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Prospectus
-------
Vintage
-------
SMITH BARNEY/TRAVELERS SERIES FUND INC.
UNDERLYING FUND PROSPECTUS
September Thirteenth
1995
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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
Alliance Growth Portfolio
AIM Capital Appreciation Portfolio
American Capital Enterprise Portfolio
Smith Barney International Equity Portfolio
Smith Barney Pacific Basin Portfolio
TBC Managed Income Portfolio
Putnam Diversified Income Portfolio
G.T. Global Strategic Income Portfolio
Smith Barney High Income Portfolio
MFS Total Return 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 SEPTEMBER 13, 1995 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 SEPTEMBER 13, 1995.
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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
G.T. Global Strategic Income
Portfolio............................... 16
Smith Barney High Income
Portfolio................................... 18
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.......................................................
......... 39
SHARES OF THE
FUND........................................................ 47
DETERMINATION OF NET ASSET
VALUE.......................................... 48
APPENDIX
A................................................................
49
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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 1994 financial statements and the
independent
auditors' report thereon appear in the October 31, 1994 Annual
Report to
Shareholders. No information is presented with respect to the AIM
Capital
Appreciation Portfolio because it did not commence operations until
September
1995.
For a share of each capital stock outstanding throughout the
period:
<TABLE>
<CAPTION>
SMITH BARNEY
ALLIANCE
INCOME & GROWTH
GROWTH
1994 (1) PORTFOLIO
PORTFOLIO
-----------------------------------------------------------------
-------------------------
<S> <C>
<C>
Net Asset Value, Beginning of Period $10.00
$10.00
-----------------------------------------------------------------
-------------------------
Income From Investment Operations:
Net investment income (2) 0.11
0.06
Net realized and unrealized gain on investment 0.03
0.59
-----------------------------------------------------------------
-------------------------
Total Income from Investment Operations 0.14
0.65
-----------------------------------------------------------------
-------------------------
Less Distributions:
Dividends from net investment income --
--
-----------------------------------------------------------------
-------------------------
Total Distributions --
--
-----------------------------------------------------------------
-------------------------
Net Asset Value, End of Period $10.14
$10.65
-----------------------------------------------------------------
-------------------------
Total Return 1.40%++
6.50%++
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-------------------------
Net Assets, End of Period (000's) $6,377
$17,086
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-------------------------
Ratios to Average Net Assets:
Expenses (2) 0.73%+
0.88%+
Net investment income 2.82%+
1.47%+
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-------------------------
Portfolio Turnover Rate 2.17%
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
SMITH BARNEY
CAPITAL
ENTERPRISE INTERNATIONAL EQUITY
1994 (1) PORTFOLIO
PORTFOLIO
-----------------------------------------------------------------
-----------------------------
<S> <C>
<C>
Net Asset Value, Beginning of Period $10.00
$10.00
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-----------------------------
Income From Investment Operations:
Net investment income (2) 0.03
(0.03)
Net realized and unrealized gain on investment 0.35
0.58
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-----------------------------
Total Income from Investment Operations 0.38
0.55
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-----------------------------
Less Distributions:
Dividends from net investment income --
--
-----------------------------------------------------------------
-----------------------------
Total Distributions --
--
-----------------------------------------------------------------
-----------------------------
Net Asset Value, End of Period $10.38
$10.55
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-----------------------------
Total Return 3.80%++
5.50%++
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-----------------------------
Net Assets, End of Period (000's) $5,734
$13,811
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-----------------------------
Ratios to Average Net Assets:
Expenses (2) 0.84%+
1.20%+
Net investment income 0.79%+
(0.73)%+
-----------------------------------------------------------------
-----------------------------
Portfolio Turnover Rate 54.74%
--
=================================================================
=============================
</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.
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---------------
1
For a share of each capital stock outstanding throughout the
period:
<TABLE>
<CAPTION>
SMITH
BARNEY TBC
PACIFIC
BASIN MANAGED INCOME
1994 (1)
PORTFOLIO PORTFOLIO
-----------------------------------------------------------------
-------------------------------
<S> <C>
<C>
Net Asset Value, Beginning of Period $10.00
$10.00
-----------------------------------------------------------------
-------------------------------
Income From Investment Operations:
Net investment loss (2)
(0.04) 0.21
Net realized and unrealized gain (loss) on investment 0.14
(0.17)
-----------------------------------------------------------------
-------------------------------
Total Income from Investment Operations 0.10
0.04
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-------------------------------
Less Distributions:
Dividends from net investment income --
--
-----------------------------------------------------------------
-------------------------------
Total Distributions --
--
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-------------------------------
Net Asset Value, End of Period $10.10
$10.04
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-------------------------------
Total Return
1.00%++ 0.40%++
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-------------------------------
Net Assets, End of Period (000's) $4,238
$3,840
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-------------------------------
Ratios to Average Net Assets:
Expenses (2)
1.26%+ 0.87%+
Net investment income
(0.93) + 5.67 +
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-------------------------------
Portfolio Turnover Rate --
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
G.T. GLOBAL
DIVERSIFIED
INCOME STRATEGIC INCOME
1994 (1)
PORTFOLIO PORTFOLIO
-----------------------------------------------------------------
--------------------------------
<S> <C>
<C>
Net Asset Value, Beginning of Period $10.00
$10.00
-----------------------------------------------------------------
--------------------------------
Income From Investment Operations:
Net investment income (2) 0.23
0.17
Net realized and unrealized loss on investment
(0.05) (0.22)
-----------------------------------------------------------------
--------------------------------
Total Income from Investment Operations 0.18
(0.05)
-----------------------------------------------------------------
--------------------------------
Less Distributions:
Dividends from net investment income --
--
-----------------------------------------------------------------
--------------------------------
Total Distributions --
--
-----------------------------------------------------------------
--------------------------------
Net Asset Value, End of Period $10.18
$9.95
-----------------------------------------------------------------
--------------------------------
Total Return
1.80%++ (0.50)%++
-----------------------------------------------------------------
--------------------------------
Net Assets, End of Period (000's) $6,763
$2,624
-----------------------------------------------------------------
--------------------------------
Ratios to Average Net Assets:
Expenses (2)
0.98%+ 1.07%+
Net investment income 6.14
+ 4.58 +
-----------------------------------------------------------------
--------------------------------
Portfolio Turnover Rate
20.02% 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.
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---------------
2
For a share of each capital stock outstanding throughout the
period:
<TABLE>
<CAPTION>
SMITH
BARNEY MFS TOTAL
HIGH
INCOME RETURN
1994 (1)
PORTFOLIO PORTFOLIO
-----------------------------------------------------------------
----------------------------
<S> <C>
<C>
Net Asset Value, Beginning of Period $10.00
$10.00
-----------------------------------------------------------------
----------------------------
Income From Investment Operations:
Net investment income (2) 0.29
0.13
Net realized and unrealized loss on investment
(0.22) (0.15)
-----------------------------------------------------------------
----------------------------
Total Income from Investment Operations 0.07
(0.02)
-----------------------------------------------------------------
----------------------------
Less Distributions:
Dividends from net investment income --
--
-----------------------------------------------------------------
----------------------------
Total Distributions --
--
-----------------------------------------------------------------
----------------------------
Net Asset Value, End of Period $10.07
$9.98
-----------------------------------------------------------------
----------------------------
Total Return
0.70%++ (0.20)%++
-----------------------------------------------------------------
----------------------------
Net Assets, End of Period (000's) $3,395
$8,504
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----------------------------
Ratios to Average Net Assets:
Expenses (2)
0.69%+ 0.93%+
Net investment income 7.55
+ 3.51%+
-----------------------------------------------------------------
----------------------------
Portfolio Turnover Rate
14.74% 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>
SMITH BARNEY
MONEY MARKET
1994 (1)
PORTFOLIO
-----------------------------------------------------------------
----------------------------
<S>
<C>
Net Asset Value, Beginning of Period
$ 1.00
-----------------------------------------------------------------
----------------------------
Income From Investment Operations:
Net investment income (2)
0.014
Net realized and unrealized gain(loss) on investment
--
-----------------------------------------------------------------
----------------------------
Total Income from Investment Operations
0.014
-----------------------------------------------------------------
----------------------------
Less Distributions:
Dividends from net investment income
(0.014)
-----------------------------------------------------------------
----------------------------
Total Distributions
(0.014)
-----------------------------------------------------------------
----------------------------
Net Asset Value, End of Period
$1.00
-----------------------------------------------------------------
----------------------------
Total Return
1.46%++
-----------------------------------------------------------------
----------------------------
Net Assets, End of Period (000's)
$5,278
-----------------------------------------------------------------
----------------------------
Ratios to Average Net Assets:
Expenses (2)
0.66%+
Net investment income
3.83 +
-----------------------------------------------------------------
----------------------------
Portfolio Turnover Rate
--
=================================================================
============================
</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.
(+) Annualized.
(++) Not annualized as it may not be representative of the total
return for the
year.
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3
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, however, 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.
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---------------
4
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
-----------------------------------------------------------------
---------------
5
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.
-----------------------------------------------------------------
---------------
6
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
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
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
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
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
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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12
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
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
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
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.
G.T. GLOBAL STRATEGIC INCOME PORTFOLIO
INVESTMENT OBJECTIVES
The investment objectives of the G.T. Global Strategic Income
Portfolio are
primarily to seek high current income and secondarily to seek
capital
appreciation. The Portfolio is managed by SBMFM; 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
-----------------------------------------------------------------
---------------
16
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
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.
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.
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---------------
18
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 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.
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19
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 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,
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---------------
20
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 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.
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21
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. 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
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22
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 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.
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23
SECURITIES OF EMERGING MARKETS. Because of the special risks
associated
with investing in emerging markets, an investment in the Putnam
Diversified
Income, G.T. 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.
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
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---------------
24
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 G.T. 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 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.
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25
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 G.T. 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. 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
G.T. 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
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---------------
26
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 G.T. 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, G.T. 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.
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.
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27
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.
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
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28
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 G.T. 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 G.T. 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 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, G.T. 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
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29
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 G.T.
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 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 G.T. 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.
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30
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,
G.T. 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 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, G.T. Global Strategic
Income,
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31
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 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,
G.T. 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
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32
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.
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
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33
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 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
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34
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, G.T. 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
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
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35
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 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
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36
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.
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.
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---------------
37
INDEXED COMMERCIAL PAPER. The G.T. 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. It is generally expected that the AIM
Capital
Appreciation Portfolio's annual turnover rate will not exceed 100%
in normal
circumstances. 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 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.
-----------------------------------------------------------------
---------------
38
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.
MANAGEMENT
=================================================================
===============
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Prior to December 31, 1994, Mutual Management Corp. ("MMC"),
an affiliate
of Smith Barney and an indirect wholly-owned subsidiary of The
Travelers Inc.
("Travelers"), managed the investment operations of each Portfolio
pursuant to
management agreements entered into by the Fund on behalf of each
Portfolio.
Effective December 31, 1994, the Board of Directors of the Fund
approved the
transfer of all of the management agreements with MMC to Smith
Barney Mutual
Funds Management Inc. ("SBMFM"), another indirect wholly-owned
subsidiary of
Travelers. Investment management of each Portfolio under SBMFM is
conducted by
the
-----------------------------------------------------------------
---------------
39
same personnel who managed each Portfolio under MMC. The reporting
requirements
for these individuals has also remained unchanged. In addition,
because the
original management agreements with MMC were simply transferred to
SBMFM, the
terms of the agreements (including the fees) have remained the
same.
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.
Also effective December 31, 1994, the Fund's Board of
Directors approved
the transfer to SBMFM of each of the subadvisory agreements MMC had
previously
entered into 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 G.T. 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.
Smith Barney Income and Growth Portfolio
0.65%
Alliance Growth Portfolio
0.80%
AIM Capital Appreciation Portfolio
0.70%
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%
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 G.T.
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.
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---------------
40
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, 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 of approximately $54
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.
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---------------
41
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 120
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 $1.6 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
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.
G.T. CAPITAL MANAGEMENT, INC. G.T. Capital Management, Inc.
("G.T.
Capital") serves as Sub-Adviser to the G.T. Global Strategic Income
Portfolio
pursuant to a subadvisory agreement. Pursuant to the subadvisory
agreement,
SBMFM pays G.T. Capital an annual fee calculated at the rate of
0.375% of the
Portfolio's average daily net assets, paid monthly.
G.T. Capital, organized in 1973, provides investment
management and/or
administration services to all the G.T. Global Mutual Funds as well
as to other
institutional, corporate and individual clients. The offices of
G.T. Capital are
located at 50 California Street, San Francisco, California 94111.
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---------------
43
G.T. Capital is the U.S. member of the G.T. 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 G.T. 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 G.T.
Group management exceeded $23 billion, of which more than $22
billion was
invested in the securities of non-U.S. issuers. Of the G.T. 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 G.T. Group
maintains fully
staffed investment offices in London, Hong Kong, Tokyo, Singapore
and Sydney.
Many of G.T. Capital'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.
G.T. Capital'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.
G.T. Capital and other companies in the G.T. 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 G.T. Global Strategic Income Portfolio, G.T.
Capital
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 G.T. Capital'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 G.T.
Capital 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 G.T. Capital 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
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
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
-----------------------------------------------------------------
---------------
46
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, diversified, 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
G.T. 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
-----------------------------------------------------------------
---------------
47
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
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
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
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
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
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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---------------
53
-----------------------------------------------------------------
---------------
Vintage Tiffany Lamp
[PHOTO APPEARS HERE]
PROSPECTUS
L 12410 Smith Barney/Travelers Series Fund Inc.
SB Ed. 9-95
-----------------------------------------------------------------
---------------
Part B
September 13, 1995
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 G.T. 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
September 13, 1995 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
<PAGE>
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.
ROBERT A. BELFER, Director
Private investor, One Dag Hammarskjold, New York, NY. Director and
Member of the Executive Committee of Enron Corp. (natural gas
pipeline company); Director of NAC Re Corporation. Former Chairman
of Belco Petroleum Corp. (production and exploration of oil and
gas).
Director of two investment companies associated with Smith Barney;
59.
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
<PAGE>
*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 April 30, 1995, Directors and officers owned in the
aggregate less than 1% of the outstanding securities of the Fund.
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 G.T. 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 G.T. 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 G.T. 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 Securities.
The Alliance Growth Portfolio, the TBC Managed Income Portfolio,
the
Putnam Diversified Income Portfolio, the G.T. 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 G.T. 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 G.T. 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 G.T. 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 G.T. 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 G.T. 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 G.T.
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 G.T. 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 G.T. 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
G.T.
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 G.T. 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 G.T. 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 G.T. 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 G.T. 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 G.T. 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 (G.T. 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 (G.T. 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 (G.T. 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 (G.T. 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.
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.
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 G.T. 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 331/3% 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 G.T. 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 G.T. 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:
1. 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.
2. 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 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 G.T.
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, 1995 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 G.T. 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. 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 dated June 2, 1994) 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 The Travelers, Inc. ("The 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 G.T. 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 period from June 16, 1994 (commencement of
operations) through October 31, 1994, each
Portfolio paid the following management fee:
Smith Barney Income and Growth Portfolio
$11,567
Alliance Growth Portfolio
27,111
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
G.T. 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
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 G.T. Global
Strategic Income Portfolio and the
MFS Total Return Portfolio. The Fund has entered into a
Subadvisory Agreement dated September 13,
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 G.T. Global Strategic Income Portfolio is advised by
G.T. Capital Management, Inc. ("G.T.
Capital"). G.T. Capital 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 G.T. Capital, the Manager pays to G.T. Capital
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 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
this period 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.
Commissions
To Others For
Execution and
For
Execution Only Research and
Statistical
Total To Smith Barney
To Others Services
6/16/94 - . . . . . . . 171,937 28,574
143,363
10/31/94
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
November 30, 1994, The Travelers Inc. owned 193,970.321 shares
(31.65%) of the outstanding shares
of the American Capital Enterprise Portfolio; 220,525.488 shares
(48.91%) of the outstanding shares of
the Smith Barney Pacific Basin Portfolio; 29,866.920 shares (9.65%)
of the outstanding shares of the
G.T. Global Strategic Income Portfolio; 117,856.626 shares (26.74%)
of the outstanding shares of the
TBC Managed Income Portfolio and 69,984.246 shares (17.42%) of the
Smith Barney High Income
Portfolio.
FINANCIAL
STATEMENTS
The financial information contained under the following
headings is hereby incorporated by
reference to the Fund's 1994 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 each series of beneficial interest
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 each series of beneficial interest
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 each series of beneficial interest
outstanding through each year)
Independent Auditors' Report
29
Annual Report of :
Pages(s) in:
Smith Barney International Equity Portfolio
Smith Barney Pacific Basin Portfolio
G.T. 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 each series of beneficial interest
outstanding through each year)
Independent Auditors' Report
29
U:\LEGAL\TRAV\SAI.B
