the various
protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds that are rated "Aa" are judged to be of high
quality by all
standards. Together with the "Aaa" group they comprise what
are generally known
as high grade bonds. They are rated lower than the best
bonds because margins of
protection may not be as large as in "Aaa" securities or
fluctuation of
protective elements may be of greater amplitude or there may
be other elements
present that make the long term risks appear somewhat larger
than in "Aaa"
securities.
A - Bonds that are rated "A" possess many favorable
investment attributes
and are to be considered as upper medium grade obligations.
Factors giving
security to principal and interest are considered adequate
but elements may be
present that suggest a susceptibility to impairment sometime
in the future.
Baa - Bonds that are rated "Baa" are considered as
medium grade
obligations, i.e., they are neither highly protected nor
poorly secured.
Interest payments and principal security appear adequate for
the present but
certain protective elements may be lacking or may be
characteristically
unreliable over any great length of time. Such bonds lack
outstanding investment
characteristics and in fact have speculative characteristics
as well.
Ba - Bonds which are rated Ba are judged to have
speculative elements;
their future cannot be considered as well assured. Often the
protection of
interest and principal payments may be very moderate and
thereby not well
safeguarded during both good and bad times over the future.
Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack
characteristics of the desirable
investment. Assurance of interest and principal payments or
of maintenance of
other terms of the contract over any long period of time may
be small.
Caa - Bonds which are rated Caa are of poor standing.
Such issues may be in
default or there may be present elements of danger with
respect to principal or
interest.
Ca - Bonds which are rated Ca represent obligations
which are speculative
in a high degree. Such issues are often in default or have
other marked
shortcomings.
C - Bonds which are rated C are the lowest class of
bonds and issues so
rated can be regarded as having extremely poor prospects of
ever attaining any
real investment standing.
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- --------------------
49
<PAGE>
Note: The modifier 1 indicates that the security ranks
in the higher end of
its generic rating category; the modifier 2 indicates a mid-
range ranking; and
the modifier 3 indicates that the issue ranks in the lower
end of its generic
rating category.
Standard & Poor's Ratings Group
AAA - Debt rated "AAA" has the highest rating assigned
by Standard &
Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay
interest and repay
principal and differs from the highest rated issues only in
small degree.
A - Debt rated "A" has a strong capacity to pay
interest and repay
principal although it is somewhat more susceptible to the
adverse effects of
changes in circumstances and economic conditions than debt
in higher rated
categories.
BBB - Debt rated "BBB" is regarded as having an
adequate capacity to pay
interest and repay principal. Whereas it normally exhibits
adequate protection
parameters, adverse economic conditions or changing
circumstances are more
likely to lead to a weakened capacity to pay interest and
repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated `BB', `B', `CCC', `CC'
or `C' is regarded,
on balance, as predominantly speculative with respect to
capacity to pay
interest and repay principal in accordance with the terms of
the obligation.
`BB' indicates the lowest degree of speculation and `C' the
highest degree of
speculation. While such debt will likely have some quality
and protective
characteristics, these are outweighed by large uncertainties
or major risk
exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from `AA' to `B' may
be modified by the
addition of a plus or minus sign to show relative standing
within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the
rating is
provisional. A provisional rating assumes the successful
completion of the
project being financed by the debt being rated and indicates
that payment of
debt service requirements is largely or entirely dependent
upon the successful
and timely completion of the project. This rating, however,
while addressing
credit quality subsequent to completion of the project,
makes no comment on the
likelihood of, or the risk of default upon failure of, such
completion. The
investor should exercise judgment with respect to such
likelihood and risk.
L - The letter "L" indicates that the rating pertains
to the principal
amount of those bonds where the underlying deposit
collateral is fully insured
by the Federal Savings & Loan Insurance Corp. or the Federal
Deposit Insurance
Corp.
+ - Continuance of the rating is contingent upon S&P's
receipt of closing
documentation confirming investments and cash flow.
* - Continuance of the rating is contingent upon S&P's
receipt of an
executed copy of the escrow agreement.
NR - Indicates no rating has been requested, that there
is insufficient
information on which to base a rating, or that S&P does not
rate a particular
type of obligation as a matter of policy.
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50
<PAGE>
Fitch Investors Service, Inc.
AAA - Bonds considered to be investment grade and of
the highest credit
quality. The obligor has an exceptionally strong ability to
pay interest and
repay principal which is unlikely to be affected by
reasonably foreseeable
events.
AA - Bonds considered to be investment grade and of
very high credit
quality. The obligor's ability to pay interest and repay
principal is very
strong, although not quite as strong as bonds rated "AAA".
Because bonds rated
in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable
future developments, short-term debt of these issuers is
generally rated "F-1+".
A - Bonds considered to be investment grade and of very
high credit
quality. The obligor's ability to pay interest and repay
principal is considered
to be strong, but may be more vulnerable to adverse changes
in economic
conditions and circumstances than bonds with higher ratings.
BBB - Bonds considered to be investment grade and of
satisfactory credit
quality. The obligor's ability to pay interest and repay
principal is considered
to be adequate. Adverse changes in economic conditions and
circumstances,
however, are more likely to have adverse impact on these
bonds, and therefore
impair timely payment. The likelihood that the ratings of
these bonds will fall
below investment grade is higher than for bonds with higher
ratings.
BB - Bonds are considered speculative. The obligor's
ability to pay
interest and repay principal may be affected over time by
adverse economic
changes. However, business and financial alternatives can be
identified which
could assist the obligor in satisfying its debt service
requirements.
B - Bonds are considered highly speculative. While
bonds in this class are
currently meeting debt service requirements, the probability
of continued timely
payment of principal and interest reflects the obligor's
limited margin safety
and the need for reasonable business and economic activity
throughout the life
of the issue.
CCC - Bonds have certain identifiable characteristics
which if not
remedied, may lead to default. The ability to meet
obligations requires an
advantageous business and economic environment.
CC - Bonds are minimally protected. Default in payment
of interest and/or
principal seems probable over time.
C - Bonds are in imminent default in payment of
interest or principal.
Plus (+) Minus (-) - Plus and minus signs are used with
a rating symbol to
indicate the relative position of a credit within the rating
category. Plus and
minus signs, however, are not used in the "AAA" category.
NR - Indicates that Fitch does not rate the specific
issue.
Conditional - A conditional rating is premised on the
successful completion
of a project or the occurrence of a specific event.
Suspended - A rating is suspended when Fitch deems the
amount of
information available from the issuer to be inadequate for
rating purposes.
Withdrawn - A rating will be withdrawn when an issue
matures or is called
or refinanced and at Fitch's discretion when an issuer fails
to furnish proper
and timely information.
FitchAlert - Ratings are placed on FitchAlert to notify
investors of an
occurrence that is likely to result in a rating change and
the likely direction
of such change. These are designated as "Positive",
indicating a potential
upgrade, "Negative", for potential downgrade, or "Evolving",
where ratings may
be lowered. FitchAlert is relatively short-term, and should
be resolved within
12 months.
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51
<PAGE>
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-1" (or related supporting
institutions) have a
superior capacity for repayment of short-term promissory
obligations. Prime-1
repayment will normally be evidenced by the following
characteristics: leading
market positions in well-established industries; high rates
of return on funds
employed; conservative capitalization structures with
moderate reliance on debt
and ample asset protection; broad margins in earnings
coverage of fixed
financial changes and high internal cash generation; well-
established access to
a range of financial markets and assured sources of
alternate liquidity.
Issuers rated "Prime-2" (or related supporting
institutions) have strong
capacity for repayment of short-term promissory obligations.
This will normally
be evidenced by many of the characteristics cited above but
to a lesser degree.
Earnings trends and coverage ratios, while sound, will be
more subject to
variation. Capitalization characteristics, while still
appropriate, may be more
affected by external conditions. Ample alternate liquidity
is maintained.
Standard & Poor's Ratings Group
A-1 - This designation indicates that the degree of
safety regarding timely
payment is either overwhelming or very strong. Those issuers
determined to
possess overwhelming safety characteristics will be denoted
with a plus (+) sign
designation.
A-2 - Capacity for timely payment on issues with this
designation is
strong. However, the relative degree of safety is not as
high as for issues
designated A-1.
IBCA Limited or its affiliate, IBCA Inc.
A-1+ - This designation indicates the highest capacity
for timely
repayment.
A-1 - Capacity for timely repayment on issues with this
designation is very
strong.
A-2 - This designation indicates a strong capacity for
timely repayment,
although such capacity may be susceptible to adverse changes
in business,
economic or financial conditions.
Fitch Investors Service, Inc.
F-1+ - Indicates the strongest degree of assurance for
timely payment.
F-1 - This designation reflects an assurance of timely
payment only
slightly less in degree than issues rated F-1+.
F-2 - This indicates a satisfactory degree of assurance
for timely payment,
although the margin of safety is not as great as indicated
by the F-1+ and F-1
categories.
Duff & Phelps Inc.
Duff 1+ - Indicates the highest certainty of timely
payment: short-term
liquidity is clearly outstanding, and safety is just below
risk-free United
States Treasury short-term obligations.
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52
<PAGE>
Duff 1 - Indicates a high certainty of timely payment.
Duff 2 - Indicates a good certainty of timely payment:
liquidity factors
and company fundamentals are sound.
The Thomson BankWatch ("TBW")
TBW-1 - Indicates a very high degree of likelihood that
principal and
interest will be paid on a timely basis.
TBW-2 - While the degree of safety regarding timely
repayment of principal
and interest is strong, the relative degree of safety is not
as high as for
issues rated TBW-1.
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<PAGE>
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Vintage Tiffany Lamp
[ARTWORK APPEARS HERE]
Prospectus
L 12410 Smith Barney/Travelers Series Fund Inc.
SB Ed. 2-96
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Part B
February 28, 1996
SMITH BARNEY/TRAVELERS SERIES FUND INC.
388 Greenwich Street
New York, New York 10013
STATEMENT OF ADDITIONAL INFORMATION
Shares of the Smith Barney/Travelers
Series Fund Inc. (the "Fund") are
offered with a choice of twelve
Portfolios:
The Smith Barney Income and Growth Portfolio seeks current
income and long-term growth of income and capital. This
Portfolio invests primarily, but not exclusively, in common
stocks.
The Alliance Growth Portfolio seeks long-term growth of
capital. Current income is only an incidental
consideration.
The AIM Capital Appreciation Portfolio seeks capital
appreciation by investing principally in common stocks, with
emphasis on medium-sized and smaller emerging growth
companies.
The American Capital Enterprise Portfolio seeks capital
appreciation through investment in securities believed by
its investment adviser to have above average potential for
capital appreciation.
The Smith Barney International Equity Portfolio seeks total
return on its assets from growth of capital and income and
will invest at least 65% of its assets in a diversified
portfolio of equity securities of established non-U.S.
issuers.
The Smith Barney Pacific Basin Portfolio seeks long-term
capital appreciation through investment primarily in equity
securities of the Asian Pacific Countries.
The TBC Managed Income Portfolio seeks high current income
consistent with what its investment adviser believes to be
prudent risk of capital through investment in various types
of debt securities.
The Putnam Diversified Income Portfolio seeks high current
income consistent with preservation of capital.
The GT Global Strategic Income Portfolio seeks high current
income and, secondarily, capital appreciation by investing
in the debt securities of issuers in the United States,
developed foreign countries and emerging markets.
The Smith Barney High Income Portfolio seeks high current
income by investing at least 65% of its assets in high-
yielding corporate debt obligations. Capital appreciation
is a secondary objective.
The MFS Total Return Portfolio seeks above-average income
(compared to a portfolio invested entirely in equity
securities) consistent with prudent employment of capital.
The Smith Barney Money Market Portfolio seeks maximum
current income and preservation of capital.
This Statement of Additional Information is not a
Prospectus. It is intended to provide more detailed
information about Smith Barney/Travelers Series Fund Inc. as
well as matters already discussed in the Prospectus and
therefore should be read in conjunction with the February
28, 1996 Prospectus which may be obtained from the Fund or
your Financial Consultant. Shares of the Fund may only be
purchased by insurance company separate accounts.
TABLE OF CONTENTS
Directors and Officers 3
Investment Policies 5
Investment Restrictions 25
Performance Information 41
Determination of Net Asset Value 41
Redemption of Shares 41
Custodians 42
Independent Auditors 42
The Fund 42
Management Agreements 43
Voting Rights 47
Financial Statements 48
DIRECTORS AND OFFICERS
VICTOR K. ATKINS, Director
Retired; 120 Montgomery Street, San Francisco, CA. Former
President of Lips Propellers, Inc. Director of two
investment companies associated with Smith Barney Inc.
("Smith Barney"); 73.
JESSICA M. BIBLIOWICZ, Director and President
Executive Vice President of Smith Barney; President of forty
investment companies associated with Smith Barney and
Director of twelve investment companies associated with
Smith Barney; prior to January, 1994, Director of Sales and
Marketing of Prudential Mutual Funds; prior to September,
1991, Assistant Portfolio Manager to Shearson Lehman
Brothers; 35
ALGER B. CHAPMAN, Director
Chairman and Chief Executive Officer, Chicago Board Options
Exchange; 400 S. LaSalle, Chicago, Il. Director of seven
investment companies associated with Smith Barney; 67.
ROBERT A. FRANKEL, Director
Managing Partner of Robert A. Frankel Managing Consultants,
108 Grand Street, Croton-on-Hudson, NY; Director of seven
investment companies associated with Smith Barney; Former
Vice President of The Readers Digest; 67.
RAINER GREEVEN, Director
Partner of the law firm Greeven & Ercklentz; 30 Rockefeller
Plaza, Suite 3030, New York, NY. Director of two investment
companies associated with Smith Barney; 58
SUSAN M. HEILBRON, Director
Attorney; 411 West End Avenue, New York, NY. Prior to
November 1990, Vice President and General Counsel of
MacMillan, Inc. and Executive Vice President of The Trump
Organization. Director of two investment companies
associated with Smith Barney; 50
HEATH B, McLENDON, Chairman of the Board and Chief Executive
Officer
Managing Director of Smith Barney; Director of forty-one
investment companies associated with Smith Barney; President
of the Manager; Chairman of Smith Barney Strategy Advisers
Inc., prior to July 1993, Senior Executive Vice President of
Shearson Lehman Brothers, Inc.; Vice Chairman of Shearson
Asset Management; 61
JAMES M. SHUART, Director
President, Hofstra University; 1000 Fulton Avenue,
Hempstead, NY. Director of European American Bank; Director
of Long Island Tourism and Convention Commission; and
Director of Association of Colleges and Universities of the
State of New York. Director of two investment companies
with Smith Barney; 63.
*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Smith Barney, Senior Vice President and
Treasurer of forty-one investment companies associated with
Smith Barney, and Senior Vice President of the Manager; 37
*BRUCE D. SARGENT, Vice President
Managing Director of Smith Barney and Vice President and
Director of the Manager; Vice President of three other
investment companies associated with Smith Barney; 51
*JAMES B. CONHEADY, Vice President
Managing Director of Smith Barney; Vice President of
Fenimore International Management Corporation ("FIMC"); Vice
President of Smith Barney World Funds, Inc.; Formerly First
Vice President of Drexel Burnham Lambert Incorporated; 59
*JEFFREY RUSSELL, Vice President
Managing Director of Smith Barney; Vice President and
Assistant Secretary of FIMC; Vice President of Smith Barney
World Funds, Inc.; Formerly Vice President of Drexel Burnham
Lambert Incorporated; 37
*JOHN C. BIANCHI, Vice President
Managing Director of Greenwich Street Advisors division of
the Manager; Vice President of five investment companies
associated with Smith Barney; 39
*MARTIN HANLEY, Vice President
Vice President in the money fund group; Vice President of
six investment companies associated with Smith Barney; 29
*EVELYN R. ROBERTSON, Vice President
Investment Officer; Vice President of Greenwich Street
Advisors; Vice President of two other investment companies
associated with Smith Barney; prior to July 1993 Vice
President and Portfolio Manager of Shearson Lehman Advisors;
39
*PHYLLIS M. ZAHORODNY, Vice President
Vice President and Investment Officer. Managing Director of
Greenwich Street Advisors; Vice President of two other
investment companies associated with Smith Barney; prior to
July 1993 Managing Director of Shearson Lehman Advisors; 37
*THOMAS M. REYNOLDS, Controller
Director of Smith Barney in the Asset Management Division,
and Controller and Assistant Secretary of thirty-five
investment companies associated with Smith Barney; Prior to
September 1991, Assistant Treasurer of Aquila Management
Corporation and its associated investment companies; 35
*CHRISTINA T. SYDOR, Secretary
Managing Director of Smith Barney and Secretary of forty-one
investment companies associated with Smith Barney, and of
the Manager; 44
___________________
*Designates "interested persons" as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")
whose business address is 388 Greenwich Street, New York,
New York 10013 unless otherwise noted. Such persons are not
separately compensated for their services as Fund officers
or Directors.
On October 31, 1995 Directors and officers owned in the
aggregate less than 1% of the outstanding securities of the
Fund.
COMPENSATION TABLE
Total
Pension or Compensation Number of
Retirement from Fund Funds for
AggregateBenefits Accrued and Fund Which Director
Compensation as part of Complex Serves Within
Name of Person from Fund Fund Expenses Paid to Directors
Fund Complex
Victor K. Atkins$11,059.50 $0 $16,950.00 2
Alger B. Chapman 11,059.50 0 51,075.00 7
Robert A. Frankel 2,065.00 0 79,100.00
7
Ranier Greeven 11,059.50 0 16,950.00 2
Susan M. Heilbron 11,059.50 0 16,950.00
2
Bruce D. Sargent0 0 0 4
James M. Shuart 11,059.50 0 16,950.00 2
INVESTMENT POLICIES
Repurchase and Reverse Repurchase Agreements. Each
Portfolio may on occasion enter into repurchase agreements,
wherein the seller agrees to repurchase a security from the
Portfolio at an agreed-upon future date, normally the next
business day. The resale price is greater than the purchase
price, which reflects the agreed-upon rate of return for the
period the Portfolio holds the security and which is not
related to the coupon rate on the purchased security. Each
Portfolio requires continual maintenance of the market value
of the collateral in amounts at least equal to the
repurchase price plus accrued interest, thus risk is limited
to the ability of the seller to pay the agreed-upon amount
on the delivery date; however, if the seller defaults,
realization upon the collateral by the Portfolio may be
delayed or limited or the Portfolio might incur a loss if
the value of the collateral securing the repurchase
agreement declines and might incur disposition costs in
connection with liquidating the collateral. A Portfolio
will only enter into repurchase agreements with
broker/dealers or other financial institutions that are
deemed creditworthy by the Manager under guidelines approved
by the Board of Directors. It is the policy of each
Portfolio (except the Smith Barney Money Market Portfolio)
not to invest in repurchase agreements that do not mature
within seven days if any such investment together with any
other illiquid assets held by a Portfolio amount to more
than 15% of that Portfolio's net assets. The Smith Barney
Money Market Portfolio may not invest in such securities if,
together with any other illiquid assets held by it amount to
more than 10% of its total assets.
The Smith Barney International Equity Portfolio and the
Smith Barney Pacific Basin Portfolio may each enter into
reverse repurchase agreements with broker/dealers and other
financial institutions with up to 5% of its net assets. The
GT Global Strategic Income Portfolio may enter into such
transactions with up to 33-1/3% of its total assets, so long
as the total amount of that Portfolio's borrowings do not
exceed 33-1/3% of its total assets. Such agreements involve
the sale of portfolio securities with an agreement to
repurchase the securities at an agreed-upon price, date and
interest payment and have the characteristics of borrowing.
Since the proceeds of borrowings under reverse repurchase
agreements are invested, this would introduce the
speculative factor known as "leverage." The securities
purchased with the funds obtained from the agreement and
securities collateralizing the agreement will have maturity
dates no later than the repayment date. Generally the
effect of such a transaction is that the Portfolio can
recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse
repurchase agreement, while in many cases it will be able to
keep some of the interest income associated with those
securities. Such transactions are only advantageous if the
Portfolio has an opportunity to earn a greater rate of
interest on the cash derived from the transaction than the
interest cost of obtaining that cash. Opportunities to
realize earnings from the use of the proceeds equal to or
greater than the interest required to be paid may not always
be available, and the Portfolio intends to use the reverse
repurchase technique only when management believes it will
be advantageous to the Portfolio. The use of reverse
repurchase agreements may exaggerate any interim increase or
decrease in the value of the participating Portfolio's
assets. The Portfolio's custodian bank will maintain a
separate account for the Portfolio with securities having a
value equal to or greater than such commitments.
Securities Lending. Each Portfolio (except the
American Capital Enterprise Portfolio and the Smith Barney
Money Market Portfolio), may seek to increase its net
investment income by lending its securities provided such
loans are callable at any time and are continuously secured
by cash or U.S. Government securities equal to no less than
the market value, determined daily, of the securities
loaned. The Portfolio will receive amounts equal to
dividends or interest on the securities loaned. It will
also earn income for having made the loan because cash
collateral pursuant to these loans will be invested in short-
term money market instruments. In connection with lending
of securities the Portfolio may pay reasonable finders,
administrative and custodial fees. Management will limit
such lending to not more than: (a) 33 1/3% of the value of
the total assets of each of the TBC Managed Income Portfolio
and the AIM Capital Appreciation Portfolio; (b) 30% of the
value of the total assets of each of the GT Global Strategic
Income Portfolio and the MFS Total Return Portfolio; (c) 20%
of the value of the total assets of each of the Smith Barney
Income and Growth Portfolio and the Smith Barney High Income
Portfolio; (d) 25% of the value of the total assets of each
of the Alliance Growth Portfolio and the Putnam Diversified
Income Portfolio; and (e) 15% of the value of the total
assets of each of the Smith Barney International Equity
Portfolio and the Smith Barney Pacific Basin Portfolio.
Where voting or consent rights with respect to loaned
securities pass to the borrower, management will follow the
policy of calling the loan, in whole or in part as may be
appropriate, to permit the exercise of such voting or
consent rights if the issues involved have a material effect
on the Portfolio's investment in the securities loaned.
Apart from lending its securities and acquiring debt
securities of a type customarily purchased by financial
institutions, none of the foregoing Portfolios will make
loans to other persons. The risks in lending portfolio
securities, as with other extensions of secured credit,
consist of possible delay in receiving additional collateral
or in the recovery of the securities or possible loss of
rights in the collateral should the borrower fail
financially. Loans will only be made to borrowers whom
management deems to be of good standing and will not be made
unless, in the judgment of management, the interest to be
earned from such loans would justify the risk.
By lending its securities, a Portfolio can increase its
income by continuing to receive interest on the loaned
securities, by investing the cash collateral in short-term
instruments or by obtaining yield in the form of interest
paid by the borrower when U.S. Government securities are
used as collateral. Each Portfolio will adhere to the
following conditions whenever it lends its securities: (1)
the Portfolio must receive at least 100% cash collateral or
equivalent securities from the borrower, which amount of
collateral will be maintained by daily marking to market;
(2) the borrower must increase the collateral whenever the
market value of the securities loaned rises above the level
of the collateral; (3) the Portfolio must be able to
terminate the loan at any time; (4) the Portfolio must
receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned
securities, and any increase in market value; (5) the
Portfolio may pay only reasonable custodian fees in
connection with the loan; and (6) voting rights on the
loaned securities may pass to the borrower, except that, if
a material event adversely affecting the investment in the
loaned securities occurs, the Portfolio's Board of Directors
must terminate the loan and regain the Portfolio's right to
vote the securities.
Foreign Investments. Each Portfolio each may invest
its assets in the securities of foreign issuers as described
in the Prospectus. Investments in foreign securities
involve certain risks not ordinarily associated with
investments in securities of domestic issuers. Such risks
include currency exchange control regulations and costs, the
possibility of expropriation, seizure, or nationalization of
foreign deposits, less liquidity and volume and more
volatility in foreign securities markets and the impact of
political, social, economic or diplomatic developments or
the adoption of other foreign government restrictions that
might adversely affect the payment of principal and interest
on securities in a Portfolio. If it should become
necessary, a Portfolio might encounter greater difficulties
in invoking legal processes abroad than would be the case in
the United States. Because a Portfolio may invest in
securities denominated or quoted in currencies other than
the U.S. dollar, changes in foreign currency exchange rates
may adversely affect the value of portfolio securities and
the appreciation or depreciation of investments. In
addition, there may be less publicly available information
about a non-U.S. company, and non-U.S. companies are not
generally subject to uniform accounting and financial
reporting standards, practices and requirements comparable
to those applicable to U.S. companies. Investments 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 commission on foreign exchanges,
the expense of maintaining securities with foreign
custodians, the imposition of transfer taxes or transaction
charges associated with foreign exchanges or foreign
withholding taxes.
For many foreign securities, there are U.S. dollar-
denominated American Depositary Receipts ("ADRs"), which are
traded in the United States on exchanges or over the counter
and are sponsored and issued by domestic banks. ADRs
represent the right to receive securities of foreign issuers
deposited in a domestic bank or a correspondent bank.
Because ADRs trade on United States securities exchanges,
they are not generally treated as foreign securities.
However, ADRs are subject to many of the risks inherent in
investing in the securities of foreign issuers. By
investing in ADRs rather than directly in foreign issuers'
stock, a Portfolio can avoid currency risks during the
settlement period for either purchases or sales. In
general, there is a large, liquid market in the United
States for many ADRs. The information available for ADRs is
subject to the accounting, auditing and financial reporting
standards of the domestic market or exchange on which they
are traded, which standards are more uniform and more
exacting that those to which many foreign issuers may be
subject.
The AIM Capital Appreciation Portfolio, which may not
invest more that 20% of its total assets in foreign
securities, does include ADRs as well as European Depository
Receipts ("EDRs") and other securities representing
underlying securities of foreign issuers as foreign
securities for purposes of this limitation. EDRs which
sometimes are referred to as Continental Depositary Receipts
("CDRs") are receipts issued in Europe typically by foreign
banks and trust companies that evidence ownership of either
foreign or domestic securities. Generally, ADRs, in
registered form, are designed for use in the United States
securities markets, and EDRs, in bearer form, are designed
for use in European securities markets.
Emerging Markets. The Putnam Diversified Income
Portfolio, the GT Global Strategic Income Portfolio and the
Smith Barney High Income Portfolio may invest in debt
securities in emerging markets. Investing in securities in
emerging countries may entail greater risks than investing
in debt securities in developed countries. These risks
include (i) less social, political and economic stability;
(ii) the small current size of the markets for such
securities and the currently low or nonexistent volume of
trading, which result in a lack of liquidity and in greater
price volatility; (iii) certain national policies which may
restrict the each such Portfolio's investment opportunities,
including restrictions on investment in issuers or
industries deemed sensitive to national interests;
(iv) foreign taxation; and (v) the absence of developed
structures governing private or foreign investment or
allowing for judicial redress for injury to private
property.
Investors should note that upon the accession to power
of authoritarian regimes, the governments of a number of
emerging market countries previously expropriated large
quantities of real and personal property similar to the
property which maybe represented by the securities purchased
by the Portfolios. The claims of property owners against
those governments were never finally settled. There can be
no assurance that any property represented by securities
purchased by Portfolios will not also be expropriated,
nationalized, or otherwise confiscated. If such confiscation
were to occur, the Portfolios could lose a substantial
portion of their investments in such countries. Each
Portfolio's investments would similarly be adversely
affected by exchange control regulation in any of those
countries.
Certain countries in which the Portfolios may invest
may have vocal minorities that advocate radical religious or
revolutionary philosophies or support ethnic independence.
Any disturbance on the part of such individuals could carry
the potential for wide-spread destruction or confiscation of
property owned by individuals and entities foreign to such
country and could cause the loss of the Portfolios'
investment in those countries.
U.S. Government Securities. Each Portfolio may invest
in direct obligations of the United States and obligations
issued by U.S. Government agencies and instrumentalities.
Included among direct obligations of the United States are
Treasury Bills, Treasury Notes and Treasury Bonds, which
differ principally in terms of their maturities. Included
among the securities issued by U.S. Government agencies and
instrumentalities are: Securities that are supported by the
full faith and credit of the United States (such as
Government National Mortgage Association certificates);
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 by the
credit of the instrumentality (such as Federal National
Mortgage Association and Federal Home Loan Mortgage
Corporation bonds).
Zero Coupon, Pay-In-Kind and Delayed Interest Secu
rities. The Alliance Growth Portfolio, the TBC Managed
Income Portfolio, the Putnam Diversified Income Portfolio,
the GT Global Strategic Income Portfolio and the MFS Total
Return Portfolio may invest in zero coupon, pay-in-kind and
delayed interest securities as well as custodial receipts or
certificates underwritten by securities dealers or banks
that evidence ownership of future interest payments,
principal payments or both on certain U.S. Government
securities. Zero coupon securities pay no cash income to
their holders until they mature and are issued at
substantial discounts from their value at maturity. When
held to maturity, their entire return comes from the
difference between their purchase price and their maturity
value. Pay-in-kind securities pay interest through the
issuance to the holders of additional securities, and
delayed interest securities are securities which do not pay
interest for a specified period. Because interest on zero
coupon, pay-in-kind and delayed interest securities is not
paid on a current basis, the values of securities of this
type are subject to greater fluctuations than are the values
of securities that distribute income regularly and may be
more speculative than such securities. Accordingly, the
values of these securities may be highly volatile as
interest rates rise or fall. In addition, the Portfolio's
investments in zero coupon, pay-in-kind and delayed interest
securities will result in special tax consequences.
Although zero coupon securities do not make interest
payments, for tax purposes a portion of the difference
between a zero coupon security's maturity value and its
purchase price is taxable income of the Portfolio each year.
Custodial receipts evidencing specific coupon or
principal payments have the same general attributes as zero
coupon U.S. Government securities but are not considered to
be U.S. Government securities. Although under the terms of
a custodial receipt a Portfolio is typically authorized to
assert its rights directly against the issuer of the
underlying obligation, the Portfolio may be required to
assert through the custodian bank such rights as may exist
against the underlying issuer. Thus, in the event the
underlying issuer fails to pay principal and/or interest
when due, a Portfolio may be subject to delays, expenses and
risks that are greater than those that would have been
involved if the Portfolio had purchased a direct obligation
of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been
deposited is determined to be an association taxable as a
corporation, instead of a non-taxable entity, the yield on
the underlying security would be reduced in respect of any
taxes paid.
Loan Participations and Other Direct Indebtedness. The
Putnam Diversified Income Portfolio, the GT Global Strategic
Income Portfolio and the MFS Total Return Portfolio may
purchase loan participations and other direct claims against
a borrower. In purchasing a loan participation, a Portfolio
acquires some or all of the interest of a bank or other
lending institution in a loan to a corporate borrower. Many
such loans are secured, although some may be unsecured. Such
loans may be in default at the time of purchase. Loans that
are fully secured offer a Portfolio more protection than an
unsecured loan in the event of non-payment of scheduled
interest or principal. However, there is no assurance that
the liquidation of collateral from a secured loan would
satisfy the corporate borrower's obligation, or that the
collateral can be liquidated.
These loans are made generally to finance internal
growth, mergers, acquisitions, stock repurchases, leveraged
buy-outs and other corporate activities. Such loans are
typically made by a syndicate of lending institutions,
represented by an agent lending institution which has
negotiated and structured the loan and is responsible for
collecting interest, principal and other amounts due on its
own behalf and on behalf of the others in the syndicate, and
for enforcing its and their other rights against the
borrower. Alternatively, such loans may be structured as a
novation, pursuant to which a Portfolio would assume all of
the rights of the lending institution in a loan, or as an
assignment, pursuant to which the Portfolio would purchase
an assignment of a portion of a lender's interest in a loan
either directly from the lender or through an intermediary.
A Portfolio may also purchase trade or other claims against
companies, which generally represent money owed by the
company to a supplier of goods or services. These claims may
also be purchased at a time when the company is in default.
Certain of the loan participations acquired by a
Portfolio may involve revolving credit facilities or other
standby financing commitments which obligate the Portfolio
to pay additional cash on a certain date or on demand. These
commitments may have the effect of requiring a Portfolio to
increase its investment in a company at a time when it might
not otherwise decide to do so (including at a time when the
company's financial condition makes it unlikely that such
amounts will be repaid). To the extent that a Portfolio is
committed to advance additional funds, it will at all times
hold and maintain in a segregated account cash or other high
grade debt obligations in an amount sufficient to meet such
commitments.A Portfolio's ability to receive payments of
principal, interest and other amounts due in connection with
these investments will depend primarily on the financial
condition of the borrower. In selecting the loan
participations and other direct investments which a
Portfolio will purchase, management will rely upon its (and
not that of the original lending institution's) own credit
analysis of the borrower. As a Portfolio may be required to
rely upon another lending institution to collect and pass on
to it amounts payable with respect to the loan and to
enforce its rights under the loan, an insolvency, bankruptcy
or reorganization of the lending institution may delay or
prevent a Portfolio from receiving such amounts. In such
cases, a Portfolio will evaluate as well the
creditworthiness of the lending institution and will treat
both the borrower and the lending institution as an issuer
of the loan participation for purposes of certain investment
restrictions pertaining to the diversification of the
Portfolio's portfolio investments. The highly leveraged
nature of many such loans may make such loans especially
vulnerable to adverse changes in economic or market
conditions. Investments in such loans may involve additional
risks to a Portfolio. For example, if a loan is foreclosed,
a Portfolio could become part owner of any collateral, and
would bear the costs and liabilities associated with owning
and disposing of the collateral. In addition, it is
conceivable that under emerging legal theories of lender
liability, a Portfolio could be held liable as a co-lender.
It is unclear whether loans and other forms of direct
indebtedness offer securities law protection against fraud
and misrepresentation. In the absence of definitive
regulatory guidance, a Portfolio relies on management's
research in an attempt to avoid situations where fraud or
misrepresentation could adversely affect the Portfolio. In
addition, loan participations and other direct investments
may not be in the form of securities or may be subject to
restrictions on transfer, and only limited opportunities may
exist to resell such instruments. As a result, a Portfolio
may be unable to sell such investments at an opportune time
or may have to resell them at less than fair market value.
To the extent that management determines that any such
investments are illiquid, a Portfolio will include them in
the investment limitations described below.
Mortgage-Backed Securities. The TBC Managed Income
Portfolio, the Putnam Diversified Income Portfolio and the
MFS Total Return Portfolio may invest in mortgage backed
securities, which are securities representing interests in
pools of mortgage loans. Monthly payments of interest and
principal by the individual borrowers on mortgages are
"passed through" to the holders of the securities (net of
fees paid to the issuer or guarantor of the securities) as
the mortgages in the underlying mortgage pools are paid off.
The average lives of mortgage pass-throughs are variable
when issued because their average lives depend on prepayment
rates. The average life of these securities is likely to be
substantially shorter than their stated final maturity as a
result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated
interest, and all or part of a premium if any has been paid,
and the actual yield (or total return) to a Portfolio may be
different than the quoted yield on the securities. Mortgage
prepayments generally increase with falling interest rates
and decrease with rising interest rates. Like other fixed
income securities, when interest rates rise the value of a
mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of
mortgage pass-through securities with prepayment features
may not increase as much as that of other fixed-income
securities.
Payment of principal and interest on some mortgage
pass-through securities (but not the market value of the
securities themselves) may be guaranteed by the full faith
and credit of the U.S. Government (in the case of securities
guaranteed by the Government National Mortgage Association
(the GNMA); or guaranteed by agencies or instrumentalities
of the U.S. Government (such as the Federal National
Mortgage Association (FNMA) or the Federal Home Loan
Mortgage Corporation, (FHLMC) which are supported only by
the discretionary authority of the U.S. Government to
purchase the agency's obligations). Mortgage pass-through
securities may also be issued by non-governmental issuers
(such as commercial banks, savings and loan institutions,
private mortgage insurance companies, mortgage bankers and
other secondary market issuers). Some of these mortgage
pass-through securities may be supported by various forms of
insurance or guarantees.
Interests in pools of mortgage-related securities
differ from other forms of debt securities, which normally
provide for periodic payment of interest in fixed amounts
with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which
consists of both interest and principal payments. In effect,
these payments are a pass-through of the monthly payments
made by the individual borrowers on their mortgage loans,
net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by prepayments of
principal resulting from the sale, refinancing or
foreclosure of the underlying property, net of fees or costs
which may be incurred. Some mortgage pass-through securities
(such as securities issued by the GNMA) are described as
modified pass-through. These securities entitle the holder
to receive all interests and principal payments owed on the
mortgages in the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether the mortgagor
actually makes the payment.
The principal governmental guarantor of mortgage
pass-through securities is the GNMA. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing
and Urban Development. GNMA is authorized to guarantee, with
the full faith and credit of the U.S. Government, the timely
payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan
institutions, commercial banks and mortgage bankers) and
backed by pools of FHA-insured or VA-guaranteed mortgages.
These guarantees, however, do not apply to the market value
or yield of mortgage pass-through securities. GNMA
securities are often purchased at a premium over the
maturity value of the underlying mortgages. This premium is
not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees
are not backed by the full faith and credit of the U.S.
Government) include the FNMA and the FHLMC. FNMA is a
government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. FNMA purchases
conventional residential mortgages (i.e., mortgages not
insured or guaranteed by any governmental agency) from a
list of approved seller/servicers which include state and
federally-chartered savings and loan associations, mutual
savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are
guaranteed as to timely payment by FNMA of principal and
interest.
FHLMC is also a government-sponsored corporation owned
by private stockholders. FHLMC issues Participation
Certificates (PCs) which represent interests in
conventional mortgages (i.e., not federally insured or
guaranteed) from FHLMC's national portfolio. FHLMC
guarantees timely payment of interest and ultimate
collection of principal regardless of the status of the
underlying mortgage loans.
Commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other
secondary market issuers also create pass-through pools of
mortgage loans. Such issuers may also be the originators
and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government
and government-related pools because there are no direct or
indirect government or agency guarantees of payments in the
former pools. However, timely payment of interest and
principal of mortgage loans in these pools may be supported
by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued
by governmental entities, private insurers and the mortgage
poolers. There can be no assurance that the private insurers
or guarantors can meet their obligations under the insurance
policies or guarantee arrangements. A Portfolio may also buy
mortgage-related securities without insurance or guarantees.
Other Asset-Backed Securities: The TBC Managed Income
Portfolio, the Putnam Diversified Income Portfolio and the
MFS Total Return Portfolio may invest in other asset-backed
securities. These securities, issued by trusts and special
purpose corporations, are backed by a pool of assets, such
as credit card and automobile loan receivables, representing
the obligations of a number of different parties.
Corporate asset-backed securities present certain
risks. For instance, in the case of credit card receivables,
these securities may not have the benefit of any security
interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off
certain amounts owed on the credit cards, thereby reducing
the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations
to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the
large number of vehicles involved in a typical issuance and
technical requirements under state laws, the trustee for the
holders of the automobile receivables may not have a proper
security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases,
be available to support payments on these securities.
Corporate asset-backed securities are often backed by a
pool of assets representing the obligations of a number of
different parties. To lessen the effect of failures by
obligers to make payments on underlying assets, the
securities may contain elements of credit support which fall
into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by
an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the receipt
of payments on the underlying pool occurs in a timely
fashion. Protection against losses resulting from ultimate
default ensures payment through insurance policies or
letters of credit obtained by the issuer or sponsor from
third parties. A Portfolio will not pay any additional or
separate fees for credit support. The degree of credit
support provided for each issue is generally based on
historical information respecting the level of credit risk
associated with the underlying assets. Delinquency or loss
in excess of that anticipated or failure of the credit
support could adversely affect the return on an instrument
in such a security.
Dollar Roll Transactions. As described in the
Prospectus, the TBC Managed Income Portfolio, the Putnam
Diversified Income Portfolio and the GT Global Strategic
Income Portfolio may enter into dollar roll transactions
pursuant to which they sell fixed income securities for
delivery in the current month and simultaneously contract to
repurchase substantially similar securities on a specified
future date. The MFS Total Return Portfolio may enter in
similar transactions pursuant to which the Portfolio sells
mortgage-backed securities for delivery in the future and
simultaneously contracts to repurchase substantially similar
securities on a specified future date. During the roll
period, a Portfolio forgoes principal and interest paid on
the securities. The Portfolio is compensated for the lost
interest by the difference between the current sales price
and the lower price for the future purchase (often referred
to as the drop) as well as by the interest earned on the
cash proceeds of the initial sale. A Portfolio may also be
compensated by receipt of a commitment fee.
Convertible Securities and Synthetic Convertible
Securities. The Smith Barney Income and Growth Portfolio,
the Alliance Growth Portfolio, the AIM Capital Appreciation
Portfolio, the American Capital Enterprise Portfolio, the
Smith Barney International Equity Portfolio, the Smith
Barney Pacific Basin Portfolio, the TBC Managed Income
Portfolio, the Putnam Diversified Income Portfolio, the GT
Global Strategic Income Portfolio, the Smith Barney High
Income Portfolio and the MFS Total Return Portfolio may
invest in convertible securities and synthetic convertible
securities. Convertible securities are fixed-income
securities that may be converted at either a stated price or
stated rate into underlying shares of common stock.
Convertible securities have general characteristics similar
to both fixed-income and equity securities. Although to a
lesser extent than with fixed-income securities generally,
the market value of convertible securities tends to decline
as interest rates increase and, conversely, tends to
increase as interest rates decline. In addition, because of
the conversion feature, the market value of convertible
securities tends to vary with fluctuations in the market
value of the underlying common stocks and, therefore, also
will react to variations in the general market for equity
securities.
Like fixed-income securities, convertible securities
are investments which provide for a stable stream of income
with generally higher yields than common stocks. Of course,
like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible
securities may default on their obligations. Convertible
securities, however, generally offer lower interest or
dividend yields than non-convertible securities of similar
quality because of the potential for capital appreciation.
A convertible security, in addition to providing fixed
income, offers the potential for capital appreciation
through the conversion feature, which enables the holder to
benefit from increases in the market price of the
underlying common stock. However, there can be no assurance
of capital appreciation because securities prices fluctuate.
Convertible securities generally are subordinated to
other similar but non-convertible securities of the same
issuer, although convertible bonds enjoy seniority in right
of payment to all equity securities, and convertible
preferred stock is senior to common stock of the same
issuer. Because of the subordination feature, however,
convertible securities typically have lower ratings than
similar non-convertible securities.
Unlike a convertible security, which is a single
security, a synthetic convertible security is comprised of
distinct securities that together resemble convertible
securities in certain respects. Synthetic convertible
securities are typically created by combining non-
convertible bonds or preferred stocks with warrants or stock
call options. The options that will form elements of
synthetic convertible securities may be listed on a
securities exchange or on the National Association of
Securities Dealers Automated Quotation System or may be
privately traded. The components of a synthetic convertible
security generally are not offered as a unit and may be
purchased and sold by the Portfolio at different times.
Synthetic convertible securities differ from convertible
securities in certain respects, including that each
component of a synthetic convertible security has a separate
market value and responds differently to market
fluctuations. Investing in synthetic convertible securities
involves the risk normally involved in holding the
securities comprising the synthetic convertible security.
When-Issued, Delayed Delivery and Forward Commitment
Securities. The Smith Barney Income and Growth Portfolio,
the Alliance Growth Portfolio, the TBC Managed Income
Portfolio, the Putnam Diversified Income Portfolio, the GT
Global Strategic Income Portfolio, the Smith Barney High
Income Portfolio and the MFS Total Return Portfolio may
purchase securities on a when-issued basis, or may purchase
or sell securities for delayed delivery. In when-issued or
delayed delivery transactions, delivery of the securities
occurs beyond normal settlement periods, but no payment or
delivery will be made by a Portfolio prior to the actual
delivery or payment by the other party to the transaction.
A Portfolio will not accrue income with respect to a when-
issued or delayed delivery security prior to its stated
delivery date. A Portfolio will establish with its
custodian a segregated account consisting of cash, U.S.
Government securities or other liquid high grade debt
obligations, in an amount equal to the amount of the
Portfolio's when-issued and delayed delivery purchase
commitments. Placing securities rather than cash in the
segregated account may have a leveraging effect on the
Portfolio's net asset value per share; that is, to the
extent that the Portfolio remains substantially fully
invested in securities at the same time that it has
committed to purchase securities on a when-issued or delayed
delivery basis, greater fluctuations in its net asset value
per share may occur than if it had set aside cash to satisfy
its purchase commitments. Securities purchased on a when-
issued or delayed delivery basis may expose a Portfolio to
risk because the securities may experience fluctuations in
value prior to their delivery. Purchasing securities on a
when-issued or delayed delivery basis can involve the
additional risk that the yield available in the market when
the delivery takes place may be higher than that obtained in
the transaction itself.
Short Sales Against the Box. The American Capital
Enterprise Portfolio, the GT Global Strategic Income
Portfolio, the AIM Capital Appreciation Portfolio and the
High Income Portfolio may each make short sales of
securities in order to reduce market exposure and/or to
increase its income if, at all times when a short position
is open, (the "AIM Capital Appreciation Portfolio will limit
investments such that nor more than 10% of the value of its
nets assets will be deposited as collateral for such sales
at any time) the Portfolio owns an equal or greater amount
of such securities or owns preferred stock, debt or warrants
convertible or exchangeable into an equal or greater number
of the shares of the securities 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 the 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 securities against which short
sales against the box have been made in a special account
with its custodian.
Commercial Bank Obligations. For the purposes of each
Portfolio's investment policies with respect to bank
obligations, obligations of foreign branches of U.S. banks
and of foreign banks may be general obligations of the
parent bank in addition to the issuing bank, or may be
limited by the terms of a specific obligation and by
government regulation. As with investment in non-U.S.
securities in general, investments in the obligations of
foreign branches of U.S. banks and of foreign banks may
subject the Portfolio to investment risks that are different
in some respects from those of investments in obligations of
domestic issuers. Although a Portfolio will typically
acquire obligations issued and supported by the credit of
U.S. or foreign banks having total assets at the time of
purchase in excess of U.S. $1 billion (or the equivalent
thereof), this U.S. $1 billion figure is not a fundamental
investment policy or restriction of the Portfolio. For
calculation purposes with respect to the U.S. $1 billion
figure, the assets of a bank will be deemed to include the
assets of its U.S. and non-U.S. branches.
Commercial Paper. With respect to each Portfolio's
investment policies with respect to commercial paper, such
security consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order
to finance their current operations. A variable amount
master demand note (which is a type of commercial paper)
represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter
agreement between a commercial paper issuer and an
institutional lender, pursuant to which the lender may
determine to invest varying amounts. Transfer of such notes
is usually restricted by the issuer, and there is no
secondary trading market for such notes. Each Portfolio
(except the Smith Barney Money Market Portfolio), therefore,
may not invest in a master demand note, if as a result more
than 15% of the value of each such Portfolio's total assets
would be invested in such notes and other illiquid
securities. The Smith Barney Money Market Portfolio may not
invest in such notes if more than 10% of the value of its
total assets would be invested in such notes and other
illiquid securities.
Options, Futures Contracts and Related Options. The
following information on options, futures contracts and
related options applies to the Portfolios as described in
the Prospectus. In addition, new options and futures
contracts and various combinations thereof continue to be
developed and the Portfolios may invest in any such options
and contracts as may be developed to the extent consistent
with its investment objective and regulatory requirements
applicable to investment companies.
Writing Covered Call Options. The Smith Barney Income
and Growth Portfolio, the Alliance Growth Portfolio, the AIM
Capital Appreciation Portfolio, the American Capital
Enterprise Portfolio, the Smith Barney International Equity
Portfolio, the Smith Barney Pacific Basin Portfolio, the
Putnam Diversified Income Portfolio, the GT Global Strategic
Income Portfolio, the High Income Portfolio and the MFS
Total Return Portfolio may write (sell) covered call
options. A Portfolio may write (sell) covered call options
for hedging purposes or to increase its portfolio return.
Covered call options will generally be written on securities
and currencies which, in the opinion of management, are not
expected to make any major price moves in the near future
but which, over the long term, are deemed to be attractive
investments for the Portfolio. (the "AIM Capital
Appreciation Portfolio" will not write covered call options
for speculative purposes).
A call option gives the holder (buyer) the right to
purchase a security or currency at a specified price (the
exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer
of a call option continues, he may be assigned an exercise
notice by the broker-dealer through whom such option was
sold, requiring him to deliver the underlying security or
currency against payment of the exercise price. This
obligation terminates upon the expiration of the call
option, or such earlier time at which the writer effects a
closing purchase transaction by purchasing an option
identical to that previously sold. Management believes that
the writing of covered call options is less risky than
writing uncovered or "naked" options, which the Portfolios
will not do.
Portfolio securities or currencies on which call
options may be written will be purchased solely on the basis
of investment considerations consistent with each
Portfolio's investment objective. When writing a covered
call option, the Portfolio, in return for the premium, gives
up the opportunity for profit from a price increase in the
underlying security or currency above the exercise price and
retains the risk of loss should the price of the security or
currency decline. Unlike one who owns securities or
currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying
securities or currencies, since the option may be exercised
at any time prior to the option's expiration. If a call
option which the Portfolio has written expires, the
Portfolio will realize a gain in the amount of the premium;
however, such gain may be offset by a decline in the market
value of the underlying security or currency during the
option period. If the call option is exercised, the
Portfolio will realize a gain or loss from the sale of the
underlying security or currency. The security or currency
covering the call option will be maintained in a segregated
account of the Portfolio's custodian. The Portfolio does
not consider a security or currency covered by a call option
to be "pledged" as that term is used in the Portfolio's
policy which limits the pledging or mortgaging of its
assets.
The premium the Portfolio receives for writing a call
option is deemed to constitute the market value of an
option. The premium the Portfolio will receive from writing
a call option will reflect, among other things, the current
market price of the underlying security or currency, the
relationship of the exercise price to such market price, the
historical price volatility of the underlying security or
currency, and the length of the option period. In
determining whether a particular call option should be
written on a particular security or currency, management
will consider the reasonableness of the anticipated premium
and the likelihood that a liquid secondary market will exist
for those options. The premium received by the Portfolio
for writing covered call options will be recorded as a
liability in the Portfolio's statement of assets and
liabilities. This liability will be adjusted daily to the
option's current market value, which will be calculated as
described in "Determination of Net Asset Value" in the
Prospectus. The liability will be extinguished upon
expiration of the option or delivery of the underlying
security or currency upon the exercise of the option. The
liability with respect to a listed option will also be
extinguished upon the purchase of an identical option in a
closing transaction.
Closing transactions will be effected in order to
realize a profit on an outstanding call option, to prevent
an underlying security or currency from being called, or to
permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the
Portfolio to write another call option on the underlying
security or currency with either a different exercise price,
expiration date or both. If the Portfolio desires to sell a
particular security or currency from its portfolio on which
it has written a call option or purchases a put option, it
will seek to effect a closing transaction prior to, or
concurrently with, the sale of the security or currency.
There is no assurance that the Portfolio will be able to
effect such closing transactions at a favorable price. If
the Portfolio cannot enter into such a transaction, it may
be required to hold a security or currency that it might
otherwise have sold, in which case it would continue to be a
market risk with respect to the security or currency.
Each Portfolio will pay transaction costs in connection
with the writing of options and in entering into closing
purchase contracts. Transaction costs relating to options
activity are normally higher than those applicable to
purchases and sales of portfolio securities.
Call options written by each Portfolio will normally
have expiration dates of less than nine months from the date
written. The exercise price of the options may be below,
equal to or above the current market values of the
underlying securities or currencies at the time the options
are written. From time to time, the Portfolio may purchase
an underlying security or currency for delivery in
accordance with the exercise of an option, rather than
delivering such security or currency from its portfolio. In
such cases, additional costs will be incurred.
Each Portfolio will realize a profit or loss from a
closing purchase transaction if the cost of the transaction
is less or more, respectively, than the premium received
from the writing of the option. Because increases in the
market price of a call option will generally reflect
increases in the market price of the underlying security or
currency, any loss resulting from the repurchase of a call
option is likely to be offset in whole or in part by
appreciation of the underlying security or currency owned by
the Portfolio.
Purchasing Put Options. The Smith Barney Income and
Growth Portfolio, the Alliance Growth Portfolio, the
American Capital Enterprise Portfolio, the Smith Barney
International Equity Portfolio, the Smith Barney Pacific
Basin Portfolio, the Putnam Diversified Income Portfolio,
the GT Global Strategic Income Portfolio, the Smith Barney
High Income Portfolio and the MFS Total Return Portfolio may
purchase put options. As the holder of a put option, the
Portfolio has the right to sell the underlying security or
currency at the exercise price at any time during the option
period. The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or
permit them to expire.
Each Portfolio may purchase a put option on an
underlying security or currency (a "protective put") owned
by the Portfolio as a hedging technique in order to protect
against an anticipated decline in the value of the security
or currency. Such hedge protection is provided only during
the life of the put option when the Portfolio, as the holder
of the put option, is able to sell the underlying security
or currency at the put exercise price regardless of any
decline in the underlying security's market price or
currency's exchange value. For example, a put option may be
purchased in order to protect unrealized appreciation of a
security or currency when management deems it desirable to
continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any
transaction costs would reduce any capital gain otherwise
available for distribution when the security or currency is
eventually sold.
Each Portfolio may also purchase put options at a time
when the Portfolio does not own the underlying security or
currency. By purchasing put options on a security or
currency it does not own, the Portfolio seeks to benefit
from a decline in the market price of the underlying
security or currency. If the put option is not sold when it
has remaining value, and if the market price of the
underlying security or currency remains equal to or greater
than the exercise price during the life of the put option,
the Portfolio will lose its entire investment in the put
option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or
currency must decline sufficiently below the exercise price
to cover the premium and transaction costs, unless the put
option is sold in a closing sale transaction.
The premium paid by a Portfolio when purchasing a put
option will be recorded as an asset in the Portfolio's
statement of assets and liabilities. This asset will be
adjusted daily to the option's current market value, which
will be calculated as described in "Determination of Net
Asset Value" in the Prospectus. The asset will be
extinguished upon expiration of the option or the delivery
of the underlying security or currency upon the exercise of
the option. The asset with respect to a listed option will
also be extinguished upon the writing of an identical option
in a closing transaction.
Purchasing Call Options. The Smith Barney Income and
Growth Portfolio, the Alliance Growth Portfolio, the
American Capital Enterprise Portfolio, the Smith Barney
International Equity Portfolio, the Smith Barney Pacific
Basin Portfolio, the Putnam Diversified Income Portfolio,
the GT Global Strategic Income Portfolio, the Smith Barney
High Income Portfolio and the MFS Total Return Portfolio may
purchase call options. As the holder of a call option, a
Portfolio has the right to purchase the underlying security
or currency at the exercise price at any time during the
option period. The Portfolio may enter into closing sale
transactions with respect to such options, exercise them or
permit them to expire. Call options may be purchased by the
Portfolio for the purpose of acquiring the underlying
security or currency for its portfolio. Utilized in this
fashion, the purchase of call options enables the Portfolio
to acquire the security or currency at the exercise price of
the call option plus the premium paid. At times the net
cost of acquiring the security or currency in this manner
may be less than the cost of acquiring the security or
currency directly. This technique may also be useful to the
Portfolio in purchasing a large block of securities that
would be more difficult to acquire by direct market
purchases. So long as it holds such a call option rather
than the underlying security or currency itself, the
Portfolio is partially protected from any unexpected decline
in the market price of the underlying security or currency
and in such event could allow the call option to expire,
incurring a loss only to the extent of the premium paid for
the option.
A Portfolio may also purchase call options on
underlying securities or currencies it owns in order to
protect unrealized gains on call options previously written
by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such
gains through a closing purchase transaction. Call options
may also be purchased at times to avoid realizing losses
that would result in a reduction of the Portfolio's current
return. It is a policy of the GT Global Strategic Income
Portfolio that aggregate premiums paid for put and call
options will not exceed 5% of the Portfolio's total assets
at the time of purchase.
Interest Rate, Securities Index, Financial Futures and
Currency Futures Contracts. The Alliance Growth Portfolio,
the Smith Barney International Equity Portfolio, the Smith
Barney Pacific Basin Portfolio, the Putnam Diversified
Income Portfolio, the GT Global Strategic Income Portfolio,
the Smith Barney High Income Portfolio and the MFS Total
Return Portfolio may enter in interest rate, securities
index, financial futures and currency futures contracts
("Futures" or "Futures Contracts"). The AIM Capital
Appreciation Portfolio may enter into stock under futures
contracts and the American Capital Enterprise Portfolio may
enter in stock index and interest rate futures contracts. A
Portfolio may enter into Futures Contracts as a hedge
against changes in prevailing levels of interest rates or
currency exchange rates in order to establish more
definitely the effective return on securities or currencies
held or committed to be acquired by the Portfolio. A
Portfolio's hedging may include holding Futures as an offset
against anticipated changes in interest or currency exchange
rates. A Portfolio may also enter into Futures Contracts
based on financial indices including any index of U.S.
Government securities, foreign government securities or
corporate debt securities. The Smith Barney International
Equity Portfolio and the Smith Barney Pacific Basin
Portfolio may also enter into Futures Contracts for non-
hedging purposes, subject to applicable law.
A Futures Contract provides for the future sale by one
party and purchase by another party of a specified amount of
a specific financial instrument or currency for a specified
price at a designated date, time and place. The purchaser
of a Futures Contract on an index agrees to take or make
delivery of an amount of cash equal to the difference
between a specified dollar multiple of the value of the
index on the expiration date of the contract ("current
contract value") and the price at which the contract was
originally struck. No physical delivery of the debt
securities underlying the index is made. Brokerage fees are
incurred when a Futures Contract is bought or sold, and
margin deposits must be maintained at all times that the
Futures Contract is outstanding.
The principal interest rate and currency Futures
exchanges in the United States are the Board of Trade of the
City of Chicago and the Chicago Mercantile Exchange.
Futures exchanges and trading are regulated under the
Commodity Exchange Act by the Commodity Futures Trading
Commission. Futures are traded in London at the London
International Financial Futures Exchange.
Although techniques other than sales and purchases of
Futures Contracts could be used to reduce the Portfolio's
exposure to interest rate and currency exchange rate
fluctuations, the Portfolio may be able to hedge its
exposure more effectively and at a lower cost through using
Futures Contracts.
Although Futures Contracts typically require future
delivery of and payment for financial instruments or
currencies, Futures Contracts are usually closed out before
the delivery date. Closing out an open Futures Contract
sale or purchase is effected by entering into an offsetting
Futures Contract purchase or sale, respectively, for the
same aggregate amount of the identical financial instrument
or currency and the same delivery date. If the offsetting
purchase price is less than the original sale price, the
Portfolio realizes a gain; if it is more, the Portfolio
realizes a loss. Conversely, if the offsetting sale price
is more than the original purchase price, the Portfolio
realizes a gain; if it is less, the Portfolio realizes a
loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that the
Portfolio will be able to enter into an offsetting
transaction with respect to a particular Futures Contract at
a particular time. If the Portfolio is not able to enter
into an offsetting transaction, the Portfolio will continue
to be required to maintain the margin deposits of the
underlying financial instrument or currency on the relevant
delivery date.
As an example of an offsetting transaction, the
contractual obligations arising from the sale of one Futures
Contract of September Treasury Bills on an exchange may be
fulfilled at any time before delivery under the Futures
Contract is required (i.e., on a specific date in September,
the "delivery month") by the purchase of another Futures
Contract of September Treasury Bills on the same exchange.
In such instance the difference between the price at which
the Futures Contract was sold and the price paid for the
offsetting purchase, after allowance for transaction costs,
represents the profit or loss to the Portfolio.
Persons who trade in Futures Contracts may be broadly
classified as "hedgers" and "speculators." Hedgers, whose
business activity involves investment or other commitment in
securities or other obligations, use the Futures markets to
offset unfavorable changes in value that may occur because
of fluctuations in the value of the securities and
obligations held or committed to be acquired by them or
fluctuations in the value of the currency in which the
securities or obligations are denominated. Debtors and
other obligers may also hedge the interest cost of their
obligations. The speculator, like the hedger, generally
expects neither to deliver nor to receive the financial
instrument underlying the Futures Contract, but, unlike the
hedger, hopes to profit from fluctuations in prevailing
interest rates or currency exchange rates.
Each Portfolio's Futures transactions will be entered
into for traditional hedging purposes; that is, Futures
Contracts will be sold to protect against a decline in the
price of securities or currencies that the Portfolio owns,
or Futures Contracts will be purchased to protect a
Portfolio against an increase in the price of securities or
currencies it has committed to purchase or expects to
purchase. The Smith Barney International Equity Portfolio,
the Smith Barney Pacific Basin Portfolio, the MFS Total
Return Portfolio and the Smith Barney High Income Portfolio
may each also enter into Futures transactions for non-
hedging purposes, provided that the aggregate initial margin
and premiums on such non-hedging positions does not exceed
5% of the liquidation value of a Portfolio's assets.
"Margin" with respect to Futures Contracts is the
amount of funds that must be deposited by the Portfolio with
a broker in order to initiate Futures trading and to
maintain the Portfolio's open positions in Futures
Contracts. A margin deposit made when the Futures Contract
is entered into ("initial margin") is intended to assure the
Portfolio's performance of the Futures Contract. The margin
required for a particular Futures Contract is set by the
exchange on which the Futures Contract is traded, and may be
significantly modified from time to time by the exchange
during the term of the Futures Contract. Futures Contracts
are customarily purchased and sold on margins, which may be
5% or less of the value of the Futures Contract being
traded.
If the price of an open Futures Contract changes (by
increase in the case of a sale or by decrease in the case of
a purchase) so that the loss on the Futures Contract reaches
a point at which the margin on deposit does not satisfy
margin requirements, the broker will require an increase in
the margin deposit
("variation margin"). If, however, the value of a position
increases because of favorable price changes in the Futures
Contract so that the margin deposit exceeds the required margin,
it is anticipated that the broker will pay the excess to the
Portfolio. In computing daily net asset values, the Portfolio
will mark to market the current value of its open Futures
Contracts. Each Portfolio expects to earn interest income on its
margin deposits.
Risks of Using Futures Contracts. The prices of Futures
Contracts are volatile and are influenced, among other things, by
actual and anticipated changes in interest rates, which in turn
are affected by fiscal and monetary policies and national and
international political and economic events.
At best, the correlation between changes in prices of
Futures Contracts and of the securities or currencies being
hedged can be only approximate. The degree of imperfection of
correlation depends upon circumstances such as: variations in
speculative market demand for Futures and for debt securities or
currencies, including technical influences in Futures trading;
and differences between the financial instruments being hedged
and the instruments underlying the standard Futures Contracts
available for trading, with respect to interest rate levels,
maturities, and creditworthiness of issuers. A decision of
whether, when, and how to hedge involves skill and judgment, and
even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or interest rate trends.
Because of the low margin deposits required, Futures trading
involves an extremely high degree of leverage. As a result, a
relatively small price movement in a Futures Contract may result
in immediate and substantial loss, as well as gain, to the
investor. For example, if at the time of purchase, 10% of the
value of the Futures Contract is deposited as margin, a
subsequent 10% decrease in the value of the Futures Contract
would result in a total loss of the margin deposit, before any
deduction for the transaction costs, if the account were then
closed out. A 15% decrease would result in a loss equal to 150%
of the original margin deposit, if the Futures Contract were
closed out. Thus, a purchase or sale of a Futures Contract may
result in losses in excess of the amount invested in the Futures
Contract. The Portfolio, however, would presumably have
sustained comparable losses if, instead of the Futures Contract,
it had invested in the underlying financial instrument and sold
it after the decline. Where the International Equity Portfolio
enters into Futures transactions for non-hedging purposes, it
will be subject to greater risks and could sustain losses which
are net offset by gains on other portfolio assets.
Furthermore, in the case of a Futures Contract purchase, in
order to be certain that the Portfolio has sufficient assets to
satisfy its obligations under a Futures Contract, the Portfolio
sets aside and commits to back the Futures Contract an amount of
cash, U.S. Government securities and other liquid, high-grade
debt securities equal in value to the current value of the
underlying instrument less the margin deposit. In the case of a
Futures Contract sale, a Portfolio will either set aside amounts
as in the case of a Futures Contract purchase, own the security
underlying the Contract, or hold a call option permitting the
Portfolio to purchase the same Futures Contract at a price no
higher than the Contract price. Assets used as cover cannot be
sold while the position in the corresponding Futures Contract is
open, unless they are replaced with similar assets. As a result,
the commitment of a significant portion of the Portfolio's assets
to cover could impede portfolio management or the Portfolio's
ability to meet redemption requests or other current obligations.
Most United States Futures exchanges limit the amount of
fluctuation permitted in Futures Contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a Futures Contract may vary either up or down from
the previous day's settlement price at the end of a trading
session. Once the daily limit has been reached in a particular
type of Futures Contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures Contract prices
have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby
preventing prompt liquidation of Futures positions and subjecting
some Futures traders to substantial losses.
Options on Futures Contracts. The Alliance Growth
Portfolio, the American Capital Enterprise Portfolio, the Smith
Barney International Equity Portfolio, the Smith Barney Pacific
Basin Portfolio, the Putnam Diversified Income Portfolio, the GT
Global Strategic Income Portfolio, the Smith Barney High Income
Portfolio and the MFS Total Return Portfolio may enter into
options on Futures Contracts. Options on Futures Contracts are
similar to options on securities or currencies except that
options on Futures Contracts give 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), rather than to purchase or sell
the Futures Contract, at a specified exercise price at any time
during the period of the option. Upon exercise of the option,
the delivery of the Futures position by the writer of the option
to the holder of the option will be accompanied by delivery of
the accumulated balance in the writer's Futures margin account
which represents the amount by which the market price of the
Futures Contract, at exercise, exceeds (in the case of a call) or
is less than (in the case of a put) the exercise price of the
option on the Futures Contract. If an option is exercised on the
last trading day prior to the expiration date of the option, the
settlement will be made entirely in cash equal to the difference
between the exercise price of the option and the closing level of
the securities or currencies upon which the Futures Contracts are
based on the expiration date. Purchasers of options who fail to
exercise their options prior to the exercise date suffer a loss
of the premium paid.
As an alternative to purchasing call and put options on
Futures, each Portfolio may purchase call and put options on the
underlying securities or currencies themselves (see "Purchasing
Put Options" and "Purchasing Call Options" above). Such options
would be used in a manner identical to the use of options on
Futures Contracts.
To reduce or eliminate the leverage then employed by the
Portfolio or to reduce or eliminate the hedge position then
currently held by the Portfolio, the Portfolio may seek to close
out an option position by selling an option covering the same
securities or currency and having the same exercise price and
expiration date. The ability to establish and close out
positions on options on Futures Contracts is subject to the
existence of a liquid market. It is not certain that this market
will exist at any specific time.
In order to assure that the Portfolios will not be deemed to
be "commodity pools" for purposes of the Commodity Exchange Act,
regulations of the Commodity Futures Trading Commission ("CFTC")
require that each Portfolio enter into transactions in Futures
Contracts and options on Futures Contracts only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin
and premiums on such non-hedging positions does not exceed 5% of
the liquidation value of the Portfolio's assets.
Forward Currency Contracts and Options on Currency. The
Alliance Growth Portfolio, the Smith Barney International Equity
Portfolio, the Smith Barney Pacific Basin Portfolio, the Putnam
Diversified Income Portfolio, the GT Global Strategic Income
Portfolio, the Smith Barney High Income Portfolio and the MFS
Total Return Portfolio may enter into forward currency contracts
and options on currency. A forward currency contract is an
obligation to purchase or sell a currency against another
currency at a future date and price as agreed upon by the
parties. A Portfolio may either accept or make delivery of the
currency at the maturity of the forward contract or, prior to
maturity, enter into a closing transaction involving the purchase
or sale of an offsetting contract. A Portfolio engages in
forward currency transactions in anticipation of, or to protect
itself against, fluctuations in exchange rates. The Portfolio
might sell a particular foreign currency forward, for example,
when it holds bonds denominated in that currency but anticipates,
and seeks to be protected against, decline in the currency
against the U.S. dollar. Similarly, the Portfolio might sell the
U.S. dollar forward when it holds bonds denominated in U.S.
dollars but anticipates, and seeks to be protected against, a
decline in the U.S. dollar relative to other currencies.
Further, the Portfolio might purchase a currency forward to "lock
in" the price of securities denominated in that currency which it
anticipates purchasing.
The matching of the increase in value of a forward contract
and the decline in the U.S. dollar equivalent value of the
foreign currency denominated asset that is the subject of the
hedge generally will not be precise. In addition, the Portfolio
may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit the
Portfolio's ability to use such contract to hedge or cross-hedge
its assets. Also, with regard to the Portfolio's use of cross-
hedges, there can be no assurance that historical correlations
between the movement of certain foreign currencies relative to
the U.S. dollar will continue. Thus, at any time poor
correlation may exist between movements in the exchange rates of
the foreign currencies underlying the Portfolio's cross-hedges
and the movements in the exchange rates of the foreign currencies
in which the Portfolio's assets that are the subject of such
cross-hedges are denominated. The MFS Total Return Portfolio
may also enter into forward currency contracts for non-hedging
purposes, subject to applicable law.
Forward contracts are traded in an interbank market
conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract
generally has no deposit requirement and is consummated without
payment of any commission. A Portfolio, however, may enter into
forward contracts with deposit requirements or commissions.
A put option on currency gives the Portfolio, as purchaser,
the right (but not the obligation) to sell a specified amount of
currency at the exercise price until the expiration of the
option. A call option gives the Portfolio, as purchaser, the
right (but not the obligation) to purchase a specified amount of
currency at the exercise price until its expiration. The
Portfolio might purchase a currency put option, for example, to
protect itself during the contract period against a decline in
the value of a currency in which it holds or anticipates holding
securities. If the currency's value should decline, the loss in
currency value should be offset, in whole or in part, by an
increase in the value of the put. If the value of the currency
instead should rise, any gain to the Portfolio would be reduced
by the premium it had paid for the put option. A currency call
option might be purchased, for example, in anticipation of, or to
protect against, a rise in the value of a currency in which the
Portfolio anticipates purchasing securities.
A Portfolio's ability to establish and close out positions
in foreign currency options is subject to the existence of a
liquid market. There can be no assurance that a liquid market
will exist for a particular option at any specific time. In
addition, options on foreign currencies are affected by all of
those factors that influence foreign exchange rates and
investments generally.
A position in an exchange-listed option may be closed out
only on an exchange that provides a secondary market for
identical options. Exchange markets for options on foreign
currencies exist but are relatively new, and the ability to
establish and close out positions on the exchanges is subject to
maintenance of a liquid secondary market. Closing transactions
may be effected with respect to options traded in the over-the-
counter ("OTC") markets (currently the primary markets for
options on foreign currencies) only by negotiating directly with
the other party to the option contract or in a secondary market
for the option if such market exists. Although the Portfolio
intends to purchase only those options for which there appears to
be an active secondary market, there is no assurance that a
liquid secondary market will exist for any particular option at
any specific time. In such event, it may not be possible to
effect closing transactions with respect to certain options, with
the result that the Portfolio would have to exercise those
options which it has purchased in order to realize any profit.
Any OTC options acquired by each Portfolio and assets used as
"cover" for OTC options written by the Portfolio would be
considered illiquid and subject to each Portfolio's limitation on
investing in such securities.
Options on Securities Indices. The Alliance Growth
Portfolio, the American Capital Enterprise Portfolio, the Smith
Barney International Equity Portfolio, the Smith Barney Pacific
Basin Portfolio, the Putnam Diversified Income Portfolio, the GT
Global Strategic Income Portfolio, the Smith Barney High Income
Portfolio and the MFS Total Return Portfolio may enter into
options on securities indices. Through the writing or purchase
of index options, a Portfolio can achieve many of the same
objectives as through the use of options on individual
securities. Options on securities indices are similar to options
on a security except that, rather than the right to take or make
delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon
exercise of the option, an amount of cash if the closing level of
the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put,
the exercise price of the option. This amount of cash is equal
to the difference between the closing price of the index and the
exercise price of the option. The writer of the option is
obligated, in return for the premium received, to make delivery
of this amount. Unlike options on securities (which require,
upon exercise, delivery of the underlying security), settlements
of options on securities indices, upon exercise thereof, are in
cash, and the gain or loss of an option on an index depends on
price movements in the market generally (or in a particular
industry or segment of the market on which the underlying index
base) rather than price movements in individual securities, as is
the case with respect to options on securities.
When the Portfolio writes an option on a securities index,
it will be required to deposit with its custodian eligible
securities equal in value to 100% of the exercise price in the
case of a put, or the contract's value in the case of a call. In
addition, where the Portfolio writes a call option on a
securities index at a time when the contract value exceeds the
exercise price, the Portfolio will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value
to such excess.
Options on securities and index options involve risks
similar to those risks relating to transactions in financial
futures described above. Also, an option purchased by the
Portfolio may expire worthless, in which case the Portfolio would
lose the premium paid therefor.
The staff of the Securities and Exchange Commission ("SEC")
has taken the position that purchased over-the-counter options
and assets used to cover written over-the-counter options are
illiquid and, therefore, together with other illiquid securities
cannot, exceed a certain percentage of a Portfolio's assets (the
"SEC illiquidity ceiling"). Although management disagrees with
this position, it intends to limit each Portfolio's writing of
over-the-counter options in accordance with the following
procedure. Except as provided below, each Portfolio intends to
write over-the-counter options only with primary U.S. Government
securities dealers recognized by the Federal Reserve Bank of New
York. Also, the contracts which each Portfolio has in place with
such primary dealers will provide that each Portfolio has the
absolute right to repurchase an option it writes at any time at a
price which represents the fair market value, as determined in
good faith through negotiation between the parties, but which in
no event will exceed a price determined pursuant to a formula in
the contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will
generally be based on a multiple of the premium received by a
Portfolio for writing the option, plus the amount, if any, of the
option's intrinsic value (i.e., the amount that the option is in-
the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike
price of the option if the option is written out-of-money. Each
Portfolio will treat all or a part of the formula price as
illiquid for purposes of the SEC illiquidity ceiling. Each
Portfolio may also write over-the-counter options with non-
primary dealers, including foreign dealers, and will treat the
assets used to cover these options as illiquid for purposes of
such SEC illiquidity ceiling.
Yield Curve Options. The MFS Total Return Portfolio may
also enter into options on the "spread," or yield differential,
between two fixed income securities, in transactions referred to
as "yield curve" options. In contrast to other types of options,
a yield curve option is based on the difference between the
yields of designated securities, rather than the prices of the
individual securities, and is settled through cash payments.
Accordingly, a yield curve option is profitable to the holder if
this differential widens (in the case of a call) or narrows (in
the case of a put), regardless of whether the yields of the
underlying securities increase or decrease.
Yield curve options may be used for the same purposes as
other options on securities. Specifically, the Portfolio may
purchase or write such options for hedging purposes. For
example, the Portfolio may purchase a call option on the yield
spread between two securities, if it owns one of the securities
and anticipates purchasing the other security and wants to hedge
against an adverse change in the yield spread between the two
securities. The Portfolio may also purchase or write yield curve
options for other than hedging purposes (i.e., in an effort to
increase its current income) if, in the judgement of management,
the Portfolio will be able to profit from movements in the spread
between the yields of the underlying securities. The trading of
yield curve options is subject to all of the risks associated
with the trading of other types of options. In addition,
however, such options present risk of loss even if the yield of
one of the underlying securities remains constant, if the spread
moves in a direction or to an extent which was not anticipated.
Yield curve options written by the Portfolio will be "covered".
A call (or put) option is covered if the Portfolio holds another
call (or put) option on the spread between the same two
securities and maintains in a segregated account with its
custodian cash or cash equivalents sufficient to cover the
Portfolio's net liability under the two options. Therefore, the
Portfolio's liability for such a covered option is generally
limited to the difference between the amount of the Portfolio's
liability under the option written by the Portfolio less the
value of the option held by the Portfolio. Yield curve options
may also be covered in such other manner as may be in accordance
with the requirements of the counterparty with which the option
is traded and applicable laws and regulations. Yield curve
options are traded over-the-counter and because they have been
only recently introduced, established trading markets for these
securities have not yet developed.
Swaps and Swap Related Products. Among the hedging
transactions into which the Smith Barney International Equity
Portfolio, the Smith Barney Pacific Basin Portfolio, the GT
Global Strategic Income Portfolio, the Smith Barney High Income
Portfolio and the MFS Total Return Portfolio may enter are
interest rate swaps, currency swaps and other types of swap
agreements such as caps, collars and floors. Each Portfolio
expects to enter into these transactions primarily to preserve a
return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of
securities the Portfolio anticipates purchasing at a later date.
Each Portfolio intends to use these transactions as a hedge and
not as a speculative investment. Swap agreements may be
individually negotiated and structured to include exposure to a
variety of different types of investments or market factors.
Depending on their structure, swap agreements may increase or
decrease a Portfolio's exposure to long or short-term interest
rates (in the U.S. or abroad), foreign currency values, mortgage
securities, corporate borrowing rates, or other factors such as
securities prices or inflation rates. Swap agreements can take
many different forms and are known by a variety of names. A
Portfolio is not limited to any particular form or variety of
swap agreement if management determines it is consistent with the
Portfolio's investment objective and policies.
A Portfolio may enter into swaps, caps and floors on either
an asset-based or liability-based basis, depending on whether it
is hedging its assets or its liabilities, and will usually enter
into interest rate swaps on a net basis, i.e., the two payment
streams are netted but, with the Portfolio receiving or paying,
as the case may be, only the net amount of the two payments.
Inasmuch as these hedging transactions are entered into for good
faith hedging purposes, management and the Portfolios believe
such obligations do not constitute senior securities and,
accordingly will not treat them as being subject to its borrowing
restrictions. The net amount of the excess, if any, of a
Portfolio's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis and an
amount of cash or liquid securities having an aggregate net asset
value at least equal to the accrued excess will be maintained in
a segregated account by its custodian. If a Portfolio enters
into a swap agreement on other than a net basis, it will maintain
cash or liquid assets with a value equal to the full amount of
such Portfolio's accrued obligations under the agreement. The
Portfolios will not enter into any swap, cap, floor or collar
transaction unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated in the highest rating
category of at least one nationally recognized rating
organization at the time of entering into such transaction. The
most significant factor in the performance of swaps, caps, floors
and collars is the change in specific interest rate, currency or
other factor that determines the amount of payments to be made
under the arrangement. If management is incorrect in its
forecasts of such factors, the investment performance of the
Portfolio would be less than what it would have been if these
investment techniques had not been used. If a swap agreement
calls for payments by the Portfolio the Portfolio must be
prepared to make such payments when due. In addition, if the
counterparty's creditworthiness declined, the value of the swap
agreement would be likely to decline, potentially resulting in
losses. If the counterparty defaults, the Portfolio's risk of
loss consists of the net amount of payments that the Portfolio is
contractually entitled to receive. The Portfolio anticipates
that it will be able to eliminate or reduce its exposure under
these arrangements by assignment or other disposition or by
entering into an offsetting agreement with the same or another
counterparty. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing swap
documentation. As a result, the swap market has become
relatively liquid. Caps and floors are more recent innovations
for which standardized documentation has not yet been developed
and, accordingly, they are less liquid than swaps.
Additional Policies
Options (Smith Barney Income and Growth Portfolio).
Although the Smith Barney Income and Growth Portfolio may buy or
sell covered put and covered call options up to 15% of its net
assets, provided such options are listed on a national securities
exchange, the Portfolio does not currently intend to commit more
than 5% of its assets to be invested in or subject to put and
call options.
Additional Policies
Selection of Debt Investments (GT Global Strategic Income
Portfolio). In determining the appropriate distribution of
investments among various countries and geographic regions for
the Portfolio, management ordinarily considers the following
factors: prospects for relative economic growth among the
different countries in which the Portfolio may invest; expected
levels of inflation; government policies influencing business
conditions; the outlook for currency relationships; and the range
of the individual investment opportunities available to
international investors.
Although the Portfolio values assets daily in terms of U.S.
dollars, the Portfolio does not intend to convert holdings of
foreign currencies into U.S. dollars on a daily basis. The
Portfolio will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference ("spread") between the
prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the
Portfolio at one rate, while offering a lesser rate of exchange
should the Portfolio desire to sell that currency to the dealer.
The Portfolio may invest in the following types of money
market instruments (i.e., debt instruments with less than
12 months remaining until maturity) denominated in U.S. dollars
or other currencies: (a) obligations issued or guaranteed by the
U.S. or foreign governments, their agencies, instrumentalities or
municipalities; (b) obligations of international organizations
designed or supported by multiple foreign governmental entities
to promote economic reconstruction or development; (c) finance
company obligations, corporate commercial paper and other
short-term commercial obligations: (d) bank obligations
(including certificates of deposit, time deposits, demand
deposits and bankers' acceptances), subject to the restriction
that the Portfolio may not invest more than 25% of its total
assets in bank securities; (e) repurchase agreements with respect
to all the foregoing; and (f) other substantially similar
short-term debt securities with comparable characteristics.
Investments in Other Investment Companies (GT Global
Strategic Income Portfolio). With respect to certain countries,
investments by the Portfolio presently may be made only by
acquiring shares of other investment companies with local
governmental approval to invest in those countries. The Portfolio
may invest in the securities of closed-end investment companies
within the limits of the 1940 Act. These limitations currently
provide that, in general, the Portfolio may purchase shares of a
closed-end investment company unless (a) such a purchase would
cause the Portfolio to own in the aggregate more than 3 percent
of the total outstanding voting securities of the investment
company or (b) such a purchase would cause the Portfolio to have
more than 5 percent of its total assets invested in the
investment company or more than 10 percent of its aggregate
assets invested in an aggregate of all such investment companies.
Investment in such investment companies may also involve the
payment of substantial premiums above the value of such
companies' portfolio securities. The Portfolio does not intend to
invest in such vehicles or funds unless, in the judgment of
management, the potential benefits of such investments justify
the payment of any applicable premiums. The yield of such
securities will be reduced by operating expenses of such
companies including payments to the investment managers of those
investment companies. At such time as direct investment in these
countries is allowed, the Portfolio will anticipate investing
directly in these markets.
Samurai and Yankee Bonds (GT Global Strategic Income
Portfolio). Subject to its fundamental investment restrictions,
the Portfolio may invest in yen-denominated bonds sold in Japan
by non-Japanese issuers ("Samurai bonds"), and may invest in
dollar-denominated bonds sold in the United States by non-U.S.
issuers ("Yankee bonds"). It is the policy of the Portfolio to
invest in Samurai or Yankee bond issues only after taking into
account considerations of quality and liquidity, as well as
yield.
Warrants or Rights (GT Global Strategic Income Portfolio and
AIM Capital Appreciation Portfolio). Warrants or rights may be
acquired by each Portfolio in connection with other securities or
separately and provide the Portfolio with the right to purchase
at a later date other securities of the issuer. Each Portfolio
has undertaken that its investment in warrants or rights, valued
at the lower of cost or market, will not exceed 5% of the value
of its net assets and not more than 2% of such assets will be
invested in warrants and rights which are not listed on the
American or New York Stock Exchange. Warrants or rights acquired
by a Portfolio in units or attached to securities will be deemed
to be without value for purposes of this restriction.
Special Situations (Aim Capital Appreciation Portfolio).
Although AIM Capital Appreciation Portfolio does not currently
intend to do so, it may invest in "special situations." A
special situation arises when, in the opinion of management, the
securities of a particular company will, within a reasonably
estimable period of time, be accorded market recognition at an
appreciated value solely by reason of a development applicable to
that company, and regardless of general business conditions or
movements of the market as a whole. Developments creating
special situations might include, among others: liquidations,
reorganizations, recapitalizations, mergers, material litigation,
technical breakthroughs and new management or management
policies. Although large and well known companies may be
involved, special situations more often involve comparatively
small or unseasoned companies. Investments in unseasoned
companies and special situations often involve much greater risk
than is inherent in ordinary investments securities. The
Portfolio will not, however, purchase securities of any company
with a record of less than three year's continuous operation
(including that of predecessors) if such purchase cause the
Portfolio's investment in all such companies, taken at cost, to
exceed 5% of the value of its total assets.
INVESTMENT RESTRICTIONS
The Portfolios have adopted the following restrictions and
fundamental policies that cannot be changed unless Sections
8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC staff
interpretations thereof are amended or modified or unless
approved by a "vote of a majority of the outstanding voting
securities" of each Portfolio affected by the change as defined
in the 1940 Act and Rule 18f-2 thereunder (see "Voting"). If a
Portfolio adheres to a percentage restriction at the time of
investment, a later increase or decrease in percentage resulting
from a change in values of portfolio securities or amount of
total or net assets will not be considered a violation of any of
the following policies.
Each of the Smith Barney Income and Growth, Smith Barney
International Equity and Smith Barney Pacific Basin Portfolios
may not:
1. With respect to 75% of its total assets, invest more
than 5% of its total assets in the securities of any single
issuer and purchase more than 10% of the outstanding voting
securities of an issuer (except securities of the U.S. Government
and its agencies and instrumentalities).
2. Invest more than 25% of its total assets in a particular
industry. This limitation shall not apply to any obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.
3. Purchase or sell real estate, although the Portfolio may
purchase securities of issuers which engage in real estate
operations and securities secured by real estate or interests
therein.
4. Invest in securities of another investment company
except as permitted by Section 12(d)(1) of the 1940 Act, or as
part of a merger, consolidation, or acquisition.
5. Purchase or sell physical commodities or contracts
thereon except for purchases of currencies, futures and options
and other related contracts as described in the Prospectus.
6. Borrow money (including borrowings through entering into
reverse repurchase agreements) in excess of 33 1/3% of its total
assets (including the amount of money borrowed but excluding any
liabilities and indebtedness not constituting senior securities,
or letters of credit solely for purposes of participating in a
captive insurance company sponsored by the Investment Company
Institute to provide fidelity and directors and officers
liability insurance), or pledge its assets other than to secure
such borrowings or in connection with short sales, when-issued
and delayed delivery transactions and similar investment
strategies. Whenever borrowings exceed 5% of the value of the
Portfolio's total assets, the Portfolio will not make any
additional investments. If at any time any borrowings exceed 33-
1/3% of the value of a Portfolio's total assets, the Portfolio
will reduce its borrowings within three business days to the
extent necessary to comply with the 33-1/3% limitation.
7. Make loans, except the Portfolio may purchase debt
obligations, may enter into repurchase agreements and may lend
securities.
8. Underwrite securities of other issuers, except to the
extent the Portfolio, in disposing of portfolio securities, may
be deemed an underwriter within the meaning of the Securities Act
of 1933, as amended (the "1933 Act").
9. Issue senior securities, except as permitted under the
1940 Act or any rule, order or interpretation thereunder.
Notwithstanding any other investment restriction of the
Smith Barney Income and Growth Portfolio, the Smith Barney
International Equity Portfolio or the Smith Barney Pacific Basin
Portfolio, each such Portfolio may invest all of its investable
assets in an open-end management investment company having its
same investment objective and restrictions.
In addition, the following policies have also been adopted
by the Smith Barney Income and Growth Portfolio, the Smith Barney
International Equity Portfolio and the Smith Barney Pacific Basin
Portfolio, but are not fundamental and accordingly may be changed
by approval of the Board of Directors. The Portfolios may not:
1. Purchase any securities on margin, provided that the
Portfolio may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities and except
that it may, if otherwise permitted, make margin deposits in
connection with futures contracts.
2. Make short sales of securities or maintain a short
position unless at all times when a short position is open, the
Portfolio owns or has the right to obtain, at no added cost,
securities identical to those sold short.
3. Have more than 15% of its net assets invested in puts,
calls, straddles, spreads or combinations thereof.
4. Purchase oil, gas or other mineral leases, rights or
royalty contracts or exploration or development programs, except
that the Portfolio may invest in the securities of companies
which operate, invest in, or sponsor such programs.
5. Invest more than 5% of its total assets in any issuer
with less than three years of continuous operation (including
that of predecessors) or so-called "unseasoned" equity securities
that are not either admitted for trading on a national stock
exchange or regularly quoted in the over-the-counter market.
6. Invest in or hold securities of an issuer if those
officers and directors of the Fund, its Adviser, or Smith Barney
owning beneficially more than 1/2 of 1% of the securities of such
issuer together own more than 5% of the securities of such
issuer.
7. Invest in any company for the purpose of exercising
control of management.
8. Acquire securities subject to restrictions on
disposition or securities for which there is no readily available
market, enter into repurchase agreements or purchase time
deposits or variable amount master demand notes, if any of the
foregoing have a term or demand feature of more than seven days,
or purchase OTC options or set aside assets to cover OTC options
written by the Portfolio if, immediately after and as a result,
the value of such securities would exceed, in the aggregate, 15%
of the Portfolio's total assets. Subject to this limitation, the
Fund's Board of Directors has authorized the Portfolio to invest
in restricted securities if such investment is consistent with
the Portfolio's investment objective and has authorized such
securities to be considered to be liquid to the extent the
Manager determines on a daily basis that there is a liquid
institutional market for such securities. The Board of Directors
retains ultimate ongoing responsibility for the determination
that a restricted security is liquid.
9. Purchase warrants if as a result the Portfolio would then
have more than 5% of its net assets (determined at the time of
investment) invested in warrants. Warrants will be valued at the
lower of cost or market and investment in warrants which are not
listed on the New York Stock Exchange or the American Stock
Exchange will be limited to 2% of the Portfolio's net assets
(determined at the time of investment). For the purpose of this
limitation, warrants acquired in units or attached to securities
are deemed to be without value.
The Smith Barney Money Market Portfolio may not:
1. Borrow money except from banks for temporary purposes in
an amount up to 10% of the value of its total assets and may
pledge its assets in an amount up to 10% of the value of its
total assets only to secure such borrowings. The Portfolio may
borrow money only to accommodate requests for the redemption of
shares while effecting an orderly liquidation of portfolio
securities or to clear securities transactions and not for
leveraging purposes. Whenever borrowings exceed 5% of the value
of a Portfolio's total assets, the Portfolio will not make any
additional investments.
2. With respect to 75% of its assets invest more than 5% of
its assets in the securities of any one issuer, except securities
issued or guaranteed as to principal and interest by the U.S.
Government, its agencies or instrumentalities.1
3. Invest more than 25% of its assets in the securities of
issuers in any industry, except it may not invest less than 25%
of its assets in bank obligations (including both domestic and
foreign bank obligations) and it reserves freedom of action to
concentrate in securities issued or guaranteed as to principal
and interest by the U.S. Government, its agencies or
instrumentalities.
4. Make loans to others (except through the purchase of debt
obligations and the lending of portfolio securities referred to
under "Smith Barney Money Market Portfolio" in the Prospectus),
except that the Portfolio may purchase and simultaneously resell
for later delivery, obligations issued or guaranteed as to
principal and interest by the U.S. Government or its agencies or
instrumentalities; provided, however, that the Portfolio will not
enter into such a repurchase agreement if, as a result thereof,
more than 10% of its total assets (taken at current value) at
that time would be subject to repurchase agreements maturing in
more than seven days.
5. Invest in securities of another investment company
except as permitted by Section 12(d)(1) of the 1940 Act, or as
part of a merger, consolidation, or acquisition.
6. Underwrite securities of other issuers, except to the
extent the Portfolio, in disposing of portfolio securities, may
be deemed an underwriter within the meaning of the 1933 Act.
7. Issue senior securities, except as permitted under the
1940 Act or any rule, order or interpretation thereunder.
Notwithstanding any other investment restriction of the
Smith Barney Money Market Portfolio, the Portfolio may invest all
of its investable assets in an open-end management investment
company having the same investment objective and restrictions as
the Portfolio.
In addition, the following policies have also been adopted
by the Smith Barney Money Market Portfolio but are not
fundamental and accordingly may be changed by approval of the
Board of Directors. The Portfolio may not:
1. Acquire securities subject to restrictions on disposition
or securities for which there is no readily available market,
enter into repurchase agreements or purchase time deposits or
variable amount master demand notes, if any of the foregoing have
a term or demand feature of more than seven days if, immediately
after and as a result, the value of such securities would exceed,
in the aggregate, 10% of the Portfolio's total assets. Subject
to this limitation, the Fund's Board of Directors has authorized
the Portfolio to invest in restricted securities if such
investment is consistent with the Portfolio's investment
objective and has authorized such securities to be considered to
be liquid to the extent the Manager determines on a daily basis
that there is a liquid institutional market for such securities.
The Board of Directors retains ultimate ongoing responsibility
for the determination that a restricted security is liquid.
2. Sell securities short.
3. Write or purchase put or call options.
Would give it the ability to invest, with respect to 25% of
the Portfolio's assets, more than 5% of its assets in any
one issuer only in the event that Rule 2a-7 is amended in
the future.
4. Purchase illiquid securities (such as repurchase
agreements with maturities in excess of seven days) or other
securities that are not readily marketable if more than 10% of
the net assets of the Portfolio would be invested in such
securities.
5. Purchase or sell real estate, real estate investment
trust securities, commodities, or oil and gas interests.
6. Invest in companies for the purposes of exercising
control.
The Alliance Growth Portfolio may not:
1. Borrow money in excess of 10% of the value (taken at the
lower of cost or current value) of its total assets (not
including the amount borrowed) at the time the borrowing is made,
and then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or pending settlement of securities transactions or
for extraordinary or emergency purpose.
2. Underwrite securities issued by other persons except to
the extent that, in connection with the disposition of its
portfolio investments, it may be deemed to be an underwriter
under certain federal securities laws.
3. Purchase or retain real estate or interests in real
estate, although the Portfolio may purchase securities which are
secured by real estate and securities of companies which invest
in or deal in real estate.
4. Make loans to other persons except by the purchase of
obligations in which the Portfolio may invest consistent with its
investment policies and by entering into repurchase agreements,
or by lending its portfolio securities representing not more than
25% of its total assets.
5. Issue any senior securities, except as permitted by the
1940 Act or any rule, order or interpretation thereunder. For
the purposes of this restriction, collateral arrangements with
respect to options, futures contracts and options on futures
contracts and collateral arrangements with respect to initial and
variation margins are not deemed to be the issuance of a senior
security. (There is no intention to issue senior securities
except as set forth in paragraph 1 above.)
6. Invest more than 5% of its total assets in the
securities of any one issuer (other than U.S. Government
securities and repurchase agreements relating thereto), although
up to 25% of the Portfolio's total assets may be invested without
regard to this restriction.
7. Invest 25% or more of its total assets in the securities
of any one industry. (Obligations of a foreign government and
its agencies or instrumentalities constitute a separate
"industry" from those of another foreign government.)
It is also a fundamental policy of the Portfolio that it may
purchase and sell futures contracts and related options.
Notwithstanding any other investment restriction of the
Alliance Growth Portfolio, the Portfolio may invest all of its
investable assets in an open-end management investment company
having the same investment objective and restrictions as the
Portfolio.
In addition, the following policies have also been adopted
by the Alliance Growth Portfolio, but are not fundamental and
accordingly may be changed by approval of the Board of Directors.
The Portfolio may not:
1. Pledge, mortgage, hypothecate or otherwise encumber an
amount of its assets taken at current value in excess of 15% of
its total assets (taken at the lower of cost or current value)
and then only to secure borrowings permitted by restriction (1)
above. For the purpose of this restriction, the deposit of
securities and other collateral arrangements with respect to
reverse repurchase agreements, options, futures contracts,
forward contracts and options on foreign currencies and payments
of initial and variation margin in connection therewith are not
considered pledges or other encumbrances. This restriction shall
not be deemed to prohibit the Portfolio from obtaining letters of
credit solely for purposes of participating in a captive
insurance company sponsored by the Investment Company Institute
to provide fidelity and directors and officers liability
insurance.
2. Purchase securities on margin, except that the Portfolio
may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities, and except that
the Portfolio may make margin payments in connection with futures
contracts, options on futures contracts, options, forward
contracts or options on foreign currencies.
3. Make short sales of securities or maintain a short
position for the account of the Portfolio unless at all times
when a short position is open it owns an equal amount of such
securities or unless by virtue of its ownership of other
securities it has at all such times a right to obtain securities
(without payment of further consideration) equivalent in kind and
amount to the securities sold, provided that if such right is
conditional the sale is made upon equivalent conditions and
further provided that the Portfolio may not make such short sales
with respect to securities having a value in excess of 5% of its
total assets.
4. Write, purchase or sell any put or call option or any
combination thereof, provided that this shall not prevent the
Portfolio from writing, purchasing and selling puts, calls or
combinations thereof with respect to securities, indexes of
securities or foreign currencies, and with respect to futures
contracts.
5. Purchase voting securities of any issuer if such
purchase, at the time thereof, would cause more than 10% of the
outstanding voting securities of such issuer to be held by the
Portfolio; or purchase securities of any issuer if such purchase
at the time thereof would cause more then 10% of any class of
securities of such issuer to be held by the Portfolio. For this
purpose all indebtedness of an issuer shall be deemed a single
class and all preferred stock of an issuer shall be deemed a
single class.
6. Invest in securities of any issuer if, to the knowledge
of the Portfolio, officers and Directors of the Portfolio and
officers and directors of the Portfolio's investment advisers who
beneficially own more than 0.5% of the shares of securities of
that issuer together own more than 5%.
7. Purchase securities issued by any other registered
investment company or investment trust except (a) by purchase in
the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary
broker's commission, or (b) where no commission or profit to a
sponsor or dealer results from such purchase, or (c) when such
purchase, though not in the open market, is part of a plan of
merger or consolidation; provided, however, that the Portfolio
will not purchase such securities if such purchase at the time
thereof would cause more than 5% of its total assets (taken at
market value) to be invested in the securities of such issuers;
and, provided further, that the Portfolio's purchases of
securities issued by an open-end investment company will be
consistent with the provisions of the 1940 Act.
8. Make investments for the purpose of exercising control
or management.
9. Participate on a joint and several basis in any trading
account in securities.
10. Invest in interests in oil, gas, or other mineral
exploration or development programs, although the Portfolio may
purchase securities which are secured by such interests and may
purchase securities of issuers which invest in or deal in oil,
gas or other mineral exploration or development programs.
11. Purchase warrants, if, as a result, the Portfolio would
have more than 5% of its total assets invested in warrants or
more than 2% of its total assets invested in warrants which are
not listed on the New York Stock Exchange or the American Stock
Exchange.
12. Purchase commodities or commodity contracts, provided
that this shall not prevent the Portfolio from entering into
interest rate futures contracts, securities index futures
contracts, foreign currency futures contracts, forward foreign
currency exchange contracts and options (including options on any
of the foregoing) to the extent such action is consistent with
its investment objective and policies.
13. Purchase additional securities in excess of 5% of the
value of its total assets until all of the Portfolio's
outstanding borrowings (as permitted and described in Restriction
No. 1 above) have been repaid.
The Aim Capital Appreciation Portfolio may not:
1. Invest for the purpose of exercising control over or
management of any company.
2. Engage in the underwriting of securities of other
issuers.
3. Purchase and sell real estate or commodities or commodity
contracts.
4. Make loans, except by the purchase of a portion of an
issue of publicly distributed bonds, debentures or other
obligations, provided that the Fund may lend its portfolio
securities provided the value of such loaned securities does not
exceed 33_% of its total assets.
5. Invest in interests in oil, gas or other mineral
exploration or development programs.
6. Invest in securities of other investment companies.
7. Invest more than 25% of the value of its total assets in
securities of issuers all of which conduct their principal
business activities in the same industry.
In addition, the Aim Capital Appreciation Portfolio treats
as fundamental its policy concerning borrowing. In accordance
with this policy, the Portfolio may borrow funds from a bank
(including its custodian bank) to purchase or carry securities
only if, immediately after such borrowing, the value of the
Portfolio's assets, including the amount borrowed, less its
liabilities, is equal to at least 300% of the amount borrowed,
plus all outstanding borrowings. For the purpose of determining
this 300% asset coverage requirement, the Portfolio's liabilities
will not include the amount borrowed but will include the market
value, at the time of computation, of all securities borrowed by
the Portfolio in connection with short sales. The amount of
borrowing will also be limited by the applicable margin
limitations imposed by the Federal Reserve Board. If at any time
the value of the Portfolio's assets should fail to meet the 300%
asset coverage requirement, the Portfolio will, within three
days, reduce its borrowings to the extent necessary. The
Portfolio may be required to eliminate partially or totally its
outstanding borrowings at times when it may not be desirable for
it to do so.
In addition, the following policies have also been adopted
by the AIM Capital Appreciation Portfolio, but are not
fundamental and accordingly may be changed by approval of the
Board of Directors. The Portfolio may not:
1. Purchase or retain the securities of any issuer, if those
officers and directors of the Company, its advisors or
distributor owning individually more than 1/2 of 1% of the
securities of such issuer, together own more than 5% of the
securities of such issuer.
2. Purchase warrants, valued at the lower of cost or market,
in excess of 5% of the value of the Fund's net assets, and no
more than 2% of such value may be warrants which are not listed
on the New York or American Stock Exchanges.
Except for the borrowing policy, if a percentage restriction
is adhered to at the time of investment, a later change in the
percentage of such investment held by a Fund resulting solely
from changes in values or assets, will not be considered to be a
violation of the restriction.
The American Capital Enterprise Portfolio may not:
1. Make loans except that the Portfolio may invest up to 25%
of the Portfolio's total assets in Repurchase Agreements.
2. Primarily engage in the underwriting or distribution of
securities, except in so far as the Portfolio may be deemed an
underwriter under the 1933 Act in selling a portfolio security.
3. Make any investment in real estate, commodities or
commodities contracts; however, the Portfolio is not prohibited
from investing in securities issued by a real estate investment
trust, provided that such trust is not permitted to invest in
real estate or interests in real estate other than mortgages or
other security interests, and the Portfolio is not prohibited
from entering into transactions in futures contracts and related
options.
4. Invest more than 5% of the value of its assets in the
securities of any one issuer with the exception of U.S.
Government securities or purchase more than 10% of the
outstanding voting securities of any one issuer. Neither
limitation shall apply to the acquisition of shares of other open-
end investment companies to the extent permitted by rule or order
of the SEC exempting the Portfolio from the
limitations imposed by Section 12(d)(1) of the 1940 Act.
5. Invest more than 25% of the value of its assets in
securities issued by companies in any one industry, provided,
however, that this limitation excludes shares of other open-end
investment companies owned by the Portfolio but includes the
Portfolio's pro rata portion of the securities and other assets
owned by any such company.
6. Borrow more than 10% of the value of its net assets
valued at the lower of cost or market at the time of borrowing;
and then only from banks and undertaken as a temporary measure
for extraordinary or emergency purposes; or pledge, transfer,
assign or otherwise encumber its assets except to secure such
borrowing and in an amount not exceeding the amount of the
borrowing. Notwithstanding the foregoing, the Portfolio may
engage in transactions in options, futures contracts and related
options, segregate or deposit assets to cover or secure options
written, and make margin deposits or payments for futures
contracts and related options.
7. Issue senior securities, except as permitted under the
1940 Act or any rule, order or interpretation thereunder, except
that this restriction shall not be deemed to prohibit the
Portfolio from (i) making and collateralizing any permitted
borrowings, (ii) making any permitted loans of its portfolio
securities, or (iii) entering into repurchase agreements,
utilizing options, futures contracts, options on futures
contracts and other investment strategies and instruments that
would be considered "senior securities" but for the maintenance
by the Portfolio of a segregated account with its custodian or
some other form of "cover".
Notwithstanding any other investment restriction of the
American Capital Enterprise Portfolio, the Portfolio may invest
all of its investable assets in an open-end management investment
company having the same investment objective and restrictions as
the Portfolio.
In addition, the following policies have also been adopted
by the American Capital Enterprise Portfolio, but are not
fundamental and accordingly may be changed by approval of the
Board of Directors. The Portfolio may not:
1. Invest more than 5% of the value of its total assets in
securities of companies which (including predecessor companies or
operations) have been in business less than three years,
provided, however, that this limitation excludes shares of other
open-end investment companies owned by the Portfolio but includes
the Portfolio's pro rata portion of the securities and other
assets owned by any such company.
2. Acquire any private placement if it would cause more than
2% of the net assets of the Portfolio, as determined at the time
the Portfolio agrees to any such acquisition, to be invested in
private placements and other assets not having readily available
market quotations, provided, however, that this limitation
excludes shares of other open-end investment companies owned by
the Portfolio but includes the Portfolio's pro rata portion of
the securities and other assets owned by any such company; and,
provided further, that this limitation excludes securities that
have been issued pursuant to Rule 144A under the 1933 Act ("Rule
144A securities").
3. Purchase or retain securities of a company which has an
officer or director who is an officer or director of the
Portfolio or its investment adviser if, to the knowledge of the
Portfolio, one or more such persons own beneficially more than
1/2 of 1% of the shares of the company, and all such persons own
more than 5%.
4. Invest more than 5% of its net assets in warrants or
rights valued at the lower of cost or market, not more than 2% of
its net assets in warrants or rights (valued on such basis) which
are not listed on the New York or American Stock Exchanges.
Warrants or rights acquired in units or attached to other
securities are not subject to the foregoing limitations.
5. Invest more than 15% of its net assets (determined at the
time of investment) in illiquid securities (excluding Rule 144A
securities) and repurchase agreements that have a maturity of
longer than seven days.
6. Invest in interests in oil, gas, or other mineral
exploration or developmental programs.
7. Sell short or buy on margin, but the Portfolio may engage
in transactions in options, futures contracts and related options
and make margin deposits and payments in connection therewith.
Short sales against the box are not subject to this restriction.
8. Make any investment in any security about which
information is not available with respect to history, management,
assets, earnings, and income of the issuer except to acquire
shares of other open-end investment companies to the extent
permitted by rule or order of the SEC exempting the Portfolio
from the limitations imposed by Section 12(d)(1) of the 1940 Act.
9. Make any investment which involves promotion or business
management by the Portfolio or which would subject the Portfolio
to unlimited liability.
10. Invest in companies for the purpose of exercising
control.
11. Acquire securities of any other domestic or foreign
investment company or investment fund except in connection with a
plan of merger or consolidation with or acquisition of
substantially all the assets of such other investment company or
to acquire shares of other open-end investment companies to the
extent permitted by rule or order of the SEC exempting the
Portfolio from the limitations imposed by Section 12(d)(1) of the
1940 Act.
The TBC Managed Income Portfolio may not:
1. Concentrate the portfolio investments in any industry by
investing more than 25% of its gross assets in any one industry.
There shall be no limitation on the purchase of U.S. Government
securities by the Portfolio when it adopts a defensive position.
2. Make investments in real estate or commodities or
commodity contracts, although the Portfolio may purchase
securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
3. Act as securities underwriter.
4. Make loans, except that the Portfolio may (i) purchase
bonds, debentures and other securities of a like nature, (ii)
make loans in the form of call loans or loans maturing in not
more than one year which are secured by marketable collateral and
are in amounts and on terms similar to those currently in effect
in the case of loans made by national banks, (iii) enter into
repurchase agreements to the extent set forth in the Prospectus
and (iv) lend its portfolio securities.
5. Borrow money, except that (a) the Portfolio may borrow
money for temporary administrative purposes provided that the
aggregate of such borrowing does not exceed 5%.
6. Lend its portfolio securities in an amount in excess of
1/3 of the total assets taken at value. Any loans of portfolio
securities will be made according to guidelines established by
the SEC and the Directors, including the borrower's maintaining
collateral equal at all times to the value of the securities
loaned.
7. Purchase "illiquid" securities, including repurchase
agreements maturing in more then seven days, securities lacking
readily available market quotations and securities which cannot
be sold without registration or the filing of a notification
under Federal or state securities laws, if as a result, such
investment would exceed 15 % of the value of the Portfolio's net
assets.
8. Purchase securities of companies for the purpose of
exercising control.
9. Purchase securities on margin, except short-term credits
as are necessary for the purchase and sale of securities, or
effect short sales.
10. As to 75% of the total assets of the Portfolio, purchase
securities of any issuer, if immediately thereafter (a) more than
5% of total assets (taken at market value) would be invested in
the securities of such issuer, or (b) more than 10% of the
outstanding securities of any class of such issuer would be held
by the Portfolio, provided that this limitation does not apply to
U.S. Government securities.
11. Purchase securities of any other investment company
except as part of a plan of merger or consolidation.
12. Purchase securities of companies which together with
predecessors have a record of less than three years' continuous
operation, if, as a result, more than 5% of the Portfolio's net
assets would then be invested in such securities.
13. Invest in puts, calls, straddles, spreads and any
combination thereof.
14. Invest in oil, gas or other mineral exploration or
development programs, provided, however, this shall not prohibit
the Portfolio from purchasing publicly traded securities of
companies engaging in whole or in part in such activities.
15. Purchase securities from or sell securities to any of
its officers or Directors, except with respect to its own shares
and as is permissible under applicable statues, rules and
regulations.
Notwithstanding any other investment restriction of the TBC
Managed Income Portfolio, the Portfolio may invest all of its
investable assets in an open-end management investment company
having the same investment objective and restrictions as the
Portfolio.
The Putnam Diversified Income Portfolio may not:
1. Borrow money in excess of 10% of the value (taken at the
lower of cost or current value) of its total assets (not
including the amount borrowed) at the time the borrowing is made,
and then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might
otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such
borrowings will be repaid before any additional investments are
purchased.
2. Pledge, hypothecate, mortgage or otherwise encumber its
assets in excess of 15% its total assets (taken at current value)
and then only to secure borrowings permitted by restriction 1
above. (The deposit of underlying securities and other assets in
escrow and other collateral arrangements in connection with the
writing of put or call options and collateral arrangements with
respect to margin for futures contracts and related options or
letters of credit obtained solely for purposes of participating
in a captive insurance company sponsored by the Investment
Company Institute to provide fidelity and directors and officers
liability insurance, are not considered to be pledges or other
encumbrances.)
3. Purchase securities on margin, except such short-term
credits as may be necessary for the clearance of purchases and
sales of securities, and except that it may make margin payments
in connection with transactions in futures contracts and related
options.
4. Make short sales of securities or maintain a short
position for the account of the Portfolio unless at all times
when a short position is open the Portfolio owns an equal amount
of such securities or owns securities which, without payment of
any further consideration, are convertible into or exchangeable
for securities of the same issue as, and equal in amount to, the
securities sold short.
5. Underwrite securities issued by other persons except to
the extent that, in connection with the disposition of its
portfolio investments, it may be deemed to be an underwriter
under certain federal securities laws.
6. Purchase or sell real estate, although it may purchase
securities of issuers which deal in real estate, securities which
are secured by interests in real estate and securities
representing interests in real estate.
7. Purchase or sell commodities or commodity contracts,
except that it may purchase or sell futures contracts, options on
futures, forward contracts and options on foreign currencies.
8. Make loans, except by purchase of debt obligations in
which the Portfolio may invest consistent with its investment
policies, by entering into repurchase agreements with respect to
not more than 25% of its total assets (taken at current value),
or through the lending of its portfolio securities with respect
to not more than 25% of its assets.
9. Invest in securities of any issuer if, to the knowledge
of the Putnam Management, officers and Directors of Putnam
Management who beneficially own more than 0.5% of the securities
of that issuer together beneficially own more than 5%.
10. Invest in securities of any issuer if, immediately
after such investment, more than 5% of the total assets of the
Portfolio (taken at current value) would be invested in the
securities of such issuer; provided that this limitation does not
apply to U.S. Government securities, or, with respect to 25% of
the Portfolio's total assets, securities of any foreign
government, its agencies or instrumentalities, securities of
supranational entities, and securities backed by the credit of a
governmental entity.
11. Acquire more than 10% of the voting securities of any
issuer.
12. Invest more than 25% of the value of its total assets
in any one industry. (U.S. Government securities and securities
of any foreign government, its agencies or instrumentalities,
securities of supranational entities, and securities backed by
the credit of a governmental entity are not considered to
represent an industry).
13. Purchase securities the disposition of which is restricted
under federal securities laws, if, as a result, such investments
would exceed 15% of the value of the Portfolio's net assets,
excluding restricted securities that have been determined by the
Directors of the Fund (or the person designated by them to make
such determinations) to be readily marketable.
14. Buy or sell oil, gas or other mineral leases, rights or
royalty contracts.
15. Make investments for the purpose of gaining control of
a company's management.
16. Issue any senior securities except as permitted by the
1940 Act or any rule, order or interpretation thereunder.
In addition, the following policy has also been adopted by
the Putnam Diversified Income Portfolio, but is not fundamental
and accordingly may be changed by approval of the Board of
Directors. The Portfolio may not:
1. Invest in securities of other registered open-end
investment companies except as they may be acquired as part of a
merger or consolidation or acquisition of assets.
Notwithstanding any other investment restriction of the
Putnam Diversified Income Portfolio, the Portfolio may invest all
of its investable assets in an open-end management investment
company having the same investment objective and restrictions as
the Portfolio.
The GT Global Strategic Income Portfolio may not:
1. Invest 25% or more of the value of its total assets in
the securities of issuers conducting their principal business
activities in the same industry, (provided, however, that the
Portfolio may invest all of its investable assets in an open-end
management investment company with substantially the same
investment objectives, policies and limitations as the Portfolio)
except that this limitation shall not apply to securities issued
or guaranteed as to principal and interest by the U.S. Government
or any of its agencies or instrumentalities.
2. Invest in companies for the purpose of exercising control
or management (provided, however, that the Portfolio may invest
all of its investable assets in an open-end management investment
company with substantially the same investment objectives,
policies and limitations as the Portfolio).
3. Buy or sell real estate (including real estate limited
partnerships) or commodities or commodity contracts; however, the
Portfolio may invest in debt securities secured by real estate or
interests therein or issued by companies which invest in real
estate or interests therein, including real estate investment
trusts, and may purchase or sell currencies (including forward
currency exchange contracts), futures contracts and related
options generally as described in the Prospectus and Statement of
Additional Information and subject to (13) below.
4. Engage in the business of underwriting securities of
other issuers, except to the extent that the disposal of an
investment position may technically cause it to be considered an
underwriter as that term is defined under the 1933 Act.
5. Make loans, except that the Portfolio may invest in loans
and participations, purchase debt securities and enter into
repurchase agreements and make loans of portfolio securities.
6. Sell securities short, except to the extent that the
Portfolio contemporaneously owns or has the right to acquire at
no additional cost securities identical to those sold short.
7. Purchase securities on margin, provided that the
Portfolio obtain such short-term credits as may be necessary for
the clearance of purchases and sales of securities; except that
it may make margin deposits in connection with futures contracts
subject to (13) below.
8. Borrow money in excess of 3313% of its total assets
(including the amount borrowed), less all liabilities and
indebtedness (other than borrowing). This restriction shall not
prevent the Portfolio from entering into reverse repurchase
agreements and engaging in "roll" transactions, provided that
reverse repurchase agreements, "roll" transactions and any other
transactions constituting borrowing by the Portfolio may not
exceed 1/3 of its total assets. In the event that the asset
coverage for the Portfolio's borrowings falls below 300%, the
Portfolio will reduce, within three days (excluding Sundays and
holidays), the amount of its borrowings in order to provide for
300% asset coverage. Transactions involving options, futures
contracts, options on futures contracts and forward currency
contracts, and collateral arrangements relating thereto will not
be deemed to be borrowings.
9. Mortgage, pledge, or hypothecate any of its assets,
provided that this restriction shall not apply to the transfer of
securities in connection with any permissible borrowing or to
letters of credit obtained solely for purposes of participating
in a captive insurance company sponsored by the Investment
Company Institute to provide fidelity and directors and officers
liability insurance.
10. Invest in interests in oil, gas, or other mineral
exploration or development programs.
11. Invest more than 5% of its total assets in securities of
companies having, together with their predecessors, a record of
less than three years of continuous operation (provided, however,
that the Portfolio may invest all of its investable assets in an
open-end management investment company with substantially the
same investment objectives, policies, and limitations as the
Portfolio).
12. Purchase or retain the securities of any issuer, if
those individual officers and Directors of the Company, the
Portfolio's investment adviser, or distributor, each owning
beneficially more than 1/2 of 1% of the securities of such
issuer, together own more than 5% of the securities of such
issuer.
13. Enter into a futures contract, if, as a result thereof,
more than 5% of the Portfolio's total assets (taken at market
value at the time of entering into the contract) would be
committed to margin on such futures contracts.
For purposes of the GT Global Strategic Income Portfolio's
concentration policy contained in limitation (1) above, the
Portfolio intends to comply with the SEC staff positions that
securities issued or guaranteed as to principal and interest by
any single foreign government or any supranational organizations
in the aggregate are considered to be securities of issuers in
the same industry.
In addition, the following policies have also been adopted
by the GT Global Strategic Income Portfolio, but are not
fundamental and accordingly may be changed by the approval of the
Board of Directors. The Portfolio may not:
1. Invest more than 15% of its net assets in illiquid
securities.
2. Borrow money to purchase securities and will not invest
in securities of an issuer if the investment would cause the
Portfolio to own more than 10% of any class of securities of any
one issuer (provided, however, that the Portfolio may invest all
of its investable assets in an open-end management investment
company with substantially the same investment objectives,
policies, and limitations as the Portfolio).
3. Invest more than 10% of its total assets in shares of
other investment companies and invest more than 5% of its total
assets in any one investment company or acquire more than 3% of
the outstanding voting securities of any one investment company
(provided, however, that the Portfolio may invest all of its
investable assets in an open-end management investment company
with substantially the same investment objectives, policies, and
limitations as the Portfolio).
The Smith Barney High Income Portfolio may not:
Purchase the securities of any issuer (other than
U.S. Government securities) if as a result more than 5% of
the value of the Portfolio's total assets would be invested
in the securities of the issuer, except that up to 25% of
the value of the Portfolio's total assets may be invested
without regard to this 5% limitation.
Purchase more than 10% of the voting securities of
any one issuer (other than U.S. Government securities),
except that up to 25% of the value of the Portfolio's total
assets may be invested without regard to this 10%
limitation.
3. Make short sales of securities, except that the
Portfolio may engage in short sales "against the box."
4. Borrow money, except that (a) the Portfolio may
borrow from banks for temporary or emergency (not
leveraging) purposes in an amount not exceeding 10% of the
value of the Portfolio's total assets (including the amount
borrowed) valued at market less liabilities (not including
the amount borrowed) at the time the borrowing is made and
(b) the Portfolio may enter into futures contracts.
Whenever borrowings described in (a) exceed 5% of the value
of the Portfolio's total assets, the Portfolio will not make
any additional investments.
5. Underwrite the securities of other issuers, except
insofar as the Portfolio may be deemed an underwriter in the
course of disposing of portfolio securities.
6. Issue any senior securities, except as permitted
under the 1940 Act or any rule, order or interpretation
thereunder, except that this restriction shall not be deemed
to prohibit the Portfolio from (i) making and
collateralizing any permitted borrowings, (ii) making any
permitted loans of its portfolio securities, or (iii)
entering into repurchase agreements, utilizing options,
futures contracts, options on futures contracts and other
investment strategies and instruments that would be
considered "senior securities" but for the maintenance by
the Portfolio of a segregated account with its custodian or
some other form of "cover".
7. Purchase or sell real estate or interests in real
estate, except that the Portfolio may purchase and sell
securities that are secured by real estate or interests in
real estate and may purchase securities issued by companies
that invest or deal in real estate.
8. Invest in commodities, except that the Portfolio may
invest in futures contracts, options on futures contracts
and options on currencies.
9. Make loans to others, except through the purchase of
qualified debt obligations, the entry into repurchase
agreements and loans of portfolio securities consistent with
the Portfolio's investment objectives and policies.
10. Invest in securities of other investment companies
registered or required to be registered under the 1940 Act,
except as they may be acquired as part of a merger,
consolidation, reorganization, acquisition of assets or an
offer of exchange, or to the extent permitted by the 1940
Act.
11. Purchase any securities which would cause more than
25% of the value of the Portfolio's total assets at the time
of purchase to be invested in the securities of issuers
conducting their principal business activities in the same
industry; provided that there shall be no limit on the
purchase of U.S. Government securities.
Notwithstanding any other investment restriction of the
Smith Barney High Income Portfolio, the Portfolio may invest
all of its investable assets in an open-end management
investment company having the same investment objective and
restrictions as the Portfolio.
In addition, the following policies have also been
adopted by the Smith Barney High Income Portfolio, but are
not fundamental and accordingly may be changed by the
approval of the Board of Directors. The Portfolio may not:
1. Purchase securities on margin, except that the
Portfolio may obtain any short-term credits
necessary for the clearance of purchases and sales of
securities. For purposes of this restriction, the deposit
or payment of initial or variation margin in connection with
futures contracts or related options will not be deemed to
be a purchase of securities on margin.
2. Pledge, hypothecate, mortgage or otherwise encumber
the Portfolio's assets except to secure borrowings, to
obtain a letter of credit solely for purposes of
participating in a captive insurance company sponsored by
the Investment Company Institute to provide fidelity and
directors and officers liability insurance and as margin for
commodities transactions.
The MFS Total Return Portfolio may not:
1. Borrow amounts in excess of 33-1/3% of its assets,
including amounts borrowed, and then only as a temporary
measure for extraordinary or emergency purposes.
2. Underwrite securities issued by other persons except
insofar as the Portfolio may technically be deemed an
underwriter under the 1933 Act in selling a portfolio
security.
3. Issue any senior securities except as permitted by
the 1940 Act. For purposes of this restriction, collateral
arrangements with respect to any type of option, any type of
forward contract, any type of futures contract and any type
of swap and collateral arrangements with respect to initial
and variation margin are not deemed to be the issuance of a
senior security.
4. Purchase or sell real estate (including limited
partnership interests but excluding securities secured by
real estate or interests therein and securities of
companies, such as real estate investment trusts, which deal
in real estate or interests therein), interests in oil, gas
or mineral leases, commodities or commodity contracts
(excluding currencies and any type of option, any type of
futures contract and any type of forward contract) in the
ordinary course of its business. The Portfolio reserves the
freedom of action to hold and to sell real estate, mineral
leases, commodities or commodity contracts (including
currencies and any type of option, any type of futures
contract and any type of forward contract) acquired as a
result of the ownership of securities.
5. Make loans to other persons. For these purposes,
the purchase of commercial paper or a portion or all of an
issue of debt securities, the lending of portfolio
securities, or the investment of the Portfolio's assets in
repurchase agreements, shall not be considered the making of
a loan.
6. Purchase any securities of an issuer of a
particular industry, if as a result, more than 25% of its
gross assets would be invested in securities of issuers
whose principal business activities are in the same industry
(except (i) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government or
its agencies and instrumentalities and repurchase agreements
collateralized by such obligations.
Notwithstanding any other investment restriction of the
MFS Total Return Portfolio, the Portfolio may invest all of
its investable assets in an open-end management investment
company having the same investment objective and
restrictions as the Portfolio.
In addition, the following policies have also been
adopted by the MFS Total Return Portfolio, but are not
fundamental and accordingly may be changed by approval of
the Board of Directors. The Portfolio may not:
1. Invest in illiquid investments, including
securities subject to legal or contractual restrictions on
resale or for which there is no readily available market
(e.g. trading in the security is suspended, or in the case
of unlisted securities, where no market exists) if more
than 15% of the Portfolio's net assets (taken at market
value) would be invested in such securities. Repurchase
agreements maturing in more than seven days will be deemed
illiquid for purposes of the Portfolio's limitation on
investment in illiquid securities. Securities that are not
registered under the 1933 Act and sold in reliance on Rule
144A thereunder, but are determined to be liquid by the
Board of Directors (or its delegate), will not be subject to
this 15% limitation;
2. Purchase securities issued by any other investment
company in excess of the amount permitted by the 1940 Act,
except when such purchase is part of a plan of merger or
consolidation.
3. Purchase any securities or evidences of interest
therein on margin except that the Portfolio may obtain such
short-term credit as may be necessary for the clearance of
any transaction and except that the Portfolio may make
margin deposits in connection with any type of swap, any
type of option, any type of futures contract and any type of
forward contract.
4. Sell any security which the Portfolio does not own
unless by virtue of its ownership of other securities the
Portfolio has at the time of sale a right to obtain
securities without payment of further consideration
equivalent in kind and amount to the securities sold and
provided that if such right is conditional the sale is made
upon the same conditions.
5. Pledge, mortgage or hypothecate in excess of 33 1/3%
of its gross assets. For the purpose of this restriction,
collateral arrangements with respect to any type of swap,
any type of options, any type of futures contract and any
type of forward contract and payments of initial and
variation margin in connection therewith, are not considered
a pledge of assets.
6. Purchase or sell any put or call options or any
combination thereof, provided, that this shall not prevent
(a) the purchase, ownership, holding or sale of (i) warrants
where the grantor of the warrants is the issuer of the
underlying securities or (ii) put or call options or
combinations thereof with respect to securities, foreign
currencies, indexes of securities, any type of swap or any
type of futures contract or (b) the purchase, ownership,
holding or sale of contracts for the future delivery of
securities or currencies.
PERFORMANCE INFORMATION
From time to time the Fund may advertise a Portfolio's
total return, average annual total return, yield and current
distribution return in advertisements and other types of
sales literature. These figures are based on historical
earnings and are not intended to indicate future
performance. In addition, these figures will not reflect
the deduction of the charges that are imposed on a Contract
by an insurance company separate account (see Contract
prospectus) which, if reflected, would reduce the
performance quoted. The total return shows what an
investment in the Portfolio would have earned over a
specified period of time (one, five or ten years) assuming
that all distributions and dividends by the Portfolio were
invested on the reinvestment dates during the period less
all recurring fees.
Each Portfolio's yield is computed by dividing the net
investment income per share earned during a specified thirty
day period by the net asset value per share on the last day
of such period and annualizing the result. For purposes of
the yield calculation, interest income is determined based
on a yield to maturity percentage for each long-term fixed
income obligation in the portfolio; income on short-term
obligations is based on current payment rate.
The Fund calculates current distribution return for
each Portfolio by dividing the distributions from investment
income declared during the most recent period by the net
asset value on the last day of the period for which current
distribution return is presented. From time to time, a
Portfolio may include its current distribution return in
information furnished to present or prospective shareowners.
A Portfolio's current distribution return may vary from
time to time depending on market conditions, the composition
of its investment portfolio and operating expenses. These
factors and possible differences in the methods used in
calculating current distribution return, and the charges
that are imposed on a Contracts by a separate account,
should be considered when comparing a Portfolio's current
distribution return to yields published for other investment
companies and other investment vehicles. Current
distribution return should also be considered relative to
changes in the value of the Portfolio's shares and to the
risks associated with the Portfolio's investment objective
and policies. For example, in comparing current
distribution returns with those offered by Certificates of
Deposit ("CDs"), it should be noted that CDs are insured (up
to $100,000) and offer a fixed rate of return.
Performance information may be useful in evaluating a
Portfolio and for providing a basis for comparison with
other financial alternatives. Since the performance of each
Portfolio changes in response to fluctuations in market
conditions, interest rate and Portfolio expenses, no
performance quotation should be considered a representation
as to the Portfolio's performance for any future period.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Portfolio's share will be
determined on any day that the New York Stock Exchange is
open. The New York Stock Exchange is closed on the
following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
REDEMPTION OF SHARES
Redemption payments shall be made wholly in cash unless
the Directors believe that economic conditions exist that
would make such a practice detrimental to the best interests
of a Portfolio and its remaining shareowners. If a
redemption is paid in portfolio securities, such securities
will be valued in accordance with the procedures described
under "Determination of Net Asset Value" in the Prospectus
and a shareholder would incur brokerage expenses if these
securities were then converted to cash.
CUSTODIANS
Portfolio securities and cash owned by the Fund on
behalf of the Smith Barney Income and Growth Portfolio, the
Alliance Growth Portfolio, the AIM Capital Appreciation
Portfolio, the American Capital Enterprise Portfolio, the
TBC Managed Income Portfolio, the Putnam Diversified Income
Portfolio, the Smith Barney High Income Portfolio, the MFS
Total Return Portfolio and the Smith Barney Money Market
Portfolio are held in the custody of PNC Bank, National
Association, 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103 (foreign securities, if any, will be held
in the custody of The Barclays Bank, PLC).
Portfolio securities and cash owned by the Fund on
behalf of the Smith Barney International Equity Portfolio,
the Smith Barney Pacific Basin Portfolio and the GT Global
Strategic Income Portfolio are held in the custody of Morgan
Guaranty Trust Company of New York, 60 Wall Street, New
York, New York 10260.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New
York 10154, has been selected as independent auditors for
the Fund for its fiscal year ending October 31, 1996 to
examine and report on the financial statements and financial
highlights of the Fund.
THE FUND
Pursuant to the Articles of Incorporation, the
Directors have authorized the issuance of twelve series of
shares, each representing shares in one of twelve separate
Portfolios - the Smith Barney Income and Growth Portfolio,
the Alliance Growth Portfolio, the AIM Capital Appreciation
Portfolio, the American Capital Enterprise Portfolio, the
Smith Barney International Equity Portfolio, the Smith
Barney Pacific Basin Portfolio, the TBC Managed Income
Portfolio, the Putnam Diversified Income Portfolio, the GT
Global Strategic Income Portfolio, the Smith Barney High
Income Portfolio, the MFS Total Return Portfolio and the
Smith Barney Money Market Portfolio. Pursuant to such
authority, the Directors may also authorize the creation of
additional series of shares and additional classes of shares
within any series (which would be used to distinguish among
the rights of different categories of shareholders, as might
be required by future regulations or other unforeseen
circumstances). The investment objectives, policies and
restrictions applicable to additional Portfolios would be
established by the Directors at the time such Portfolios
were established and may differ from those set forth in the
Prospectus and this Statement of Additional Information. In
the event of liquidation or dissolution of a Portfolio or of
the Fund, shares of a Portfolio are entitled to receive the
assets belonging to that Portfolio and a proportionate
distribution, based on the relative net assets of the
respective Portfolios, of any general assets not belonging
to any particular Portfolio that are available for
distribution.
The Articles of Incorporation may be amended only upon
the vote of a majority of the shares of capital stock of the
Fund outstanding and entitled to vote, and in accordance
with applicable law, except for certain amendments that may
be made by the Directors.
The Articles of Incorporation further provide that the
Fund shall indemnify its directors, officers and employees
against any liability to the Fund or to a shareowner, except
as such liability may arise from his or its own bad faith,
willful misfeasance, gross negligence, or reckless disregard
of his or its duties. With the exceptions stated, the
Articles of Incorporation provide that a Director, officer
or employee is entitled to be indemnified against all
liability in connection with the affairs of the Fund.
The Fund shall continue without limitation of time
subject to the provisions in the Articles of Incorporation
concerning termination of the corporation or any of the
series of the corporation by action of the shareowners or
by action of the Directors upon notice to the shareowners.
MANAGEMENT AGREEMENTS
The Directors are responsible for the direction and
supervision of the Fund's business and operations. Each
Portfolio is managed by Smith Barney Mutual Funds Management
Inc. ("SBMFM" or the "Manager") pursuant to a Management
Agreement dated June 2, 1994 with respect to each Portfolio
except the AIM Capital Appreciation Portfolio, whose
Management Agreement is dated October 10, 1995. The Smith
Barney High Income Portfolio is managed by the Greenwich
Street Advisors Division of SBMFM. Each Portfolio receives
discretionary advisory services provided by the Manager or
by a Sub-Adviser (pursuant to a Subadvisory Agreement) who
is identified, retained, supervised and compensated by the
Manager. The Manager is located at 388 Greenwich Street,
New York, New York 10013 and is a wholly-owned subsidiary of
Smith Barney Holdings Inc. Smith Barney Holdings Inc.,
which is a wholly-owned subsidiary of Travelers Group Inc.
("Travelers"), is also the parent company of Smith Barney
Inc. ("Smith Barney"), the Fund's distributor.
Each Management Agreement provides that the Manager
will administer the Portfolio's corporate affairs and, in
connection therewith, shall furnish the Portfolio with
office facilities and with clerical, bookkeeping and
recordkeeping services at such office facilities. Subject
to the provisions of any applicable Subadvisory Agreement,
the Manager will also manage the investment operations of
each Portfolio and will be responsible for furnishing or
causing to be furnished to each Portfolio advice and
assistance with respect to the purchase, retention and
disposition of investments, in accordance with each
Portfolio's investment objectives, policies and restrictions
as stated in the Prospectus and Statement of Additional
Information.
By written agreement, research and other departments
and staff of Smith Barney will furnish the Manager with
information, advice and assistance and will be available for
consultation on the Fund's Portfolios. Thus, Smith Barney
may also be considered an investment adviser to the Fund.
Smith Barney's services are paid for by the Manager; there
is no charge to the Fund for such services.
The Manager has agreed to waive its fee to the extent
that the aggregate expenses of any of the Smith Barney
Income and Growth Portfolio, the Alliance Growth Portfolio,
the AIM Capital Appreciation Portfolio, the American Capital
Enterprise Portfolio, the TBC Managed Income Portfolio, the
Putnam Diversified Income Portfolio, the Smith Barney High
Income Portfolio, the MFS Total Return Portfolio and the
Smith Barney Money Market Portfolio, exclusive of taxes,
brokerage, interest and extraordinary expenses, such as
litigation and indemnification expenses, exceed 1.25% of the
average daily net assets for any fiscal year of each such
Portfolio. The Manager has agreed to waive its fee to the
extent that the aggregate expenses of each of the Smith
Barney International Equity Portfolio, the Smith Barney
Pacific Basin Portfolio and the GT Global Strategic Income
Portfolio exclusive of taxes, brokerage, interest and
extraordinary expenses, exceed 1.50% of the average daily
net assets for any fiscal year of each such Portfolio. Each
of these voluntary expense limitations shall be in effect
until it is terminated by notice to shareowners and by
supplement to the then current Statement of Additional
Information.
Each Management and Subadvisory Agreement
(collectively, the "Investment Agreements") provides further
that if in any fiscal year the aggregate expenses of a
Portfolio (including fees pursuant to such agreements, but
excluding interest, taxes, brokerage and extraordinary
expenses) exceed the expense limitation of any state having
jurisdiction over such Portfolio, the Manager or Sub-
Adviser, as the case may be, will reduce its fee by the
proportion of such excess expenses equal to the proportion
that its fee thereunder bears to the aggregate of fees paid
by the Portfolio for investment advice or management and any
administration in that year, to the extent required by state
law. Each Management Agreement also provides that the
Manager shall not be liable to the Fund for any error of
judgment or mistake of law or for any loss suffered by the
Fund so long as it acted in good faith without willful
misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless
disregard of its obligations and duties under the Management
Agreement. Each Subadvisory Agreement also provides that
the Sub-Advisor shall not be liable to the Manager or the
Portfolio for any error of judgment or mistake of law or for
any loss suffered by the Manager or the Portfolio so long as
it acted in good faith without willful misfeasance, bad
faith or gross negligence in the performance of its duties
or by reason of its reckless disregard of its obligations
and duties under the Subadvisory Agreement.
Each Investment Agreement shall continue for an initial
two-year term and shall be continued from year to year if
specifically approved at least annually as required by the
1940 Act. Each Investment Agreement further provides that
it shall terminate automatically in the event of its
assignment (as defined in the 1940 Act) and that it may be
terminated without penalty by either party on not less than
60 days' written notice.
For the periods shown, each Portfolio paid the
following management fee:
Period Ended*
Year Ended
10-31-94 10-31-
95
Smith Barney Income and Growth Portfolio
$11,567
Alliance Growth Portfolio 27,111
AIM Capital Appreciation Portfolio N/A
**
American Capital Enterprise Portfolio
11,354
Smith Barney International Equity Portfolio
24,422
Smith Barney Pacific Basin Portfolio
12,450
TBC Managed Income Portfolio 7,369
Putnam Diversified Income Portfolio
11,520
GT Global Strategic Income Portfolio
5,389
Smith Barney High Income Portfolio 7,951
MFS Total Return Portfolio 13,651
Smith Barney Money Market Portfolio
9,916
*From June 16, 1994 (commencement of operations through
October 31, 1994.
**From October , 1995 (commencement of operations)
through October 31, 1995.
The Management Agreement for each Portfolio that does
not have a Sub-Adviser provides that SBMFM will (a) manage
the Portfolio's assets in accordance with the Portfolio's
investment objectives and policies as stated in the
Prospectus and the Statement of Additional Information, (b)
make investment decisions for the Portfolio; (c) place
purchase and sale orders for portfolio transactions on
behalf of the Portfolio; (d) employ professional portfolio
managers and securities analysts who provide research
services to the Portfolio; and (e) administer the
Portfolio's corporate affairs and, in connection therewith,
furnish the Portfolio with office facilities and with
clerical, bookkeeping and recordkeeping services at such
office facilities.
The Fund has entered into a Subadvisory Agreement dated
June 2, 1994 on behalf of each of the Alliance Growth
Portfolio, the American Capital Enterprise Portfolio, the
TBC Managed Income Portfolio, the Putnam Diversified Income
Portfolio, the GT Global Strategic Income Portfolio and the
MFS Total Return Portfolio. The Fund has entered into a
Subadvisory Agreement dated October 10, 1995 on behalf of
the AIM Capital Appreciation Portfolio. Pursuant to each
Subadvisory Agreement among the Manager, the Fund on behalf
of the applicable Portfolio and the applicable Sub-Adviser,
the Sub-Adviser is authorized, in its discretion and without
prior consultation with Manager to: (a) manage the
Portfolio's assets in accordance with the Portfolio's
investment objectives and policies as stated in the
Prospectus and the Statement of Additional Information, (b)
make investment decisions for the Portfolio; (c) place
purchase and sale orders for portfolio transactions on
behalf of the Portfolio; and (d) employ professional
portfolio managers and securities analysts who provide
research services to the Portfolio.
The Alliance Growth Portfolio is advised by Alliance
Capital Management L.P. ("Alliance Capital"). Alliance
Capital is a Delaware limited partnership with principal
offices at 1345 Avenue of the Americas, New York, New York
10105. For the services provided by Alliance Capital, the
Manager pays Alliance Capital an annual fee calculated at a
rate of 0.375% of the Portfolio's average daily net assets,
paid monthly.
Alliance Capital Management Corporation ("ACMC"), the
sole general partner of, and the owner of a 1% general
partnership interest in, Alliance Capital, is an indirect
wholly-owned subsidiary of The Equitable Life Assurance
Society of the United States ("Equitable"), one of the
largest life insurance companies in the United States, which
is itself a wholly-owned subsidiary of The Equitable
Companies Incorporated ("ECI"), a holding company controlled
by AXA, a French insurance holding company. (For purposes
of this Statement of Additional Information, ACMC refers to
Alliance Capital Management Corporation, the general partner
of Alliance Capital, and to the predecessor general partner
of the Alliance Capital of the same name.) ACMC, Inc., a
wholly-owned subsidiary of Equitable, owns approximately 62%
of the issued and outstanding units representing assignments
of beneficial ownership of limited partnership interests in
the Alliance Capital ("Units"). As of October 31, 1994,
approximately 28% and 10% of the Units were owned by the
public and employees of Alliance Capital and its
subsidiaries, respectively.
AXA owns 49% of the outstanding voting shares of common
stock of ECI. AXA is a member of a group of companies (the
"AXA Group") that is the second largest insurance group in
France and one of the largest insurance groups in Europe.
Principally engaged in property and casualty insurance and
life insurance in Europe and elsewhere in the world, the AXA
Group is also involved in real estate operations and certain
other financial services, including mutual fund management,
lease financing services and brokerage services. Based on
information provided by AXA, as of June 30, 1994, 42.7% of
the voting shares (representing 54.8% of the voting power)
of AXA were owned by Midi Participations, a French
corporation that is a holding company. The voting shares of
Midi Participations are in turn owned 60% by Finaxa, a
French corporation that is a holding company, and 40% by
subsidiaries of Assicurazioni Generali S.P.A., an Italian
corporation ("Generali") (one of which, Belgica Insurance
Holding S.A., a Belgian corporation, owned 34.15%). As of
June 30, 1994, 61.5% of the voting shares (representing
70.4% of the voting power) of Finaxa were owned by five
French mutual insurance companies (the "Mutuelles AXA"), one
of which, AXA Assurances I.A.R.D. Mutuelle, owned 31.1% of
the voting shares (representing 44.7% of the voting power),
and 26.3% of the voting shares (representing 19.1% of the
voting power) of Finaxa were owned by Compagnie Financiere
de Paribas, a French Financial institution engaged in
banking and related activities ("Paribas"). Including the
shares owned by Midi Participations, as of June 30, 1994,
the Mutuelles AXA directly or indirectly owned 51.7% of the
voting shares (representing 64.5% of the voting power) of
AXA. Acting as a group, the Mutuelles AXA control AXA, Midi
Participations and Finaxa. The Mutuelles AXA have
approximately 1.5 million policyholders.
The address of each AXA, Midi Participations, Belgica
and Finaxa is 23 Avenue Matigon, Paris, France. The address
of AXA Assurances I.A.R.D. Mutuelle is La Grande Arche,
Paroi Nord, Paris La Defense, France. The address of
Generali is Paizza Duca Degli Abruzzzi 2, Trieste, Italy.
The address of Paribas is 5 Rue d'Antin, Paris, France.
Alliance Capital is a major international investment
manager, supervising client accounts with assets, as of
October 31, 1994 totaling more than $124 billion. Alliance
Capital serves its clients, who primarily are major
corporate employee benefit funds, public employee retirement
systems, investment companies, foundations and endowment
funds, with a staff of more than 1,400 employees operating
out of five domestic offices and the overseas offices of
five subsidiaries. The 49 registered investment companies
comprising 93 separate investment portfolios managed by
Alliance Capital currently have over 1.3 million
shareholders. As of October 31, 1994, Alliance Capital was
retained as an investment manager of employee benefit fund
assets for 21 of the "Fortune 100" Companies.
The AIM Capital Appreciation Portfolio is advised by
AIM Capital Management, Inc. ("AIM Capital"). AIM Capital
is located at 11 Greenway Plaza, Suite 1919, Houston, Texas
77046 and is a wholly-owned subsidiary of AIM Advisors,
Inc., which is a wholly-owned subsidiary of AIM Management
Group, Inc. For services provided by AIM Capital, the
Manager pays to AIM Capital an annual fee calculated at the
rate of 0.375% of the Portfolio's average daily net assets,
paid monthly.
The American Capital Enterprise Portfolio is advised by
American Capital Asset Management ("ACAM"). ACAM is located
at 2800 Post Oak Boulevard, Houston, Texas 77056 and is a
wholly-owned subsidiary of American Capital Management &
Research, Inc., which is an indirect wholly-owned subsidiary
of VKM Holding, Inc. For the services provided by ACAM, the
Manager pays to ACAM an annual fee calculated at the rate of
0.325% of the Portfolio's average daily net assets, paid
monthly.
The TBC Managed Income Portfolio is advised by The
Boston Company Asset Management, Inc. ("TBCAM"). TBCAM is
located at One Boston Place, Boston, Massachusetts 02108,
and is a wholly-owned subsidiary of The Boston Company,
Inc., which is an indirect wholly-owned subsidiary of Mellon
Bank Corporation. For the services provided by TBCAM, the
Manager pays to TBCAM an annual fee calculated at the rate
of 0.30% of the Portfolio's average daily net assets, paid
monthly.
The Putnam Diversified Income Portfolio is advised by
Putnam Investment Management, Inc. ("Putnam Management").
Putnam Management is located at One Post Office Square,
Boston, Massachusetts 02109. Putnam Management is a
subsidiary of Putnam Investments, Inc., which is a wholly-
owned subsidiary of Marsh & McLennan Companies, Inc. For
the services provided by Putnam Management, the Manager pays
Putnam Management an annual fee calculated at the rate of
0.35% of the Portfolio's average daily net assets, paid
monthly.
The GT Global Strategic Income Portfolio is advised by
LGT Asset Management, Inc. ("LGT Asset Management"). LGT
Asset Management is located at 50 California Street, San
Francisco, California 94111 and is an indirect wholly-owned
subsidiary of BIL GT Group Limited, a financial services
holding company. BIL GT Group Limited in turn is controlled
by the Prince of Liechtenstein Foundation, which serves as
the parent organization for the various business enterprises
of the Princely Family of Liechtenstein. For the services
provided by LGT Asset Management, the Manager pays to LGT
Asset Management an annual fee calculated at the rate of
0.375% of the Portfolio's average daily net assets, paid
monthly.
The MFS Total Return Portfolio is advised by
Massachusetts Financial Services Company ("MFS"). MFS is
located at 500 Boylston Street, Boston, Massachusetts 02116
and is a subsidiary of Sun Life of Canada (U.S.), which is a
subsidiary of Sun Life Assurance Company of Canada. For
services provided by MFS, the Manager pays MFS an annual fee
calculated a rate equal to 0.375% of the Portfolio's average
daily net assets, paid monthly.
Portfolio Transactions and Distribution
Smith Barney distributes shares of the Fund as
principal underwriter. In addition, the Fund's Board of
Directors has determined that transactions for the Fund may
be executed through Smith Barney or any broker-dealer
affiliate of Smith Barney (each, an "Affiliated Broker") if,
in the judgment of management, the use of an Affiliated
Broker is likely to result in price and execution at least
as favorable to the Fund as those obtainable through other
qualified broker-dealers, and if, in the transaction, the
Affiliated Broker charges the Fund a fair and reasonable
rate consistent with that charged to comparable unaffiliated
customers in similar transactions. The Fund will not deal
with Smith Barney in any transactions in which Smith Barney
acts as principal. In addition, the Alliance Growth
Portfolio will not deal with Donaldson, Lufkin & Jenrette
("DLJ") (an affiliate of Alliance Capital) in any
transactions in which DLJ acts as principal.
Shown below are the total brokerage fees paid by the
Fund for the period June 16, 1994 (commencement of
operations) through October 31, 1994 and for the fiscal year
ended October 31, 1995 on behalf of the Portfolios, the
portion paid to Smith Barney and the portion paid to other
brokers for the execution of orders allocated in
consideration of research and statistical services or solely
for their ability to execute the order. During the period
from June 16, 1994 through October 31, 1994 the total amount
of commissionable transactions was $ 52,150,191.44;
$8,792,558.77(16.86%) of which was directed to Smith Barney
and executed by unaffiliated brokers and
$43,357,632.67(83.14%) of which was directed to other
brokers. During the fiscal year ended October 31, 1995 the
total amount of commissionable transactions was $
; $ ( %) of which was directed to Smith
Barney and executed by unaffiliated brokers and $
( %) of which was directed to other brokers.
Commissions
To
Others For
Execution and
Research and
To Others
Statistical
Total To Smith Barney For
Execution Only Services
6/16/94 - $171,937 $28,574
$143,363
10/31/94
Year ended
10/31/95
The Board of Directors of the Fund has adopted certain
policies and procedures incorporating the standard of Rule
l7e-l issued by the Securities and Exchange Commission under
the 1940 Act which requires that the commissions paid to any
Affiliated Broker must be "reasonable and fair compared to
the commission, fee or other remuneration received or to be
received by other brokers in connection with comparable
transactions involving similar securities during a
comparable period of time." The Rule and the policy and
procedures also contain review requirements and require
management to furnish reports to the Board of Directors and
to maintain records in connection with such reviews.
VOTING RIGHTS
The Directors themselves have the power to alter the
number and the terms of office of the directors, and they
may at any time lengthen their own terms or make their terms
of unlimited duration (subject to certain removal
procedures) and appoint their own successors, provided that
in accordance with the 1940 Act always at least a majority,
but in most instances, at least two-thirds of the Directors
have been elected by the shareowners of the Fund. Shares do
not have cumulative voting rights and therefore the owners
of more than 50% of the outstanding shares of the Fund may
elect all of the Directors irrespective of the votes of
other shareowners.
The Fund offers its shares only for purchase by
insurance company separate accounts. With respect to any
Fund shareholder meeting, the insurance company will solicit
and accept timely voting instructions from its contract
owners who own units in a separate account investment
division which corresponds to shares in the Fund in
accordance with the procedures set forth in the section
entitled "Voting Rights" in the accompanying prospectus for
the applicable contract and to the extent required by law.
Shares of the Fund attributable to contractowner interests
for which no voting instructions are received will be voted
by the insurance company in proportion to the shares for
which voting instructions are received.
Shares of the Fund entitle their owners to one vote per
share; however, on any matter submitted to a vote of the
shareowners, all shares then entitled to vote will be voted
by individual Portfolio unless otherwise required by the
1940 Act (in which case all shares will be voted in the
aggregate). For example, a change in investment policy for
a Portfolio would be voted upon only by shareowners of the
Portfolio involved. Additionally, approval of an amendment
to a Portfolio's advisory or subadvisory agreement is a
matter to be determined separately by that Portfolio.
Approval of a proposal by the shareowners of one Portfolio
is effective as to that Portfolio whether or not enough
votes are received from the shareowners of the other
Portfolios to approve the proposal as to that Portfolio. As
of December 21, 1995, Travelers Group Inc. owned
shares (16.62%) of the outstanding shares of the Smith
Barney Pacific Basin Portfolio and
shares (.55%) of the outstanding shares of the AIM Capital
Appreciation Portfolio.
FINANCIAL STATEMENTS
The financial information contained under the following
headings is hereby incorporated by reference to the Fund's
1995 Annual Reports to Shareholders:
Annual Report of: Pages(s) in:
Smith Barney Income & Growth Portfolio
Alliance Growth Portfolio
American Capital Enterprise Portfolio
Schedule of Investments 10-24
Statements of Assets and Liabilities 25
Statements of Operations 26
Statements of Changes in Net Assets 27
Notes to Financial Statements 28-31
Financial Highlights (for a share 32-34
of capital stock of each series
outstanding through each year)
Independent Auditors' Report 35
MFS Total Return Portfolio
TBC Managed Income Portfolio
Smith Barney Money Market Portfolio
Schedule of Investments 9-17
Statements of Assets and Liabilities 18
Statements of Operations 19
Statements of Changes in Net Assets 20
Notes to Financial Statements 21-24
Financial Highlights (for a share 25-27
of capital stock of each series
outstanding through each year)
Independent Auditors' Report 28
Smith Barney High Income Portfolio
Putnam Diversified Income Portfolio
Schedule of Investments 9-17
Statements of Assets and Liabilities 19
Statements of Operations 20
Statements of Changes in Net Assets 21
Notes to Financial Statements 22-26
Financial Highlights (for a share 27-28
of capital stock of each series
outstanding through each year)
Independent Auditors' Report 29
Annual Report of : Pages(s) in:
Smith Barney International Equity Portfolio
Smith Barney Pacific Basin Portfolio
GT Global Strategic Income Portfolio
Schedule of Investments 11-17
Statements of Assets and Liabilities 18
Statements of Operations 19
Statements of Changes in Net Assets 20
Notes to Financial Statements 21-25
Financial Highlights (for a share 26-28
of capital stock of each series
outstanding through each year)
Independent Auditors' Report 29
Annual Report of : Pages(s) in:
AIM Capital Appreciation Portfolio
Schedule of Investments
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Financial Highlights (for a share
of capital stock of each series
outstanding through each year)
Independent Auditors' Report
PART C. Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Location In:
Part A Part B
Statements of Assets and Liabilities
dated October 31, 1995 *
Statements of Operations for the *
period ended October 31, 1995
Statements Changes in Net Assets for
the period ended October 31, 1995 *
Notes to Financial Statements *
Independent Auditors' Report *
* The Registrant's Annual Reports for the fiscal year ended
October 31, 1995 and the Reports of Independent Accountants
will be filed by amendment.
All other statements and schedules are omitted because they
are not applicable or the required information is shown in
the financial statements or notes thereto.
(b) Exhibits
(1) (a) Articles of Incorporation dated as of
February 18, 1994 is incorporated by reference to
Exhibit 1(a) to the Registration Statement on
February 23, 1994.
(b) Amendment to Articles of Incorporation
dated as of May 26, 1994 is incorporated by
reference to Exhibit 1(b) to Pre-Effective
Amendment No. 1 on June 10, 1994.
(c) Amendment to Articles of Incorporation
dated as of June 7, 1994 is incorporated by
reference to Exhibit 1(c) to Pre-Effective
Amendment No. 1 on June 10, 1994.
(2) Bylaws of the Fund are incorporated by
reference to Exhibit 2 to Pre-Effective Amendment
No. 1 on June 10, 1994.
(3) Not applicable.
(4) Not applicable.
(5) (a) Management Agreement between
Registrant on behalf of the Smith Barney Income
and Growth Portfolio and Mutual Management Corp.
is incorporated by reference to Exhibit 5(a) to
Pre-Effective Amendment No. 1 on June 10, 1994.
Transfer and Assumption of Management
Agreement**
(b) Management Agreement
between Registrant on behalf of the
Alliance Growth Portfolio and Mutual
Management Corp. is incorporated by
reference to Exhibit 5(b) to Pre-
Effective Amendment No. 1 on June
10, 1994. Transfer and Assumption
of Management Agreement**
(c) Management Agreement
between Registrant on behalf of the
American Capital Enterprise
Portfolio and Mutual Management
Corp. is incorporated by reference
to Exhibit 5(c) to Pre-Effective
Amendment No. 1 on June 10, 1994.
Transfer and Assumption of
Management Agreement **
(d) Management Agreement
between Registrant on behalf of the
Smith Barney International Equity
Portfolio and Mutual Management
Corp. is incorporated by reference
to Exhibit 5(d) to Pre-Effective
Amendment No. 1 on June 10, 1994.
Transfer and Assumption of
Management Agreement **
(e) Management Agreement
between Registrant on behalf of the
Smith Barney Pacific Basin Portfolio
and Mutual Management Corp. is
incorporated by reference to Exhibit
5(e) to Pre-Effective Amendment No.
1 on June 10, 1994. Transfer and
Assumption of Management Agreement
**
(f) Management Agreement
between Registrant on behalf of the
TBC Managed Income Portfolio and
Mutual Management Corp. is
incorporated by reference to Exhibit
5(f) to Pre-Effective Amendment No.
1 on June 10, 1994. Transfer and
Assumption of Management Agreement
**
(g) Management Agreement
between Registrant on behalf of the
Putnam Diversified Income Portfolio
and Mutual Management Corp. is
incorporated by reference to Exhibit
5(g) to Pre-Effective Amendment No.
1 on June 10, 1994. Transfer and
Assumption of Management Agreement
**
(h) Management Agreement
between Registrant on behalf of the
G.T. Global Strategic Income
Portfolio and Mutual Management
Corp. is incorporated by reference
to Exhibit 5(h) to Pre-Effective
Amendment No. 1 on June 10, 1994.
Transfer and Assumption of
Management Agreement **
(i) Management Agreement
between Registrant on behalf of the
Smith Barney High Income Portfolio
and Mutual Management Corp. is
incorporated by reference to Exhibit
5(i) to Pre-Effective Amendment No.
1 on June 10, 1994. Transfer and
Assumption of Management Agreement
**
(j) Management Agreement between
Registrant on behalf of the MFS Total Return
Portfolio and Mutual Management Corp. is
incorporated by reference to Exhibit 5(j) to
Pre-Effective Amendment No. 1 on June 10,
1994. Transfer and Assumption of Management
Agreement**
(k) Management Agreement
between Registrant on behalf of the
Smith Barney Money Market Portfolio
and Mutual Management Corp. is
incorporated by reference to Exhibit
5(k) to Pre-Effective Amendment No.
1 on June 10, 1994. Transfer and
Assumption of Management Agreement
**
(l) Subadvisory Agreement
among Registrant, Mutual Management
Corp. and Alliance Capital
Management L.P. is incorporated by
reference to Exhibit 5(l) to Pre-
Effective Amendment No. 1 on June
10, 1994. Transfer and Assumption
of Subadvisory Agreement **
(m) Subadvisory Agreement
among Registrant, Mutual Management
Corp. and American Capital Asset
Management, Inc. is incorporated by
reference to Exhibit 5(m) to Pre-
Effective Amendment No. 1 on June
10, 1994. Transfer and Assumption
of Subadvisory Agreement **
(n) Subadvisory Agreement
among Registrant, Mutual Management
Corp. and The Boston Company Asset
Management, Inc. is incorporated by
reference to Exhibit 5(n) to Pre-
Effective Amendment No. 1 on June
10, 1994. Transfer and Assumption
of Subadvisory Agreement **
(o) Subadvisory Agreement
among Registrant, Mutual Management
Corp. and Putnam Investment
Management, Inc. is incorporated by
reference to Exhibit 5(o) to Pre-
Effective Amendment No. 1 on June
10, 1994. Transfer and Assumption
of Subadvisory Agreement **
(p) Subadvisory Agreement
among Registrant, Mutual Management
Corp. and G.T. Capital Management,
Inc. is incorporated by reference to
Exhibit 5(p) to Pre-Effective
Amendment No. 1 on June 10, 1994.
Transfer and Assumption of
Subadvisory Agreement **
(q) Subadvisory Agreement
among Registrant, Mutual Management
Corp. and Massachusetts Financial
Services Company. is incorporated by
reference to Exhibit 5(q) to Pre-
Effective Amendment No. 1 on June
10, 1994. Transfer and Assumption
of Subadvisory Agreement **
(r) Subadvisory Agreement
between Mutual Management Corp. and
Smith Barney Inc. is incorporated by
reference to Exhibit 5(r) to Pre-
Effective Amendment No. 1 on June
10, 1994. Transfer and Assumption
of Subadvisory Agreement **
(s) Management Agreement among Registrant, Smith
Barney Mutual Funds Management Inc.
and AIM Capital Management, Inc.*
(t) Subadvisory Agreement among Registrant, Smith
Barney Mutual Funds Management Inc.
and AIM Capital Management, Inc.*
(6) Distribution Agreement between Registrant
and Smith Barney Inc. is incorporated by reference
to Exhibit 6 to Pre-Effective Amendment No. 1.
(7) Not applicable.
(8) (a) Custodian Agreement between
Registrant and PNC Bank, National
Association **
(b) Global Custody Agreement between Barclays
Bank PLC and PNC Bank**
(b) Custodian Agreement
between Registrant and Morgan
Guaranty Trust Company of New York*
(9) Transfer Agency Agreement between
Registrant and The Shareholder Services Group Inc.*
(10) Opinion and Consent of Sullivan &
Cromwell is incorporated by reference to
Exhibit 10 to Pre-Effective Amendment No. 1
on June 10, 1994.
(11) (a) Auditors' Report (incorporated by
referenced into Part B).
(b) Auditors' Consent*
(12) Not applicable.
(13) Subscription Agreement between Registrant
and The Travelers, Inc. **.
(14) Not applicable.
(15) Not applicable.
(16) Schedule for Computation of Performance
Quotations **.
(17) Financial Data Schedule.*
(18) Not Applicable.
__________________________
*To be supplied by amendment
** Filed with Post-Effective Amendment No. 1 on December 29,
1994.
Item 25. Persons Controlled by or under Common Control with
Registrant
The Registrant is not controlled directly or
indirectly by any person. Information with respect to
the Registrant's investment manager and each sub-
adviser is set forth under the caption "Management" in
the prospectus included in Part A of this Amendment to
the Registration Statement on Form N-1A.
Item 26. Number of Holders of Securities
Number of Recordholders
Title of Class on December 21, 1995
SB Income and Growth Portfolio 1
Alliance Growth Portfolio 1
American Capital Enterprise Portfolio 2
SB International Equity Portfolio 1
SB Pacific Basin Portfolio 2
TBC Managed Income Portfolio 2
Putnam Diversified Income Portfolio 1
GT Global Strategic Income Portfolio 2
SB High Income Portfolio 2
MFS Total Return Portfolio 1
SB Money Market Portfolio 1
Item 27. Indemnification
Reference is made to ARTICLE IX of Registrant's
Charter for a complete statement of its terms.
Insofar as indemnification for liability arising
under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in
connection with the securities being registered, the
registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against
public policy as expressed in the Act and will be
governed by the final adjudication of such issue."
Item 28. Business and other Connections of the Manager and
each Sub-Adviser
See the material under the caption "Management"
included in Part A (Prospectus) of this
Registration Statement and the material appearing
under the caption "Management Agreements"
included in Part B (Statement of Additional
Information) of this Registration Statement.
Information as to the Directors and Officers of
Smith Barney Mutual Funds Management Inc. is
included in its Form ADV (File No. 801-8314),
filed with the Commission, which is incorporated
herein by reference thereto.
Information as to the Directors and Officers of
Alliance Capital Management L.P. is included in
its Form ADV (File No. 801-32361), filed with the
Commission, which is incorporated herein by
reference thereto.
Information as to the Directors and Officers of
The Boston Company Asset Management Inc. is
included in its Form ADV (File No. 801-6829),
filed with the Commission, which is incorporated
herein by reference thereto.
Information as to the Directors and Officers of
Putnam Investment Management, Inc. is included in
its Form ADV (File No. 801-07974), filed with the
Commission, which is incorporated herein by
reference thereto.
Information as to the Directors and Officers of
G.T. Capital Management, Inc. is included in its
Form ADV (File No. 801-10254), filed with the
Commission, which is incorporated herein by
reference thereto.
Information as to the Directors and Officers of
American Capital Asset Management, Inc. is
included in its Form ADV (File No. 801-01669),
filed with the Commission, which is incorporated
herein by reference thereto.
Information as to the Directors and Officers of
Massachusetts Financial Services Company is
included in its Form ADV (File No. 801-07352 and
801-17352), filed with the Commission, which is
incorporated herein by reference thereto.
Information as to the Directors and Officers of AIM
Capital Management, Inc. is included in its Form ADV (File No.
), with the Commission, which is incorporated herein by
reference thereto.
Item 29. Principal Underwriters
(a) Smith Barney Inc. ("Smith Barney") also acts
as principal underwriter for Smith Barney Money
Funds, Inc., Smith Barney Municipal Money Market
Fund Inc., Smith Barney Muni Funds, Smith Barney
Funds, Inc., Smith Barney Variable Account Funds;
Smith Barney Intermediate Municipal Fund, Inc.,
Smith Barney Municipal Fund, Inc., High Income
Opportunity Fund Inc., Smith Barney Adjustable
Rate Government Income Fund, Smith Barney Equity
Funds, Smith Barney Income Funds, Smith Barney
Massachusetts Municipals Fund, Smith Barney Small
Capitalization Fund, Zenix Income Fund Inc.,
Smith Barney Arizona Municipals Fund Inc., Smith
Barney Principal Return Fund, The Advisors Fund
L.P., Smith Barney 1990s Fund, Municipal High
Income Fund Inc., Pacific Corinthian Variable
Annuity Fund, The Trust for TRAK Investments,
Smith Barney Series Fund, Smith Barney Income
Trust, Smith Barney Aggressive Growth Fund Inc.,
Smith Barney Appreciation Fund Inc., Smith Barney
California Municipals Fund Inc., Smith Barney
Fundamental Value Fund Inc., Smith Barney Managed
Governments Fund Inc., Smith Barney Managed
Municipals Fund Inc., Smith Barney New York
Municipals Fund Inc., Smith Barney New Jersey
Municipals Fund Inc., Smith Barney Worldwide
Prime Assets Fund, Smith Barney Short-Term World
Income Fund, Smith Barney Precious Metals and
Minerals Fund Inc., Smith Barney Investment Funds
Inc., Smith Barney FMA (R) Trust, The Italy Fund
Inc., Smith Barney Telecommunications Trust,
Managed Municipals Portfolio Inc., Managed
Municipals Portfolio II Inc., Managed High Income
Portfolio Inc., and Greenwich Street California
Municipal Inc., Smith Barney Managed Growth Fund
Inc. and The Inefficient-Market Fund, Inc.
(b) The information required by this Item 29 with
respect to each director and officer of Smith Barney
is incorporated by reference to Schedule A of Form
BD filed by Smith Barney pursuant to the Securities
Exchange Act of 1934 (SEC File No. 8-8177)
(c) not applicable
Item 30. Location of Accounts and Records
PNC Bank, National Association,17th and Chestnut
Streets, Philadelphia, Pennsylvania 19103, will
maintain the custodian records for the Smith
Barney Income and Growth Portfolio, Alliance
Growth Portfolio, AIM Capital Appreciation
Portfolio, American Capital Enterprise Portfolio,
TBC Managed Income Portfolio, Putnam Diversified
Income Portfolio, Smith Barney High Income
Portfolio, MFS Total Return Portfolio and Smith
Barney Money Market Portfolio and Morgan Guaranty
Trust Company of New York, 60 Wall Street, New
York, New York 10260 will maintain the custodian
records for the Smith Barney International Equity
Portfolio, Smith Barney Pacific Basin Portfolio
and G.T. Global Strategic Income Portfolio, each
as required by Section 31 (a) of the Investment
Company Act of 1940, as amended (the "1940 Act").
First Data Investor Services Group, Inc., 53 State
Street, Boston, Massachusetts 02109-2873, will
maintain the shareholder servicing agent records,
required by Section 31 (a) of the 1940 Act.
All other records required by Section 31 (a) of
the 1940 Act are maintained at the offices of the
Registrant at 388 Greenwich Street, New York, New
York 10013 (and preserved for the periods
specified by Rule 31a-2 of the 1940 Act).
Item 31. Management Services
Not Applicable
Item 32. Undertakings
(a) Not Applicable
(b) Not Applicable
(c) Registrant undertakes to furnish each person
to whom a prospectus is delivered with a copy of
Registrant's latest report to shareholders, upon
request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of
1933 and the Investment Company Act of 1940, the Registrant
certifies that it meets all of the requirements for
effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485 (a) under the
Securities Act of 1933 and has duly caused this Post-
Effective Amendment to its Registration Statement to be
signed on its behalf by the undersigned and where
applicable, the true and lawful attorney-in-fact, thereto
duly authorized, in the City of New York, and State of New
York on the 28th day of December, 1995.
SMITH BARNEY/TRAVELERS SERIES FUND
INC.
By /s/Heath B. McLendon
(Heath B. McLendon, Chairman of
the
Board and Chief Executive
Officer)
Pursuant to the requirements of the Securities Act of
1933, this Post-Effective Amendment to the Registration
Statement has been signed below by the following persons in
the capacities and on the date indicated.
Signature Title Date
/s/Heath B. McLendon President
December 28, 1995
(Heath B. McLendon) (Chief Executive
Officer)
/s/ Victor K. Atkins* Director
December 28, 1995
(Victor K. Atkins)
/s/ Robert A. Belfer* Director
December 28, 1995
(Robert A. Belfer)
/s/ Jessica Bibliowicz Director and
December 28, 1995
(Jessica Bibliowicz) President
/s/ Alger B. Chapman* Director
December 28, 1995
(Alger B. Chapman)
/s/ Robert A. Frankel* Director
December 28, 1995
(Robert A. Frankel)
/s/ Rainer Greeven* Director
December 28, 1995
(Rainer Greeven)
/s/ Susan M. Heilbron* Director
December 28, 1995
(Susan M. Heilbron)
/s/Lewis E. Daidone Treasurer
December 28, 1995
(Lewis E. Daidone) (Principal Financial
and Accounting Officer)
*By:/s/Lewis E. Daidone December
28, 1995
Lewis E. Daidone
Pursuant to Power of Attorney
EXHIBIT INDEX
Exhibit No. Exhibit
Cover Cover Letter
