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PROSPECTUS
SMITH BARNEY/TRAVELERS SERIES FUND INC.
Smith Barney International Equity Portfolio
Smith Barney Money Market Portfolio
February Twenty-Eighth
1996
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SMITH BARNEY/TRAVELERS SERIES FUND INC.
388 Greenwich Street
New York, NY 10013
1-800-842-8573
The Smith Barney International Equity Portfolio and the Smith Barney Money
Market Portfolio are two of twelve portfolios that currently comprise Smith
Barney/Travelers Series Fund Inc. (the "Fund"), the investment underlying
certain variable annuity and variable life insurance contracts.
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 investment objectives of the SMITH BARNEY MONEY MARKEY PORTFOLIO are
maximum current income and preservation of capital.
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 both of the Portfolios in accordance with allocation instructions
received from Contract owners. Such allocation rights are further described in
the accompanying Contract prospectus.
Shares of each Portfolio are offered to Separate Accounts at their net
asset value, without a sales charge, next determined after receipt of an order
by an insurance company. The offering of shares of a Portfolio may be suspended
from time to time and the Fund reserves the right to reject any specific
purchase order.
Shares of the Smith Barney Money Market Portfolio are not insured or
guaranteed by the U.S. Government. There is no assurance that the Portfolio will
be able to maintain a stable net asset value of $1.00 per share.
THIS PROSPECTUS, WHICH SETS FORTH CONCISE INFORMATION ABOUT THE FUND THAT
PROSPECTIVE INVESTORS SHOULD KNOW BEFORE INVESTING, SHOULD BE READ AND RETAINED
FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL INFORMATION, ALSO REFERRED TO AS
"PART B", DATED FEBRUARY 28, 1996 IS HEREBY INCORPORATED BY REFERENCE INTO THIS
PROSPECTUS AND IS AVAILABLE FROM THE FUND, WITHOUT CHARGE, BY WRITING TO THE
FUND AT THE ABOVE ADDRESS OR CALLING THE TELEPHONE NUMBER LISTED ABOVE.
This Prospectus should be read in conjunction with the prospectus for the
Contracts.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 28, 1996.
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TABLE OF CONTENTS
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FINANCIAL HIGHLIGHTS. . . . . . . . . . . . . . . . . . . . . . . 1
THE FUND'S INVESTMENT PROGRAM. . . . . . . . . . . . . . . . . . 3
Smith Barney International Equity Portfolio . . . . . . . . . 3
Smith Barney Money Market Portfolio. . . . . . . . . . . . . . 5
SPECIAL INVESTMENT TECHNIQUES AND RISK CONSIDERATIONS. . . . . . 7
DIVIDENDS, DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . . 14
REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . 14
PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 14
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SHARES OF THE FUND . . . . . . . . . . . . . . . . . . . . . . . 17
DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . 18
APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
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FINANCIAL HIGHLIGHTS
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The following information for the year ended October 31, 1995 and the
period ended October 31, 1994 of each of the portfolios within the Smith
Barney/Travelers Series Fund Inc. have been audited in conjunction with the
annual audits of the financial statements of the Fund by KPMG Peat Marwick LLP,
independent auditors. The 1995 financial statements and the independent
auditors' report thereon appear in the October 31, 1995 Annual Report to
Shareholders.
For a share of each capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
SMITH BARNEY
INTERNATIONAL EQUITY
----------------------------
1995 1994(1)
<S> <C> <C>
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NET ASSET VALUE, BEGINNING OF PERIOD $10.55 $10.00
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INCOME FROM OPERATIONS:
Net investment income (loss) (2) 0.03 (0.03)
Net realized and unrealized gain (0.10) 0.58
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Total Income from Operations (0.07) 0.55
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LESS DISTRIBUTION FROM:
Net investment income -- --
Net realized gains -- --
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Total Distributions -- --
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NET ASSET VALUE, END OF PERIOD $10.48 $10.55
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TOTAL RETURN (0.66)% 5.50%++
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NET ASEETS, END OF PERIOD (000's) $53,538 $13,811
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RATIOS TO AVERAGE NET ASSETS:
Expenses (2) 1.44% 1.20%+
Net investment income 0.25 (0.73)%+
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PORTFOLIO TURNOVER RATE 28.72% --
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AVERAGE COMMISSIONS PAID
ON EQUITY SECURITY TRANSACTIONS (3) $ 0.01 --
===================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) The Manager has waived a portion of its fees for the period ended October
31, 1994 for the International Equity Portfolio. If such fees were not
waived the effect of the per share decrease in net investment income for
the Smith Barney International Equity Portfolio would have been $0.03 and
the ratio of expenses to average net assets would have been 2.00%+. In
addition, during the year ended October 31, 1995, the Smith Barney
International Equity Portfolio has earned credits from the custodian, which
reduces service fees incurred. When the credits are taken into
consideration the ratio of expenses to average net assets is 1.21%; prior
year numbers have not been restated to reflect these adjustments.
(3) Due to new SEC disclosure guidelines, average commissions per share are
calculated for the current year and not for the prior period.
(+) Annualized.
(++) Total return is not annualized, as it may not be representative of the
total return for the year.
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1
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For a share of each capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
SMITH BARNEY
MONEY MARKET
----------------------------
1995 1994(1)
<S> <C> <C>
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NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $10.00
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INCOME FROM OPERATIONS:
Net investment income (2) 0.052 0.014
Net realized and unrealized (loss) -- --
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Total Income from Operations 0.052 0.014
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LESS DISTRIBUTION FROM:
Net investment income (0.052) (0.014)
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Total Distributions (0.052) (0.014)
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NET ASSET VALUE, END OF PERIOD $1.00 $1.00
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TOTAL RETURN 5.35% 1.46%++
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NET ASSETS, END OF PERIOD (000's) $37,487 $5,278
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RATIOS TO AVERAGE NET ASSETS:
Expenses (2) 0.65% 0.66%+
Net investment income 5.26 3.83 +
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</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) The Manager has waived all or part of its fees for the year ended October
31, 1995 and the period ended October 31, 1994. In addition, the Manager
has reimbursed the Smith Barney Money Market Portfolio for $15,423 in
expenses for the period ended October 31, 1994. If such fees were not
waived and expenses not reimbursed, the per share decreases in net
investment income and the ratios of expenses to average net assets of the
Smith Barney Money Market Portfolio would have been as follows:
Expense Ratios
Per Share Decreases Without Fee Waivers
in Net Investment Income and Reimbursement
-------------------------- ---------------------
1995 $0.003 0.94%
1994 0.005 2.11+
(+) Annualized.
(++) Total return is not annualized, as it may not be representative of the
total return for the year.
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2
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THE FUND'S INVESTMENT PROGRAM
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The Fund consists of twelve investment portfolios, two of which are offered
herein. Each Portfolio has its own investment objective and policies. 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 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 Smith Barney Mutual Funds Management Inc. ("SBMFM" or
the "Manager") (See "Management--Smith Barney Mutual Funds Management Inc.").
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 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.
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3
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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.
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.
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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.
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.
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5
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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 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.
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6
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SPECIAL INVESTMENT TECHNIQUES AND RISK CONSIDERATIONS
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FOREIGN SECURITIES. Each Portfolio 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.
SECURITIES LENDING. Each Portfolio may seek to increase its net investment
income by lending portfolio securities to unaffiliated brokers, dealers and
other financial institutions, provided such loans are callable at any time and
are continuously secured by cash or U.S. Government securities or other high
grade liquid debt securities equal to no less than the market value, determined
daily, of the securities loaned. The risks in lending portfolio securities
consist of possible delay in receiving additional collateral or in the recovery
of the securities or possible loss of rights in the collateral should the
borrower fail financially.
REPURCHASE AGREEMENTS. Each Portfolio may on occasion enter into repurchase
agreements, wherein the seller agrees to repurchase a security from the
Portfolio at an agreed-upon future date, normally the next business day. The
resale price is greater than the purchase price, which reflects the agreed-upon
rate of return for the period the Portfolio holds the security and which is not
related to the coupon rate on the purchased security. Each Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the resale price, thus risk is limited to the ability of the seller to
pay the agreed-upon amount on the delivery date; however, if the seller
defaults, realization upon the collateral by the Portfolio may be delayed or
limited or the Portfolio might incur a loss if the value of the collateral
securing the repurchase agreement declines and might incur disposition costs in
connection with liquidating the collateral. Repurchase agreements are considered
loans by the Portfolios. The Portfolios will only enter into repurchase
agreements with broker/dealers or other financial institutions that are deemed
creditworthy by management, under guidelines approved by the Board of Directors.
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CONVERTIBLE SECURITIES. The Smith Barney International Equity 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.
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
Portfolio will utilize leverage.
Leverage creates an opportunity for increased returns to shareholders of
the Smith Barney International Equity Portfolio but, at the same time, creates
special risk considerations. For example, leverage may exaggerate changes in the
net asset value of the Portfolio's shares and in the Portfolio's yield. Although
the principal or stated value of such borrowings will be fixed, the portfolio
assets may change in value during the time the borrowing is outstanding.
Leverage will create interest or dividend expenses for the Portfolio which can
exceed the income from the assets retained. To the extent the income or other
gain derived from securities purchased with borrowed funds 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 the 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
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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.
FUTURES, OPTIONS AND CURRENCY TRANSACTIONS. Consistent with its investment
objective and policies, the Smith Barney International Equity Portfolio 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 the 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 the
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 Smith Barney International Equity Portfolio 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
Portfolio, 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 the 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, the Portfolio will incur
brokerage fees when it buys or sells futures contracts.
The 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 Smith Barney International Equity
Portfolio may 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. The Portfolio may enter into a forward
currency contract, for example, when it
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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 the Portfolio believes that a foreign
currency in which the portfolio securities are denominated may suffer a
substantial decline against the U.S. dollar, the Portfolio may enter into a
forward currency contract to sell an amount of that foreign currency
approximating the value of some or all of the portfolio securities denominated
in that currency, or, when the Portfolio believes that the U.S. dollar may
suffer a substantial decline against a foreign currency, the Portfolio may enter
into a forward currency contract to buy that foreign currency for a fixed U.S.
dollar amount ("position hedge"). The 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"). The Portfolio may invest in forward
currency contracts with stated contract values of up to the value of the
Portfolio's assets.
The 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.
The 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. Because the Smith Barney International Equity Portfolio may
invest substantially in securities denominated in currencies other than the U.S.
dollar, or may hold foreign currencies, the Portfolio 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 the Portfolio's shares and also may affect the value
of dividends and interest earned by the Portfolio and gains and losses realized
by the Portfolio. 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 Smith
Barney International Equity Portfolio 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 Portfolio may write and buy options on the
same types of securities that it 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 of options on securities.
A put option gives the holder the right, upon payment of a premium, to
deliver a specified amount of a security to the writer of the option on or
before a fixed date at a predetermined price. A call option gives the holder the
right, upon payment of a premium, to call upon the writer to deliver a specified
amount of a security on or before a fixed date at a predetermined price.
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A call option is "covered" if the 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.
The Portfolio also may write a covered call option to cross-hedge if it 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 the 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.
The 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 the Portfolio's investments in options on foreign currencies.
The Portfolio may buy or write options in privately negotiated transactions
on the types of securities and indices based on the types of securities in which
the Portfolio is permitted to invest directly. The Portfolio will effect such
transactions only with investment dealers and other financial institutions (such
as commercial banks or savings and loan institutions) deemed creditworthy, and
only pursuant to procedures adopted by
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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, the Smith Barney International Equity Portfolio
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
the 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, the
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.
The 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 the Portfolio's investment exposure from
one type of investment to another. For example, if the 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 the 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
the 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. The Portfolio may also suffer
losses if it is unable to terminate outstanding swap agreements or reduce its
exposure through offsetting transactions.
Swaps, caps, floors and collars are highly specialized activities which
involve certain risks. See the Statement of Additional Information for a further
discussion on the risks involved in these activities.
SPECIAL INVESTMENT CONSIDERATIONS AND RISKS WITH RESPECT TO FUTURES,
OPTIONS AND CURRENCY TRANSACTIONS AND SWAPS AND SWAP-RELATED PRODUCTS. The
successful use of the investment practices described above with respect to
futures contracts, options on futures contracts, forward contracts, options on
securities and on foreign currencies, and swaps and swap-related products draws
upon skills and experience which are different from those needed to select the
other instruments in which the Portfolio invests. Should interest or exchange
rates or the prices of securities or financial indices move in an unexpected
manner, the
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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, the 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.
The 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, the 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.
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.
PORTFOLIO TURNOVER. Although it is anticipated that most investments of
each Portfolio will be long-term in nature, the rate of portfolio turnover will
depend upon market and other conditions, and it will not be a limiting factor
when management believes that portfolio changes are appropriate. Each
Portfolio's historical portfolio turnover rates are included in the Financial
Highlights tables above. A higher rate of portfolio turnover may result in
higher transaction costs, including brokerage commissions.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
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Each Portfolio 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. The Smith Barney International Equity 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 is also subject to asset diversification regulations
promulgated by the U.S. Treasury Department under the Code. The regulations
generally provide that, as of the end of each calendar quarter or within 30 days
thereafter, no more than 55% of the total assets of each Portfolio may be
represented by any one investment, no more than 70% by any two investments, no
more than 80% by any three investments, and no more than 90% by any four
investments. For this purpose all securities of the same issuer are considered a
single investment. If a Portfolio should fail to comply with these regulations,
Contracts invested in that Portfolio would not be treated as annuity, endowment
or life insurance contracts under the Code.
REDEMPTION OF SHARES
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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 third 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.
PERFORMANCE
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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
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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
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SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Smith Barney Mutual Funds Management Inc. ("SBMFM") manages the investment
operations of each Portfolio pursuant to management agreements entered into by
the Fund on behalf of each Portfolio. Under each management agreement SBMFM is
responsible for furnishing or causing to be furnished to each Portfolio advice
and assistance with respect to the acquisition, holding or disposal of
investments and recommendations with respect to other aspects and affairs of
each Portfolio, bookkeeping, accounting and administrative services, office
space and equipment, and the services of the officers and employees of the Fund.
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.
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 International Equity Portfolio 0.90%
Smith Barney Money Market Portfolio 0.60%
Although the management fee paid by the Smith Barney International Equity
Portfolio is greater than that paid by most mutual funds, management has
determined that the fee is comparable to the fee charged by other investment
advisers of mutual funds that have similar investment objectives and policies.
The management agreement further provides that all other expenses not
specifically assumed by SBMFM under the management agreement on behalf of the
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
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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 the Portfolio; general
corporate expenses are allocated on the basis of relative net assets.
SBMFM, which until recently operated under the name, Smith, Barney
Advisers, Inc., was incorporated in 1968 under the laws of Delaware. It is a
wholly-owned subsidiary of Smith Barney Holdings Inc., the parent company of
Smith Barney. Smith Barney Holdings Inc. is a wholly-owned subsidiary of
Travelers Group Inc. ("Travelers"), which is a financial services holding
company engaged, through its subsidiaries, principally in four business
segments: Investment Services, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance Services. SBMFM, Smith Barney and
Smith Barney Holdings Inc. are each located at 388 Greenwich Street, New York,
New York 10013. SBMFM also acts as investment manager to numerous other
investment companies having aggregate assets as of the date of this Prospectus
in excess of $60 billion. Smith Barney 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
the Smith Barney International Equity Portfolio and the 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.
The Smith Barney International Equity Portfolio is managed by Maurits E.
Edersheim and a team of seasoned international equity portfolio managers, who
collectively have over 125 years of experience and who are responsible for the
day to day operations of these Portfolios, including making all investment
decisions. Mr. Edersheim is Chairman and Advisory Director of Smith Barney World
Funds, Inc. and is Deputy Chairman of Smith Barney International Incorporated.
Prior to joining Smith Barney in 1990, Mr. Edersheim was Deputy Chairman and
Director of Drexel Burnham Lambert Incorporated ("Drexel Burnham"). Mr. James
Conheady and Mr. Jeffrey Russell, both Vice Presidents of the Fund and Managing
Directors of Smith Barney are members of the international equity team.
Together, Mr. Conheady and Mr. Russell currently manage in excess of $2.8
billion in global equity assets for other investment companies and managed
accounts. Prior to joining Smith Barney in February 1990, Mr. Conheady was a
First Vice President and Mr. Russell was a Vice President of Drexel Burnham.
PORTFOLIO TRANSACTIONS AND DISTRIBUTION
SBMFM is 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
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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 transactions. The Fund will not deal with
Smith Barney in any transaction in which Smith Barney acts as principal.
SHARES OF THE FUND
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GENERAL
The Fund, an open-end managed investment company, was incorporated in
Maryland on February 22, 1994. The Fund has an authorized capital of
6,000,000,000 shares with a par value of $.00001 per share. The Board of
Directors has authorized the issuance of twelve series of shares, each
representing shares in one of twelve separate Portfolios--the Smith Barney
Income and Growth Portfolio, the Alliance Growth Portfolio, the AIM Capital
Appreciation Portfolio, the American Capital Enterprise Portfolio, the Smith
Barney International Equity Portfolio, the Smith Barney Pacific Basin Portfolio,
the TBC Managed Income Portfolio, the Putnam Diversified Income Portfolio, the
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
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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 contract owners 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 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 contract owners
and those given by variable life insurance contract owners. 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, contract owners would
presumably no longer have the economies of scale resulting from a larger
combined mutual fund.
DETERMINATION OF NET ASSET VALUE
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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
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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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APPENDIX A
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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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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
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.
PROVISONAL 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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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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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
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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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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PROSPECTUS
Smith Barney/Travelers Series Fund Inc.
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