FILE NO.33-75644
811-8372
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM N-1A
__________
POST-EFFECTIVE AMENDMENT NO. 7
TO THE
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AND
THE INVESTMENT COMPANY ACT OF 1940
__________
TRAVELERS SERIES FUND INC.
(Formerly, Smith Barney/Travelers Series Fund Inc.
(Exact name of Registrant as specified in the Charter)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices)
(212) 816-6474
(Registrant's telephone number)
Christina T. Sydor
388 Greenwich Street, New York, New York 10013 (22nd floor)
(Name and address of agent for service)
__________
Rule 24f-2(a)(1) Declaration:
Registrant previously registered an indefinite number of its
shares pursuant to Rule 24f-2 of the Investment Company Act of
1940.
Registrant filed its Rule 24f-2 Notice on December 24, 1996 for
its fiscal year ended October 31, 1996.
It is proposed that this Post-Effective Amendment will become
effective February 28, 1997 pursuant to paragraph (b) of Rule 485.
Total number of pages: _____
CROSS REFERENCE SHEET
(as required by Rule 495(a))
Part A
of Form N-1A Prospectus Caption
1. Cover Page cover page
2. Synopsis not applicable
3. Condensed Financial Information "Financial Highlights"
4. General Description of Registrant cover page
"The Fund's Investment Program"
"Special Investment Techniques and Risk
Considerations"
"Shares of the Fund
5. Management of the Fund "Management"
5A. Management Discussion of Fund
Performance not applicable
6. Capital Stock and Other Securities cover page
"Dividends, Distributions and
Taxes"
"Redemption of Shares"
"Shares of the Fund"
7. Purchase of Securities Being Offered cover page
"The Fund's Investment Program"
"Management"
"Determination of Net Asset Value"
8. Redemption or Repurchase "Redemption of Shares"
9. Pending Legal Proceedings not applicable
Part B Statement of Additional
of Form N-1A Information Caption
10. Cover Page cover page
11. Table of Contents "Table of Contents"
12. General Information and History "The Fund"
13. Investment Objectives and Policies "Investment
Policies"
"Investment Restrictions"
14. Management of the Fund "Directors and Officers"
Part B of Statement of Additional
Form N-1A Information Caption
15. Control Persons and Principal
Holders of Securities See Prospectus - "Shares of the
Fund"
"Voting Rights"
"Directors and Officers"
16. Investment Advisory and Other Services See Prospectus
- "Management"
Directors and Officers"
"Management Agreements"
"Custodians"
"Independent Auditors"
17. Brokerage Allocation and Other
Practices See Prospectus - "Management"
18. Capital Stock and Other Securities See Prospectus -
"Shares of the Fund"
See Prospectus - "Dividends,
Distributions and Taxes"
"Investment Policies"
"Voting Rights"
19. Purchase, Redemption and Pricing of
Securities Being Offered See Prospectus - "The Fund's
Investment Program"
See Prospectus - "Determination
of Net Asset Value"
"Determination of Net Asset Value"
"Redemption of Shares"
"Financial Statements"
20. Tax Status See Prospectus - "Dividends,
Distributions and Taxes"
21. Underwriters See Prospectus - "Management"
22. Calculation of Performance Data See Prospectus -
"Performance"
"Performance Information"
23. Financial Statements "Financial Statements"
Part C of
Form N-1A
Information required to be included in Part C is set forth under
the appropriate item, so numbered in Part C of this Registration
Statement.
This Registration Statement contains twelve Portfolios of
Travelers Series Fund Inc. (the "Fund"). Three other
versions of Prospectuses will be created from this Registration
Statement. The distribution system for each version of the
Prospectus is different. One version of the Prospectus will
contain four Portfolios of the Fund (Version I). The second
version of the Prospectus will contain two Portfolios of the Fund
(Version II). The third version of the Prospectus will contain
three Portfolios of the Fund (Version III). These Prospectuses will
be filed with the Commission pursuant to Rule 497.
<PAGE>
================================================================================
PROSPECTUS
=============
V I N T A G E
=============
TRAVELERS SERIES FUND INC.
UNDERLYING FUND PROSPECTUS
February Twenty-Eighth
1997
================================================================================
<PAGE>
TRAVELERS SERIES FUND INC.
388 Greenwich Street
New York, New York 10013
1-800-842-8573
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
Van Kampen American Capital Enterprise Portfolio
Smith Barney International Equity Portfolio
Smith Barney Pacific Basin Portfolio
TBC Managed Income Portfolio
Putnam Diversified Income Portfolio
GT 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 ("SAI"), ALSO
REFERRED TO AS "PART B", DATED FEBRUARY 28, 1997 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, 1997.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
================================================================================
FINANCIAL HIGHLIGHTS................................................... 1
THE FUND'S INVESTMENT PROGRAM.......................................... 7
Smith Barney Income and Growth Portfolio............................. 7
Alliance Growth Portfolio............................................ 8
AIM Capital Appreciation Portfolio................................... 9
Van Kampen American Capital Enterprise Portfolio..................... 10
Smith Barney International Equity Portfolio.......................... 11
Smith Barney Pacific Basin Portfolio................................. 13
TBC Managed Income Portfolio......................................... 14
Putnam Diversified Income Portfolio.................................. 16
GT Global Strategic Income Portfolio................................. 19
Smith Barney High Income Portfolio................................... 22
MFS Total Return Portfolio........................................... 23
Smith Barney Money Market Portfolio.................................. 25
SPECIAL INVESTMENT TECHNIQUES AND RISK CONSIDERATIONS.................. 27
DIVIDENDS, DISTRIBUTIONS AND TAXES..................................... 43
REDEMPTION OF SHARES................................................... 43
PERFORMANCE............................................................ 43
MANAGEMENT............................................................. 44
SHARES OF THE FUND..................................................... 53
DETERMINATION OF NET ASSET VALUE....................................... 54
APPENDIX A............................................................. 55
- --------------------------------------------------------------------------------
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
The following information for the three-year period ended October 31, 1996 for
each of the portfolios within the Travelers Series Fund Inc. has been audited in
conjunction with the annual audits of the financial statements of the Fund by
KPMG Peat Marwick LLP, independent auditors. The 1996 financial statements and
the independent auditors' report thereon appear in the October 31, 1996 Annual
Report to Shareholders.
For a share of each capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
Smith Barney Income & Growth Alliance Growth
------------------------------ -----------------------------------
1996 1995 1994(1) 1996 1995 1994(1)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 12.12 $ 10.14 $ 10.00 $ 13.28 $ 10.65 $ 10.00
- ----------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(2) 0.32 0.28 0.11 0.04 0.14 0.06
Net realized and unrealized gain 2.62 1.76 0.03 3.39 2.61 0.59
- ----------------------------------------------------------------------------------------------------------------------
Total Income from Operations 2.94 2.04 0.14 3.43 2.75 0.65
- ----------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.17) (0.06) -- (0.09) (0.02) --
Net realized gains (0.05) -- -- (0.32) (0.10) --
- ----------------------------------------------------------------------------------------------------------------------
Total Distributions (0.22) (0.06) -- (0.41) (0.12) --
- ----------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 14.84 $ 12.12 $ 10.14 $ 16.30 $ 13.28 $ 10.65
- ----------------------------------------------------------------------------------------------------------------------
Total Return 24.55% 20.21% 1.40%+++ 26.55% 26.19% 6.50%+++
- ----------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000's) $138,712 $39,364 $ 6,377 $294,596 $111,573 $ 17,086
- ----------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.73% 0.73% 0.73%+ 0.87% 0.90% 0.88%+
Net investment income 2.35 2.70 2.82 + 0.39 1.24 1.47 +
- ----------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 32% 38% 2% 88% 78% 37%
======================================================================================================================
Average commissions paid
on equity security transactions(3) $ 0.06 $ 0.07 -- $ 0.05 $ 0.06 --
======================================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) Smith Barney Mutual Funds Management Inc. (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
Income and Growth Portfolio for $13,120 in expenses and the Alliance Growth
Portfolio for $3,500 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 for the Smith Barney Income and Growth Portfolio would have been
as follows:
Expense Ratios
Per Share Decreases Without Fee Waivers
in Net Investment Income and Reimbursement
------------------------ -------------------
1995 $0.02 0.94%
1994 0.05 2.08+
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 for the Alliance Growth Portfolio would have been as follows:
Expense Ratios
Per Share Decreases Without Fee Waivers
in Net Investment Income and Reimbursement
------------------------ -------------------
1995 $0.01 0.97%
1994 0.03 1.76+
(3) As of September 1995, the Securities and Exchange Commission ("SEC")
instituted new guidelines requiring the disclosure of average commissions
per share.
(+) Annualized.
(+++) Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
1
<PAGE>
For a share of each capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
Van Kampen American Capital Enterprise Smith Barney International Equity
-------------------------------------- ---------------------------------
1996 1995 1994(1) 1996 1995 1994(1)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period $ 12.89 $ 10.38 $ 10.00 $ 10.48 $ 10.55 $ 10.00
- ------------------------------------------------------------------------------------------------------------
Income (loss) From
Operations:
Net investment income
(loss)(2) 0.05 0.03 0.03 0.02 0.03* (0.03)
Net realized and
unrealized gain (loss) 2.87 2.53 0.35 1.69 (0.10) 0.58
- ------------------------------------------------------------------------------------------------------------
Total Income (loss)
from Operations 2.92 2.56 0.38 1.71 (0.07) 0.55
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.04) (0.02) -- (0.01) -- --
Net realized gains (0.40) (0.03) -- -- -- --
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.44) (0.05) -- (0.01) -- --
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of
Period $ 15.37 $ 12.89 $ 10.38 $ 12.18 $ 10.48 $ 10.55
- ------------------------------------------------------------------------------------------------------------
Total Return 23.35% 24.74% 3.80%+++ 16.36% (0.66)% 5.50%+++
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Period
(000's) $103,691 $32,447 $ 5,734 $143,323 $53,538 $13,811
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net
Assets:
Expenses (2) 0.83% 0.88% 0.84%+ 1.10% 1.44% 1.20%+
Net investment income
(loss) 0.53 0.65 0.79%+ 0.23 0.25 (0.73)+
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 112% 180% 55% 41% 29% --
============================================================================================================
Average commissions paid
on equity security
transactions(3) $ 0.06 $ 0.05 -- $ 0.02 $ 0.01 --
============================================================================================================
</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 for the Van Kampen American
Capital Enterprise Portfolio. In addition, the Manager has reimbursed the
Van Kampen American Capital Enterprise Portfolio for $19,007 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 for the Van Kampen
American Capital Enterprise Portfolio would have been as follows:
Expense Ratios
Per Share Decreases Without Fee Waivers
in Net Investment Income and Reimbursement
------------------------ -------------------
1995 $0.06 1.26%
1994 0.07 2.66+
The Manager has waived a portion of its fees for the period ended October
31, 1994 for the Smith Barney International Equity Portfolio.
If such fees were not waived the effect of the per share increase in net
investment loss 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) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(*) Includes realized gains and losses from foreign currency transactions.
(+) Annualized.
(+++) Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
2
<PAGE>
For a share of each capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
Smith Barney Pacific Basin TBC Managed Income
------------------------------ ----------------------------------
1996 1995 1994(1) 1996 1995 1994(1)
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 8.95 $ 10.10 $ 10.00 $ 11.16 $ 10.04 $ 10.00
- ------------------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss)(2) 0.08 (0.04)* (0.04) 0.65 0.61 0.21
Net realized and unrealized gain (loss) 0.75 (1.11) 0.14 (0.14) 0.64 (0.17)
- ------------------------------------------------------------------------------------------------------------------------
Total Income (loss) from Operations 0.83 (1.15) 0.10 0.51 1.25 0.04
- ------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.03) -- -- (0.46) (0.13) --
Net realized gains -- -- -- (0.15) -- --
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.03) -- -- (0.61) (0.13) --
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 9.75 $ 8.95 $ 10.10 $ 11.06 $ 11.16 $ 10.04
- ------------------------------------------------------------------------------------------------------------------------
Total Return 9.26% (11.58)% 1.00%+++ 4.61% 12.68% 0.40%+++
- ------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000's) $16,657 $ 7,122 $ 4,238 $23,532 $11,279 $ 3,840
- ------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 1.34% 1.83% 1.26%+ 0.92% 0.92% 0.87%+
Net investment income (loss) 0.47 (0.51) (0.93)+ 6.19 6.13 5.67%+
- ------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 58.94% 27.70% -- 255% 170% 42%
========================================================================================================================
Average commissions paid
on equity security transactions(3) $ 0.02 $ 0.01 -- n/a n/a n/a
========================================================================================================================
</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, 1996, October 31, 1995 and the period ended October 31, 1994. In
addition, the Manager has reimbursed the Smith Barney Pacific Basin
Portfolio for $9,778 in expenses and the TBC Managed Income Portfolio for
$15,557 in expenses for the period ended October 31, 1994. If such fees
were not waived and expenses not reimbursed, the per share increases in
net investment loss and the ratios of expenses to average net assets for
the Smith Barney Pacific Basin Portfolio would have been as follows:
Expense Ratios
Without Fee Waiver
Per Share Decreases Reimbursement and
in Net Investment Income Custody Credits
------------------------ ------------------
1996 $0.02 1.58%
1995 0.03 2.23
1994 0.06 2.82+
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 for the TBC Managed Income Portfolio would have been as
follows:
Expense Ratios
Per Share Decreases Without Fee Waivers
in Net Investment Income and Reimbursement
------------------------ -------------------
1995 $0.04 1.29%
1994 0.07 2.91+
In addition, during the year ended October 31, 1996 and 1995, the Smith
Barney Pacific Basin Portfolio has earned credits from the custodian which
reduce service fees incurred. If the credits are taken into consideration
the expense ratios are 1.17% and 1.30%, respectively; prior year numbers
have not been restated to reflect these adjustments.
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(*) Includes realized gains and losses from foreign currency transactions.
(+) Annualized.
(+++) Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
3
<PAGE>
For a share of each capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
Putnam Diversified Income GT Global Strategic Income
---------------------------------- --------------------------------
1996(3) 1995 1994(1) 1996 1995 1994(1)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.46 $ 10.18 $ 10.00 $ 10.77 $ 9.95 $ 10.00
- ---------------------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (2) 0.78 0.79 0.23 0.74 0.64* 0.17
Net realized and unrealized gain (loss) 0.27 0.58 (0.05) 1.36 0.28 (0.22)
- ---------------------------------------------------------------------------------------------------------------------------
Total Income from Operations 1.05 1.37 0.18 2.10 0.92 (0.05)
- ---------------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.39) (0.09) -- (0.42) (0.10) --
Net realized gains (0.13) -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions (0.52) (0.09) -- (0.42) (0.10) --
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 11.99 $ 11.46 $ 10.18 $ 12.45 $ 10.77 $ 9.95
- ---------------------------------------------------------------------------------------------------------------------------
Total Return 9.43% 13.55% 1.80%+++ 19.97% 9.37% (0.50)%+++
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000's) $81,076 $31,514 $ 6,763 $19,152 $ 8,397 $ 2,624
- ---------------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 0.96% 0.97% 0.98%+ 1.23% 1.47% 1.07%+
Net investment income 7.57 7.53 6.14+ 6.87 6.44 4.58%+
- ---------------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 255% 276% 20% 192.36% 295.47% 56.34%
===========================================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) The Manager has waived all or part of its fees for the years ended October
31, 1996, October 31, 1995 and the period ended October 31, 1994. In
addition, the manager has reimbursed the Putnam Diversified Income
Portfolio for $19,028 in expenses and the GT Global Strategic Income
Portfolio for $18,556 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 Putnam Diversified Income Portfolio would have been as
follows:
Expense Ratios
Per Share Decreases Without Fee Waivers
in Net Investment Income and Reimbursement
------------------------ -------------------
1995 $0.04 1.31%
1994 0.07 2.92+
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 GT Global Strategic Income Portfolio would
have been as follows:
Expense Ratios
Without Fee Waiver
Per Share Decreases Reimbursement and
in Net Investment Income Custody Credits
------------------------ ------------------
1996 $0.02 1.38%
1995 0.04 1.93
1994 0.13 4.53+
In addition, during the years ended October 31, 1996 and 1995, the GT
Global Strategic Income Portfolio has earned credits from the custodian
which reduce service fees incurred. If the credits are taken into
consideration the expense ratios are 1.11% and 1.11%, respectively; prior
year numbers have not been restated to reflect these adjustments.
(3) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the
period since the use of the undistributed net investment income method
does not accord with results of operations.
(*) Includes realized gains and losses from foreign currency transactions.
(+) Annualized.
(+++) Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
4
<PAGE>
For a share of each capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
Smith Barney High Income MFS Total Return
----------------------------- -------------------------------
1996 1995 1994(1) 1996 1995 1994(1)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.26 $ 10.07 $ 10.00 $ 11.53 $ 9.98 $ 10.00
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) From Operations:
Net investment income (2) 1.14 0.93 0.29 0.33 0.45 0.13
Net realized and unrealized gain (loss) 0.19 0.48 (0.22) 1.62 1.15 (0.15)
- ---------------------------------------------------------------------------------------------------------------------
Total Income (loss) from Operations 1.33 1.41 0.07 1.95 1.60 (0.02)
- ---------------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.50) (0.22) -- (0.27) (0.05) --
Net realized gains -- -- -- (0.08) -- --
- ---------------------------------------------------------------------------------------------------------------------
Total Distributions (0.50) (0.22) -- (0.35) (0.05) --
- ---------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 12.09 $ 11.26 $ 10.07 $ 13.13 $ 11.53 $ 9.98
- ---------------------------------------------------------------------------------------------------------------------
Total Return 12.17% 14.30% 0.70%+++ 17.16% 16.12% (0.20)%+++
- ---------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000's) $65,955 $20,450 $ 3,395 $134,529 $49,363 $ 8,504
- ---------------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 0.84% 0.70% 0.69%+ 0.91% 0.95% 0.93%+
Net investment income 9.79 9.54 7.55%+ 3.82 4.40 3.51%+
- ---------------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 104% 57% 15% 139% 104% 18%
=====================================================================================================================
Average commissions paid
on equity security transactions(3) n/a n/a n/a $ 0.06 $ 0.04 --
=====================================================================================================================
</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 High Income
Portfolio for $17,664 in expenses and the MFS Total Return
Portfolio for $13,857 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
High Income Portfolio would have been as follows:
Expense Ratios
Per Share Decreases Without Fee Waivers
in Net Investment Income and Reimbursement
------------------------ -------------------
1995 $0.04 1.07%
1994 0.07 2.60+
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 MFS Total Return Portfolio would have been
as follows:
Expense Ratios
Per Share Decreases Without Fee Waivers
in Net Investment Income and Reimbursement
------------------------ -------------------
1995 $0.01 1.06%
1994 0.06 2.51+
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
(+) Annualized.
(+++) Total return is not annualized, as it may not be representative of the
total return for the year.
- --------------------------------------------------------------------------------
5
<PAGE>
For a share of each capital stock outstanding throughout the period:
<TABLE>
<CAPTION>
AIM Capital Appreciation Smith Barney Money Market
------------------------ -------------------------
1996(5) 1995(3) 1996 1995 1994(1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.00 $ 10.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (2) 0.02 0.02 0.049 0.052 0.014
Net realized and unrealized (loss) 0.75 (0.02) -- -- --
- --------------------------------------------------------------------------------------------------------
Total Income from Operations 0.77 -- 0.049 0.052 0.014
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.01) -- (0.049) (0.052) (0.014)
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.01) -- (0.049) (0.052) (0.014)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 10.76 $ 10.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------------------
Total Return 7.71% 0.00% 5.05% 5.35% 1.46%+++
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Period (000's) $112,905 $ 8,083 $99,150 $37,487 $ 5,278
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 0.96% 1.00%+ 0.65% 0.65% 0.66%+
Net investment income 0.22 4.07%+ 4.86 5.26 3.83%+
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 44% 5.91% n/a n/a n/a
========================================================================================================
Average commissions paid
on equity security transactions(4) $ 0.06 $ 0.06 n/a n/a n/a
========================================================================================================
</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 with respect to the AIM
Capital Appreciation Portfolio for the years ended October 31, 1996,
October 31, 1995 and the period ended October 31, 1994. In addition, the
Manager has reimbursed the AIM Capital Appreciation Portfolio for $13,456
in expenses for the period ended October 13, 1995 and 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 decrease in net investment income and the
ratio of expenses to average net assets for the AIM Capital Appreciation
Portfolio would have been $0.03 and 5.95%+, respectively. 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
------------------------ -------------------
1996 $0.001 0.74%
1995 0.003 0.94
1994 0.005 2.11+
(3) For the period from October 10, 1995 (commencement of operations) to
October 31, 1995.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosures of average commissions per share.
(5) Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the
period since the use of the undistributed net investment income method
does not accord with results of operations.
(+) Annualized.
(+++) Total return is not annualized, as it may not be representative of the
total return for the year.
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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 SAI.
The investment objectives and certain investment restrictions designated as
such in the SAI 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). At least 65% of the
Portfolio's assets will at all times be invested in equity securities. 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 ("ADRs"), 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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7
<PAGE>
ALLIANCE GROWTH PORTFOLIO
Investment Objective
The investment objective of the Alliance Growth Portfolio is to provide long-
term growth of capital. Current income is only an incidental consideration. The
Portfolio attempts to achieve its objective by investing primarily in equity
securities of companies with a favorable outlook for earnings and whose rate of
growth is expected to exceed that of the U.S. economy over time. The Portfolio
is managed by Travelers Investment Adviser, Inc. ("TIA" or the "Manager");
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
- --------------------------------------------------------------------------------
8
<PAGE>
hedging purposes. The Portfolio may buy and sell call and put options on index
futures or on stock indices in addition to, or as an alternative to, purchasing
or selling index futures or, to the extent permitted by applicable law, to earn
additional income. The Portfolio may also, for hedging purposes, purchase and
sell futures contracts, options thereon and options with respect to U.S.
Treasury securities, including U.S. Treasury bills, notes and bonds. The
Portfolio may also seek to increase its current return by writing covered call
and put options on securities it owns or in which it may invest.
The Portfolio may lend portfolio securities amounting to not more than 25% of
its total assets and may enter into repurchase agreements on up to 25% of its
total assets. It may also purchase securities for future delivery, which may
increase its overall investment exposure and involves a risk of loss if the
value of the securities declines prior to the settlement date. For temporary
defensive purposes, the Portfolio may invest all or a major part of its assets
in money market instruments and repurchase agreements. To the extent the
Portfolio's assets are invested for temporary defensive purposes, they will not
be invested in a manner designed to achieve the Portfolio's investment
objective.
AIM CAPITAL APPRECIATION PORTFOLIO
Investment Objective
The investment objective of the AIM Capital Appreciation Portfolio is to seek
capital appreciation. The Portfolio is managed by TIA; 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.
- --------------------------------------------------------------------------------
9
<PAGE>
VAN KAMPEN AMERICAN CAPITAL ENTERPRISE PORTFOLIO
Investment Objective
The investment objective of the Van Kampen 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 TIA; Van Kampen American Capital Asset
Management, Inc., serves as the Portfolio's Sub-Adviser.
Investment Policies
The Van Kampen 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 issuers.
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
- --------------------------------------------------------------------------------
10
<PAGE>
of portfolio securities, a similar result can be achieved to the extent that the
performance of the stock index futures contracts correlates to the performance
of the Portfolio's securities. Sale of futures contracts could frequently be
accomplished more rapidly and at less cost than the actual sale of securities.
Once the desired hedged position has been effected, the Portfolio could then
liquidate securities in a more deliberate manner, reducing its futures position
simultaneously to maintain the desired balance, or it could maintain the hedged
position.
As an alternative to selling stock index futures contracts, the Portfolio can
purchase stock index puts (or stock index futures puts) to hedge the Portfolio's
risk in a declining market. Since the value of a put increases as the index
declines below a specified level, the Portfolio's value is protected against a
market decline to the degree the performance of the index correlates with the
performance of its investment portfolio. If the market remains stable or
advances, the Portfolio can refrain from exercising the put and its portfolio
will participate in the advance, having incurred only the premium cost for the
put.
The Portfolio may invest in a separate investment company, Van Kampen 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
to provide a 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
- --------------------------------------------------------------------------------
11
<PAGE>
in bonds, notes and debt securities (consisting of securities issued in
Eurocurrency markets or obligations of the United States or foreign governments
and their political subdivisions) of established non-U.S. issuers. Investments
may be made for capital appreciation or for income or any combination of both
for the purpose of achieving a higher overall return than might otherwise be
obtained solely from investing for growth of capital or for income. There is no
limitation on the percent or amount of the Portfolio's assets which may be
invested for growth or income and, therefore, from time to time the investment
emphasis may be placed solely or primarily on growth of capital or solely or
primarily on income.
In seeking to achieve its objective, the Portfolio presently expects to invest
its assets primarily in common stocks of established non-U.S. companies that, in
the opinion of the Manager, have potential for growth of capital. However, there
is no requirement that the Portfolio invests exclusively in common stocks or
other equity securities, and, when the Manager believes that the return on debt
securities will equal or exceed the return on common stocks, the Portfolio may,
in seeking its objective of total return, substantially increase its holdings
(up to a maximum of 35% of its assets) in debt securities. In determining
whether the Portfolio will be invested for capital appreciation or for income or
any combination of both, the Manager regularly analyzes a broad range of
international equity and fixed income markets in order to asses 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. Allocation of the Portfolio's investments will depend upon the relative
attractiveness of the international markets and particular issuers.
Concentration of the Portfolio assets in one or a few countries or currencies
will subject the Portfolio to greater risks than if the Portfolio's assets were
not geographically concentrated.
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.
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12
<PAGE>
However, the Portfolio may invest up to 5% of its assets in such "unseasoned"
issuers.
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.
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 and Thailand 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 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. However, the Portfolio has no predetermined policy on
the allocation of funds for investment among such countries or securities and
allocation of the Portfolio's investments will depend upon the relative
attractiveness of the Asian Pacific markets and particular issuers.
Concentration of the Portfolio's assets in one or a few of the Asian Pacific
countries and Asian Pacific currencies will subject the Portfolio to greater
risks than if the Portfolio's assets were not geographically concentrated.
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<PAGE>
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
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. However, the
Portfolio may invest up to 5% of its assets in such "unseasoned" issuers.
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. Debt
securities rated Baa or BBB may have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity of their issuers to pay interest and repay principal than is the case
with higher rated securities. 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
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<PAGE>
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 TIA; 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 unrated
obligations of comparable quality; and (2) at least 65% of the Portfolio's total
assets will be invested in debt obligations having durations 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 durations 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."
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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.
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 TIA; 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,
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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 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 may 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, S&P or any other nationally recognized
statistical rating agency, 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.
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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.
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, the equivalent by another, nationally recognized statistical rating agency)
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, the equivalent by another,
nationally recognized statistical rating agency) 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.
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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 times, the
Sub-Adviser may temporarily use alternative strategies, primarily designed to
reduce fluctuations in the value of the Portfolio's assets. In implementing
these "defensive" strategies, depending on the circumstances, the Portfolio may
temporarily reduce or suspend its option writing activities, shift its portfolio
emphasis to higher-rated securities in the High Yield Sector, hedge currency
risks in the International Sector, or generally reduce the average maturity of
its holdings in any or all of the Sectors. Under unusual market conditions, the
Portfolio could invest up to 100% of its assets in short-term U.S. Government
securities when the risks of investing in the other Sectors are perceived to
outweigh the possible benefits of sector diversification. The Portfolio may also
increase the portion of its assets invested in cash or money market instruments
for such defensive purposes or for liquidity purposes. To the extent the
Portfolio's assets are invested for temporary defensive purposes, they will not
be invested in a manner designed to achieve the Portfolio's investment
objective.
The Portfolio may also purchase securities of issuers located in emerging
markets, invest in sovereign debt, Brady Bonds, loan participations and
assignments and enter into dollar roll transactions. It may also engage in the
writing of covered call and put options with respect to foreign fixed-income
securities, foreign currencies, and related futures in order to supplement the
Fund's portfolio income. See "Special Investment Techniques and Risk
Considerations" below and in the Statement of Additional Information.
GT GLOBAL STRATEGIC INCOME PORTFOLIO
Investment Objectives
The investment objectives of the GT Global Strategic Income Portfolio are
primarily to seek high current income and secondarily to seek capital
appreciation. The Portfolio is managed by TIA; Chancellor LGT Asset Management,
Inc. ("Chancellor LGT") (formerly known as "G.T. Capital Management, Inc." and
"LGT Asset 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 GT 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
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<PAGE>
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 Chancellor LGT 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 most countries located 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, Colombia, Costa
Rica, Cyprus, Czech Republic, Ecuador, Egypt, Finland, Greece, Ghana, Hong Kong,
Hungary, India, Indonesia, Israel, Ivory Coast, Jamaica, Jordan, Kenya,
Malaysia, Mauritius, Mexico, Morocco, Nicaragua, Nigeria, Pakistan, Panama,
Peru, Philippines, Poland, Portugal, Russia, Singapore, Slovakia, Slovenia,
South Africa, South Korea, Sri Lanka, Swaziland, 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, or 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.
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". The Fund may also use instruments (including forward
currency contracts) often referred to as "derivatives." See "Futures, Options
and Currency Transactions."
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,
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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 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
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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.
As a "non-diversified" company under the 1940 Act, the Portfolio will have the
ability to invest more than 5% of its assets in the securities of any issuer.
However, the Portfolio intends to comply with Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), that limits the aggregate value
of all holdings (except U.S. Government and cash items, as defined in the Code)
that exceed 5% of the Portfolio's total assets to an aggregate amount of 50% of
such assets. Also, holdings of a single issuer (with the same exceptions) may
not exceed 25% of the Portfolio's total assets. These limits are measured at the
end of each quarter. Under the Subchapter M limits, "non-diversification" allows
up to 50% of a Portfolio's total assets to be invested in as few as two single
issuers. In the event of decline of creditworthiness or default upon the
obligations of one or more such issuers exceeding 5%, an investment in the
Portfolio will entail greater risk than in a portfolio having a policy of
"diversification" because a high percentage of the Portfolio's assets may be
invested in securities of one or two issuers. Furthermore, a high percentage of
investments among few issuers may result in a greater degree of fluctuation in
the market value of the assets of the Portfolio, and consequently a greater
degree of fluctuation of the Portfolio's net asset value, because the Portfolio
will be more susceptible to economic, political or regulatory developments
affecting these securities than would be the case with a portfolio composed of
varied obligations of more issuers.
SMITH BARNEY HIGH INCOME PORTFOLIO
Investment Objectives
The primary investment objective of the Smith Barney High Income Portfolio is
to seek high current income. Capital appreciation is a secondary objective. The
Portfolio is managed by SBMFM.
Investment Policies
The Smith Barney High Income Portfolio will seek to achieve its investment
objectives by investing, under normal circumstances, at least 65% of its assets
in high-yielding corporate debt obligations and preferred stock. Although the
Portfolio may invest in securities of any maturity, under current market
conditions the Portfolio intends that its portfolio will have an average
remaining maturity of between five and ten years. The Manager may adjust the
Portfolio's average maturity when, based on interest rate trends and other
market conditions, it deems it appropriate to do so. Up to 35% of the
Portfolio's assets may be invested in common stock or common stock equivalents,
including convertible securities, options, warrants and rights. Equity
investments may be made in securities of companies of any size depending on the
relative attractiveness of the company and the economic sector in which it
operates. Fixed income securities purchased by the Portfolio will generally be
rated in the lower rating categories of nationally recognized securities rating
organizations, as low as C by Moody's or D by S&P, or in non-rated income
securities that the Manager determines to be of comparable quality. The
Portfolio will not purchase securities rated lower than B by both Moody's and
S&P, if, immediately after such purchase, more than 10% of the Portfolio's total
assets are invested in such securities.
THE PORTFOLIO INVESTS SIGNIFICANTLY IN LOWER RATED AND UNRATED CORPORATE DEBT
SECURITIES, COMMONLY KNOWN AS "JUNK BONDS." INVESTMENTS OF THIS TYPE ARE SUBJECT
TO A GREATER RISK OF LOSS OF PRINCIPAL AND INTEREST. PURCHASERS SHOULD CAREFULLY
ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THIS PORTFOLIO. SEE "LOWER-
QUALITY AND NON-RATED SECURITIES".
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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.
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. Under normal market conditions, at least 25%
of the Portfolio's assets will be invested in fixed income securities and at
least 40% and no more than 75% of the Portfolio's assets will be invested in
equity securities. The Portfolio is managed by TIA; Massachusetts Financial
Services Company serves as the Portfolio's Sub-Adviser.
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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 depositary 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 net 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.
AS NOTED ABOVE, THE PORTFOLIO INVESTS 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 up to 20% (and generally expects to invest between 5%
and 20%) of its total assets in foreign securities which are not traded on a
U.S. exchange (not including American Depositary Receipts). The Portfolio may
also invest in American Depository Receipts. The Portfolio may also invest in
emerging market securities, Brady Bonds, U.S. Government securities, mortgage
pass-through securities, corporate asset-backed securities, zero-coupon bonds,
deferred interest bonds and payment-in-kind bonds. In addition, the Portfolio
may enter into repurchase agreements and mortgage dollar roll transactions, may
lend its portfolio securities, purchase securities on a when-issued or forward
delivery basis, enter into swap transactions and invest in indexed securities
and loan participations and other direct indebtedness. 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
indices 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.
The Portfolio will be managed actively with respect to the Portfolio's fixed
income securities and the asset allocations modified as the Sub-adviser deems
necessary. Although the Portfolio does not intend to seek short-term profits,
fixed income securities will be sold whenever the sub-adviser believes it is
appropriate to do so without regard to the length of time the particular asset
may have been held. With respect to its equity securities the Portfolio does not
intend to trade in securities for short-term profits and anticipates that
portfolio securities ordinarily will be held for one year or longer. However,
the Portfolio will effect trades whenever it believes that changes in its
portfolio securities are appropriate.
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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.
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.
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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 an ultimate maturity of from two business to six months
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, London,
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
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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
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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.
Securities of Emerging Markets. Because of the special risks associated with
investing in emerging markets, an investment in the Smith Barney International
Equity, Smith Barney Pacific Basin, Putnam Diversified Income, GT Global
Strategic Income, Smith Barney High Income or MFS Total Return Portfolios, may
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.
Emerging market countries include any country determined by the investment
adviser or sub-adviser, as the case may be, to have an emerging market economy,
taking into account a number of factors, including the country's foreign
currency debt rating, its political and economic stability and the development
of its financial and capital markets. The investment adviser (or sub-adviser)
determines an issuer's principal trading market for its securities and the
source of its revenues and assets. The issuer's principal activities generally
are deemed to be located in a particular country if: (a) the security is issued
or guaranteed by the government
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of that country or any of its agencies, authorities or instrumentalities; (b)
the issuer is organized under the laws of, and maintains a principle office in,
that country; (c) the issuer has its principal securities trading market in that
country; or (d) the issuer has 50% or more of its assets in that country.
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 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.
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Sovereign Debt. The TBC Managed Income, the Putnam Diversified Income, the MFS
Total Return and the GT Global Strategic Income Portfolios may each invest in
sovereign debt securities of emerging market governments including Brady Bonds.
Investments in such securities involve special risks. The issuer of the debt or
the governmental authorities that control the repayment of the debt may be
unable or unwilling to repay principal or interest when due in accordance with
the terms of such debt. Periods of economic uncertainty may result in the
volatility of market prices of sovereign debt obligations, 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, Russia and Mexico are among the largest debtors
among developing countries. At times certain emerging market countries have
declared moratoria on the payment of principal and interest on external debt;
such a moratorium is currently in effect in certain emerging market countries.
There is no bankruptcy proceeding by which a creditor may collect in whole or in
part sovereign debt on which an emerging market government has defaulted.
The ability of emerging market governments to make timely payments on their
sovereign debt securities is likely to be influenced strongly by a country's
balance of trade and its access to trade and other international credits. A
country whose exports are concentrated in a few commodities could be vulnerable
to a decline in the
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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, the MFS Total Return and the GT
Global Strategic Income Portfolios may each invest in "Brady Bonds," which are
debt restructurings that provide for the exchange of cash and loans for newly
issued bonds. Brady Bonds have been issued by the governments of Argentina,
Brazil, Bulgaria, Costa Rica, Dominican Republic, Ecuador, Jordan, Mexico,
Nigeria, Panama, the Philippines, Poland, Uruguay and Venezuela. In addition,
Peru has 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 GT
Global Strategic Income Portfolio and the MFS Total Return Portfolio may each
invest a portion of its assets in loan participations ("Participations"). By
purchasing a Participation, a Portfolio acquires some or all of the interest of
a bank or other lending institution in a loan to a corporate or government
borrower. The Participations typically will result in the Portfolio having a
contractual relationship only with the lender not the borrower. A Portfolio will
have the right to receive payments of principal, interest and any fees to which
it is entitled only from the lender selling the Participation and only upon
receipt by the lender of the payments from the borrower. In connection with
purchasing Participations, a Portfolio generally will have no right to enforce
compliance by the borrower with the terms of the loan agreement relating to the
loan, nor any rights of set-off against the borrower, and a Portfolio may not
directly benefit from any collateral supporting the loan in which it has
purchased the Participation. As a result, a Portfolio will assume the credit
risk of both the borrower
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and the lender that is selling the Participation. In the event of the insolvency
of the lender selling a Participation, a Portfolio may be treated as a general
creditor of the lender and may not benefit from any set-off between the lender
and the borrower. Each Portfolio will acquire Participations only if the lender
interpositioned between the Portfolio and the borrower is determined by
management to be creditworthy.
The Putnam Diversified Income and the GT Global Strategic Income Portfolio may
also invest in assignments of portions of loans from third parties
("Assignments"). When it purchases Assignments from lenders, the Portfolio will
acquire direct rights against the borrower on the loan. However, since
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the Portfolio as
the purchaser of an Assignment may differ from, and be more limited than, those
held by the assigning lender.
The Portfolios may have difficulty disposing of Assignments and
Participations. The liquidity of such securities is limited and, each Portfolio
anticipates that such securities could be sold only to a limited number of
institutional investors. The lack of a liquid secondary market could have an
adverse impact on the value of such securities and on each Portfolio's ability
to dispose of particular Assignments or Participations when necessary to meet
the Portfolio's liquidity needs or in response to a specific economic event,
such as a deterioration in the creditworthiness of the borrower. The lack of a
liquid secondary market for Assignments and Participations also may make it more
difficult for the Portfolio to assign a value to those securities for purposes
of valuing the Portfolio's portfolio and calculating its net asset value.
Synthetic Security Positions. The GT Global Strategic Income Portfolio and the
Putnam Diversified Income Portfolio may utilize combinations of futures on bonds
and forward currency contracts to create investment positions that have
substantially the same characteristics as bonds of the same type on which the
futures contracts are written. Investment positions of this type are generally
referred to as "synthetic securities."
For example, in order to establish a synthetic security position for the
Portfolio that is comparable to owning a Japanese government bond, the relevant
Sub-Adviser might purchase futures contracts on Japanese government bonds in the
desired principal amount and purchase forward currency contracts for Japanese
Yen in an amount equal to the then current purchase price for such bonds in the
Japanese cash market, with each contract having approximately the same delivery
date.
The Sub-Adviser might roll over the futures and forward currency contract
positions before taking delivery in order to continue the Portfolio's investment
position, or the Sub-Adviser might close out those positions, thus effectively
selling the synthetic security. Further, the amount of each contract might be
adjusted in response to market conditions and the forward currency contract
might be changed in amount or eliminated in order to hedge against currency
fluctuations.
Further, while these futures and currency contracts remain open, a Portfolio
will comply with applicable SEC guidelines to set aside cash, debt securities of
any grade or equity securities, in a segregated account with its custodian in an
amount sufficient to cover its potential obligations under such contracts;
provided such securities have been determined by the Sub-Adviser to be liquid
and unencumbered pursuant to guidelines established by the Directors.
A Sub-Adviser would create synthetic security positions for a Portfolio when
it believes that it can obtain a better yield or achieve cost savings in
comparison to purchasing actual bonds or when comparable bonds are not readily
available in the market. Synthetic security positions are subject to the risk
that changes in the value of purchased futures contracts may differ from changes
in the value of the bonds that might otherwise have been purchased in the cash
market. Also, while a Sub-Adviser believes that the cost of creating synthetic
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security positions generally will be materially lower than the cost of acquiring
comparable bonds in the cash market, the Sub-Adviser will incur transaction
costs in connection with each purchase of a futures or a forward currency
contract. The use of futures contracts and forward currency contracts to create
synthetic security positions also is subject to substantially the same risks as
those that exist when these instruments are used in connection with hedging
strategies. See "Futures, Options and Currency Transactions" in the Prospectus
and "Options, Futures Contracts and Related Options," "Interest Rate, Securities
Index, Financial Futures and Currency Futures Contracts," "Options on Futures
Contracts" and "Forward Currency Contracts and Options on Currency" in the
Statement of Additional Information.
Lower-Quality and Non-Rated Securities. The Alliance Growth, TBC Managed
Income, Putnam Diversified Income, GT Global Strategic Income, Smith Barney High
Income and MFS Total Return Portfolios may each invest in lower-quality
securities. Investments in lower-rated securities are subject to special risks,
including a greater risk of loss of principal and non-payment of interest. An
investor should carefully consider the following factors before investing in
these Portfolios.
Generally, lower-quality securities offer a higher return potential than
higher-rated securities but involve greater volatility of price and greater risk
of loss of income and principal, including the possibility of default or
bankruptcy of the issuers of such securities. Lower-quality securities and
comparable non-rated securities will likely have large uncertainties or major
risk exposure to adverse conditions and are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. The occurrence of adverse
conditions and uncertainties would likely reduce the value of securities held by
a Portfolio, with a commensurate effect on the value of the Portfolio's shares.
The markets in which lower-quality securities or comparable non-rated
securities are traded generally are more limited than those in which higher-
quality securities are traded. The existence of limited markets for these
securities may restrict the availability of securities for a Portfolio to
purchase and also may restrict the ability of a Portfolio to obtain accurate
market quotations for purposes of valuing securities and calculating net asset
value or to sell securities at their fair value. The public market for lower-
quality securities and comparable non-rated securities is relatively new and has
not fully weathered a major economic recession. Any such economic downturn could
adversely affect the ability of issuers' lower-quality securities to repay
principal and pay interest thereon.
While the market values of lower-quality securities and comparable non-rated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-quality securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-quality securities. In addition,
lower-quality securities and comparable non-rated securities generally present a
higher degree of credit risk. Issuers of lower-quality securities and comparable
non-rated securities are often highly leveraged and may not have more
traditional methods of financing available to them so that their ability to
service their debt obligations during an economic downturn or during sustained
periods of rising interest rates may be impaired. The risk of loss due to
default by such issuers is significantly greater because lower-quality
securities and comparable non-rated securities generally are unsecured and
frequently are subordinated to the prior payment of senior indebtedness. A
Portfolio may incur additional expenses to the extent that it is required to
seek recovery upon a default in the payment of principal or interest on its
portfolio holdings.
Fixed-income securities, including lower-quality securities and comparable
non-rated securities, frequently have call and buy-back features that permit
their issuers to call or repurchase the securities from
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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 Van Kampen 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 liquid debt securities
equal to no less than the market value, determined daily, of the securities
loaned. The risks in lending portfolio securities consist of possible delay in
receiving additional collateral or in the recovery of the securities or possible
loss of rights in the collateral should the borrower fail financially.
Repurchase Agreements. Each Portfolio may on occasion enter into repurchase
agreements, wherein the seller agrees to repurchase a security from the
Portfolio at an agreed-upon future date, normally the next business day. The
resale price is greater than the purchase price, which reflects the agreed-upon
rate of return for the period the Portfolio holds the security and which is not
related to the coupon rate on the purchased security. Each Portfolio requires
continual maintenance of the market value of the collateral in amounts at least
equal to the resale price, thus risk is limited to the ability of the seller to
pay the agreed-upon amount on the delivery date; however, if the seller
defaults, realization upon the collateral by the Portfolio may be delayed or
limited or the Portfolio might incur a loss if the value of the collateral
securing the repurchase agreement declines and might incur disposition costs in
connection with liquidating the collateral. Repurchase agreements are considered
loans by the Portfolios. The Portfolios will only enter into repurchase
agreements with broker/dealers or other financial institutions that are deemed
creditworthy by management, under guidelines approved by the Board of Directors.
Reverse Repurchase Agreements. The GT Global Strategic Income Portfolio may
enter into reverse repurchase agreements with the same parties with whom it may
enter into repurchase agreements. Under a reverse repurchase agreement, the
Portfolio will sell securities and agree to repurchase them at a particular
price at a future date. At the time the Portfolio enters into a reverse
repurchase agreement, it will establish and maintain a segregated account with
an approved custodian containing cash or liquid 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
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Portfolio's use of the proceeds of the reverse repurchase agreements may
effectively be restricted pending such decision. Reverse repurchase agreements
will be treated as borrowings and will be considered in the Portfolio's overall
borrowing limitation. The Portfolio may enter into reverse repurchase
agreements, although it does not currently intend to do so with respect to more
than 5% of its total assets.
Dollar Roll Transactions. The TBC Managed Income, the Putnam Diversified
Income and the GT Global Strategic Income Portfolios may each enter into "dollar
rolls", in which a Portfolio sells fixed income securities for delivery in the
current month and simultaneously contracts to repurchase substantially similar
(same type, coupon and maturity) securities on a specified future date. The MFS
Total Return Portfolio may enter into similar transactions pursuant to which the
Portfolio sells mortgage-backed securities for delivery in the future (generally
within 30 days). During the roll period, a Portfolio would forego principal and
interest paid on such securities. The Portfolio would be compensated by the
difference between the current sales price and the forward price for the future
purchase, as well as by the interest earned on the cash proceeds of the initial
sale. Since a Portfolio will receive interest on the securities in which it
invests the transaction proceeds, such transactions may involve leverage.
However, since such securities must satisfy the quality requirements of 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, Smith Barney International Equity, Alliance Growth,
TBC Managed Income, Putnam Diversified Income, GT Global Strategic Income,
Smith Barney High Income and MFS Total Return Portfolios may each purchase or
sell securities on a when-issued, delayed delivery or forward commitment basis.
Such transactions arise when securities are purchased or sold by a Portfolio
with payment and delivery taking place in the future in order to secure what
is considered to be an advantageous price and yield to the Portfolio at the
time of entering into the transaction.
Purchasing such securities involves the risk of loss if the value of the
securities declines prior to settlement date. The sale of securities for delayed
delivery involves the risk that the prices available in the market on the
delivery date may be greater than those obtained in the sale transaction. Each
Portfolio's custodian will maintain, in a segregated account on behalf of the
Portfolio, cash, U.S. Government securities or other liquid securities 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
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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 Van Kampen American Capital Enterprise, the
GT Global Strategic Income, the AIM Capital Appreciation and the Smith Barney
High Income Portfolios may each make short sales of securities in order to
reduce market exposure and/or to increase its income if, at all times when a
short position is open, the Portfolio owns an equal or greater amount of such
securities or owns preferred stock, debt or warrants convertible or exchangeable
into an equal or greater number of the shares of the securities sold short.
Short sales of this kind are referred to as short sales "against the box."
Securities of Unseasoned Issuers. Securities in which the Smith Barney High
Income Portfolio may invest may lack a significant operating history and be
dependent on products or services without an established market share.
Borrowing and Leverage. Each Portfolio may borrow from banks, on a secured or
unsecured basis. If the Portfolio borrows and uses the proceeds to make
additional investments, income and appreciation from such investments will
improve its performance if they exceed the associated borrowing costs but impair
its performance if they are less than such borrowing costs. This speculative
factor is known as "leverage". Only the Smith Barney International Equity, Smith
Barney Pacific Basin and GT Global Strategic Income Portfolios will utilize
leverage. In addition, the AIM Capital Appreciation Portfolio may, but has no
current intention to, engage in leverage. Should any Portfolio engage in
leverage, immediately after such borrowing the value of its assets, including
the amount borrowed, less liabilities, must be equal to at least 300% of the
amount borrowed, plus all outstanding borrowings.
Leverage creates an opportunity for increased returns to shareholders of a
Portfolio but, at the same time, creates special risk considerations. For
example, leverage may exaggerate changes in the net asset value of a Portfolio's
shares and in the Portfolio's yield. Although the principal or stated value of
such borrowings will be fixed, the portfolio assets may change in value during
the time the borrowing is outstanding. Leverage will create interest or dividend
expenses for a Portfolio which can exceed the income from the assets retained.
To the extent the income or other gain derived from securities purchased with
borrowed funds exceeds the interest and other charges the Portfolio will have to
pay in respect thereof, the Portfolio's net income or other gain will be greater
than if leverage had not been used. Conversely, if the income or other gain from
the incremental assets is not sufficient to cover the cost of leverage, the net
income or other gain of the Portfolio will be less than if leverage had not been
used. If the amount of income from the incremental securities is insufficient to
cover the cost of borrowing, securities might have to be liquidated to obtain
required funds. Depending on market or other conditions, such liquidations could
be disadvantageous to a Portfolio.
Illiquid and Restricted Securities. Each Portfolio may purchase securities
that are not registered ("restricted securities") under the Securities Act of
1933, as amended (the "1933 Act"), but can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule 144A"). Each
Portfolio may also invest a portion of its assets in illiquid investments, which
include repurchase agreements maturing in more than seven days and restricted
securities. The Board of Directors may determine, based upon a continuing review
of the trading markets for the specific restricted security, that such
restricted securities are liquid. The Board of Directors has adopted guidelines
and delegated to management the daily function of determining and monitoring
liquidity of restricted securities available pursuant to Rule 144A. The Board,
however, retains sufficient oversight and is ultimately responsible for the
determinations. Since it is not possible to predict with assurance exactly how
the market for Rule 144A restricted securities will develop, the
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Board will carefully monitor each Portfolio's investments in these securities,
focusing on such important factors, among others, as valuation, liquidity and
availability of information. Investments in restricted securities could have the
effect of increasing the level of illiquidity in a Portfolio to the extent that
qualified institutional buyers become for a time uninterested in purchasing
these restricted securities. The Portfolios may also purchase restricted
securities that are not registered under Rule 144A.
Zero-Coupon Bonds, Deferred Interest Bonds and Payment-in-Kind Bonds. The
Alliance Growth, the TBC Managed Income, Putnam Diversified Income, GT Global
Strategic Income and MFS Total Return Portfolios may each invest in zero-coupon
and payment-in-kind bonds. The MFS Total Return and Putnam Diversified Income
Portfolios also may each invest in deferred interest bonds. Zero-coupon and
deferred interest bonds are issued at a significant discount from their
principal amount. While zero-coupon bonds do not require the periodic payment of
interest, deferred interest bonds provide for a period of delay before the
regular payment of interest begins. Payment-in-kind bonds allow the issuer, at
its option, to make current interest payments on the bonds either in cash or in
additional bonds. The value of zero-coupon bonds is subject to greater
fluctuation in market value in response to changes in market interest rates than
bonds of 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,
Van Kampen American Capital Enterprise, Smith Barney International Equity, Smith
Barney Pacific Basin, Putnam Diversified Income, GT Global Strategic Income,
Smith Barney High Income and MFS Total Return Portfolios may enter into
contracts for the purchase or sale for future delivery of fixed-income
securities, foreign currencies or contracts based on financial indices including
interest rates or an index of U.S. Government or foreign government securities
or equity or fixed-income securities ("futures contracts"), and may buy and
write put and call options to buy or sell futures contracts ("options on futures
contracts"); provided, however, that the AIM Capital Appreciation Portfolio may
only write covered call options. 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
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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, GT Global
Strategic Income, Smith Barney High Income and MFS Total Return Portfolios may
each enter into forward foreign currency exchange contracts ("forward currency
contracts") to attempt to minimize the risk to the Portfolio from adverse
changes in the relationship between the U.S. dollar and other currencies. A
forward currency contract is an obligation to buy or sell an amount of a
specified currency for an agreed price (which may be in U.S. dollars or a
foreign currency) at a future date which is individually negotiated between
currency traders and their customers. A Portfolio may enter into a forward
currency contract, for example, when it enters into a contract to buy or sell a
security denominated in a foreign currency in order to "lock in'' the U.S.
dollar price of the security ("transaction hedge''). Additionally, when a
Portfolio believes that a foreign currency in which the portfolio securities are
denominated may suffer a substantial decline against the U.S. dollar, the
Portfolio may enter into a forward currency contract to sell an amount of that
foreign currency approximating the value of some or all of the portfolio
securities denominated in that currency, or, when the Portfolio believes that
the U.S. dollar may suffer a substantial decline against a foreign currency, the
Portfolio may enter into a forward currency contract to buy that foreign
currency for a fixed U.S. dollar amount ("position hedge''). A Portfolio also
may enter into a forward currency contract with respect to a currency where the
Portfolio is considering the purchase of investments denominated in that
currency but has not yet done so ("anticipatory hedge''). In any of these
circumstances the Portfolio may, alternatively, enter into a forward currency
contract with respect to a different foreign currency when the Portfolio
believes that the U.S. dollar value of that currency will correlate with the
U.S. dollar value of the currency in which portfolio securities of, or being
considered for purchase by, the Portfolio are denominated ("cross hedge''). A
Portfolio may invest in forward currency contracts with stated contract values
of up to the value of the Portfolio's assets. The MFS Total Return Portfolio and
Putnam Diversified Income Portfolio may also enter into forward currency
contracts for non-hedging purposes, subject to applicable law.
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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 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.
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
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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 banks or savings and loan institutions) deemed creditworthy, and
only pursuant to procedures adopted by management for monitoring the
creditworthiness of those entities. To the extent that an option bought or
written by the Portfolio in a negotiated transaction is illiquid, the value of
an option bought or the amount of the Portfolio's obligations under an option
written by the Portfolio, as the case may be, will be subject to the Portfolio's
limitation on illiquid investments. In the case of illiquid options, it may not
be possible for the Portfolio to effect an offsetting transaction at a time when
management believes it would be advantageous for the Portfolio to do so. See the
Statement of Additional Information for a further discussion of the use, risks
and costs of option trading.
Swaps and Swap-Related Products. As one way of managing its exposure to
different types of investments, each of the Smith Barney International Equity,
Smith Barney Pacific Basin, GT Global Strategic Income, Smith Barney High Income
and MFS Total Return Portfolios may enter into interest rate swaps, currency
swaps and other types of available swap agreements, such as caps, collars and
floors. Swaps involve the exchange by a Portfolio with another party of cash
payments based upon different interest rate indexes, currencies, and other
prices or rates, such as the value of mortgage prepayment rates. For example,
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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 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
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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 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.
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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.
Indexed Commercial Paper. The GT Global Strategic Income Portfolio may invest
without limitation in commercial paper which is indexed to certain specific
foreign currency exchange rates. The terms of such commercial paper provide that
its principal amount is adjusted upwards or downwards (but not below zero) at
maturity to reflect changes in the exchange rate between two currencies while
the obligation is outstanding. The Portfolio will purchase such commercial paper
with the currency in which it is denominated and, at maturity, will receive
interest and principal payments thereon in that currency, but the amount of
principal payable by the issuer at maturity will change in proportion to the
change (if any) in the exchange rate between the two specified currencies
between the date the instrument is issued and the date the instrument matures.
While such commercial paper entails the risk of loss of principal, the potential
for realizing gains as a result of changes in foreign currency exchange rates
enables the Portfolio to hedge against a decline in the U.S. dollar value of
investments denominated in foreign currencies while seeking to provide an
attractive money market rate of return. The Portfolio will not purchase such
commercial paper for speculation.
Portfolio Turnover. Although it is anticipated that most investments of each
Portfolio (except the Smith Barney Money Market 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. The historical portfolio turnover rates for
each Portfolio (except the Smith Barney Money Market Portfolio) are included in
the Financial Highlights tables above. A higher rate of portfolio
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turnover may result in higher transaction costs, including brokerage
commissions. Portfolio turnover rates for the Smith Barney Money Market
Portfolio are not shown because of the short-term nature of the investments
owned by the Portfolio.
DIVIDENDS, DISTRIBUTIONS AND TAXES
================================================================================
Each Portfolio of the Fund intends to qualify as a "regulated investment
company" under Subchapter M of 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.
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 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
================================================================================
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
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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
================================================================================
The Investment Managers:
SBMFM manages the investment operations of the Smith Barney Income and Growth,
the Smith Barney International Equity, the Smith Barney Pacific Basin, the Smith
Barney High Income and the Smith Barney Money Market Portfolios, pursuant to
management agreements entered into by the Fund on behalf of each such 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.
TIA, an affiliate of SBMFM, manages the investment operations of the Alliance
Growth, the AIM Capital Appreciation, the Putnam Diversified Income, the MFS
Total Return, the GT Global Strategic Income, the Van Kampen American Capital
Enterprise and the TBC Managed Income Portfolios (each, a "TIA Portfolio")
pursuant to management agreements entered into by the Fund on behalf of each
such Portfolio.
Under each management agreement SBMFM or TIA, as the case may be, is
responsible for furnishing or causing to be furnished to each applicable
Portfolio advice and assistance with respect to the acquisition, holding or
disposal of investments and recommendations with respect to other aspects and
affairs of the Portfolio, bookkeeping, accounting and administrative services,
office space and equipment, and the services of the officers and employees of
the Fund.
TIA and each TIA Portfolio are also subject to a subadvisory agreement (see
"The Sub-Advisers" below). Pursuant to each subadvisory agreement, each sub-
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 TIA, 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.
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TIA has also entered into a Sub-Administrative Services Agreement with SBMFM
pursuant to which SBMFM will: (a) assist TIA in supervising all aspects of each
TIA Portfolio's operations; (b) supply each TIA Portfolio with office
facilities, statistical and research services, data processing services,
clerical, accounting and bookkeeping services; and (c) prepare reports to each
TIA Portfolio's shareholders and prepare reports to and filings with the
Securities and Exchange Commission and state blue sky authorities, if
applicable. TIA pays SBMFM, as Sub-Administrator, a fee in an amount equal to an
annual rate of 0.10% of each TIA Portfolio's average daily net assets.
For the services provided by SBMFM or TIA, as the case may be, each Portfolio
pays SBMFM or TIA 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 0.80%
Van Kampen 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%
GT 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 Van Kampen American Capital Enterprise
Portfolio, the Smith Barney International Equity Portfolio, the Smith Barney
Pacific Basin Portfolio, the Putnam Diversified Income Portfolio, the GT Global
Strategic Income Portfolio and the MFS Total Return Portfolio is greater than
that paid by most mutual funds, management has determined that each fee is
comparable to the fee charged by other investment advisers of mutual funds that
have similar investment objectives and policies.
Each management agreement further provides that all other expenses not
specifically assumed by SBMFM or TIA 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.
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SBMFM was incorporated in 1968 under the laws of the State of Delaware. It is
a wholly-owned subsidiary of Smith Barney Holdings Inc. ("SBH"), the parent
company of Smith Barney. SBH 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. TIA was incorporated in 1996 under the laws of the
State of Delaware. It is a wholly-owned subsidiary of The Plaza Corporation
("Plaza"), which is an indirect wholly-owned subsidiary of Travelers. SBMFM,
TIA, Smith Barney and SBH 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 $80 billion. TIA also acts as investment manager to other
investment companies having aggregate assets as of the date of this Prospectus
of approximately $1 million. 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 manages 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 26 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 9 years and currently manages over
$250 million of assets.
The Smith Barney International Equity Portfolio and the Smith Barney Pacific
Basin Portfolio are each managed by Maurits E. Edersheim and a team of seasoned
international equity portfolio managers, who collectively have over 125 years of
experience. 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,
and are responsible for the day-to-day operations of the Smith Barney
International Equity Portfolio, making all of the investment decisions for the
Portfolio since its inception. Together, Mr. Conheady and Mr. Russell currently
manage in excess of $2.8 billion in global equity assets for other investment
companies and managed
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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.
David S. Ishibashi, a Vice President of Smith Barney, and Mr. Scott Kalb, a
Managing Director of Smith Barney, are responsible for the day-to-day operations
of the Smith Barney Pacific Basin Portfolio, making all of the investment
decisions since October, 1996. Mr. Ishibashi joined Smith Barney in 1993 and Mr.
Kalb joined Smith Barney in 1990, as members of the international equity team.
Prior to joining Smith Barney, Mr. Ishibashi was responsible for Japanese
equities and headed the Japan desk at SG Warburg, and Mr. Kalb served as Vice
President of Equity Research at 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 TIA pays Alliance Capital an
annual fee calculated at the rate of 0.375% of the Portfolio's average daily net
assets, paid monthly.
Alliance is a global investment adviser providing diversified services to
institutions and individuals through a broad line of investments including more
than 100 mutual funds. Since 1971, Alliance has earned a reputation as a leader
in the investment world, with over $168 billion in assets under management as of
June 30, 1996. Alliance provides investment management services to 33 of the
FORTUNE 100 companies.
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 TIA pays AIM Capital an annual
fee calculated at the rate of 0.375% of the Portfolio's average daily net
assets, paid monthly.
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 and its affiliates act as manager or
adviser to 43 investment company portfolios. As of January 31, 1997, the total
assets of the investment company portfolios advised or managed by AIM or its
affiliates were approximately $66.5 billion.
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On November 4, 1996, AIM Management announced that it had entered into an
Agreement and Plan of Merger with INVESCO plc ("INVESCO") and INVESCO Group
Services Inc. pursuant to which AIM Management will be merged with a subsidiary
of INVESCO. Subject to a number of conditions being met, it is anticipated that
the transaction will occur in the early part of 1997.
On December 3, 1996, the Fund's Board of Directors approved, subject to
shareholder approval, a new subadvisory agreement between AIM Capital and TIA
with respect to the AIM Capital Appreciation Portfolio. Shareholders approved
the proposed subadvisory agreement at a special meeting of shareholders held on
February 7, 1997. There have been no material changes to the terms of the new
agreement, including the fees payable by the Fund. No change is anticipated in
the investment advisory or other personnel responsible for the AIM Capital
Appreciation Portfolio as a result of the new subadvisory agreement or the
merger.
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 117 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 13 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 22 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 seven years of experience as an investment
professional.
Van Kampen American Capital Asset Management, Inc. Van Kampen American Capital
Asset Management, Inc. ("VKAC") will serve as Sub-Adviser to the Van Kampen
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, TIA pays VKAC an annual fee calculated at the rate of
.325% of the Portfolio's average daily net assets, paid monthly.
VKAC is located at One Parkview Plaza, Oakbrook Terrace, Illinois 60181. VKAC
is a wholly-owned subsidiary of Van Kampen American Capital, Inc. ("Van Kampen
American Capital"), which, in turn, is a wholly-owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is a wholly-owned subsidiary of MSAM Holdings
II, Inc. which, in turn, is a wholly-owned subsidiary of Morgan Stanley Group
Inc.
Van Kampen American Capital is a diversified asset management company with
more than two million retail investor accounts, extensive capabilities for
managing institutional portfolios, and more than $58 billion under management or
supervision. Van Kampen American Capital's more than 40 open-end and 38 closed-
end funds and more than 2,500 unit investment trusts are professionally
distributed by leading financial advisers nationwide.
Jeff New is responsible for the day-to-day management of the Portfolio. Mr.
New has been a portfolio manager with VKAC since April, 1994. Since 1991, Mr.
New was an associate portfolio manager. Prior to that he was a securities
analyst with Texas Commerce Investment Management Company.
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Chancellor LGT Asset Management, Inc. Chancellor LGT Asset Management, Inc.
("Chancellor LGT") serves as Sub-Adviser to the GT Global Strategic Income
Portfolio pursuant to a subadvisory agreement. Pursuant to the subadvisory
agreement, TIA pays Chancellor LGT an annual fee calculated at the rate of
0.375% of the Portfolio's average daily net assets, paid monthly.
Chancellor LGT provides investment management and/or administration services
to the GT Global Mutual Funds. Chancellor LGT and its worldwide asset management
affiliates have provided investment management and/or administration services to
institutional, corporate and individual clients around the world since 1969. The
U.S. offices of Chancellor LGT are located at 50 California Street, 27th Floor,
San Francisco, California 94111 and 1166 Avenue of the Americas, New York, New
York 10036.
Chancellor LGT and its worldwide affiliates, including LGT Bank in
Liechtenstein, formerly Bank in Liechtenstein, comprise Liechtenstein Global
Trust, formerly BIL GT Group Limited. Liechtenstein Global Trust is a provider
of global asset management and private banking products and services to
individual and institutional investors. Liechtenstein Global Trust is controlled
by the Prince of Liechtenstein Foundation, which serves as a parent organization
for the various business enterprises of the Princely Family of Liechtenstein.
The principal business address of the Prince of Liechtenstein Foundation is
Herrengasse 12, FL-9490, Vaduz, Liechtenstein.
As of October 31, 1996, Chancellor LGT and its worldwide affiliates manage
approximately $59 billion of assets. In the United States, as of October 31,
1996, Chancellor LGT manages or administers approximately $10 billion of GT
Global Mutual Funds. As of October 31, 1996, assets entrusted to Liechtenstein
Global Trust totaled approximately $80 billion.
On October 31, 1996, Chancellor Capital Management, Inc. ("Chancellor
Capital") merged with LGT Asset Management, Inc. As of September 30, 1996,
Chancellor Capital, based in New York was the 15th largest independent
investment manager in the United States with approximately $33 billion in assets
under management. Chancellor Capital specializes in public and private U.S.
equity and bond portfolio management for over 300 U.S. institutional
clients.
In addition to the investment resources of its San Francisco and New York
offices, Chancellor LGT draws upon the expertise, personnel, data and systems of
other offices of Liechtenstein Global Trust, including investment offices in
Frankfurt, Hong Kong, London, Singapore, Sydney, Tokyo, and Toronto. In managing
the GT Global Mutual Funds, Chancellor LGT employs a team approach, taking
advantage of its investment resources around the world in seeking to achieve
each fund's investment objective. Many of the GT Global Mutual Funds' portfolio
managers are natives of the countries in which they invest, speak local
languages and/or live or work in the markets they follow.
In managing the GT Global Strategic Income Portfolio, Chancellor LGT 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. Simon
Nocera and Chang-Hock Lau are responsible for the day-to-day management of the
Portfolio. Mr. Nocera has been a Portfolio Manager and Economist at Chancellor
LGT 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. Chang-Hock
Lau also is a Portfolio Manager for GT Global Strategic Income Portfolio. Mr.
Lau has been Chief Investment Officer for Developed Market Debt for Chancellor
LGT since November 1996, and was a Senior Portfolio Manager for
global/international fixed income for Chancellor LGT from July 1995 to November
1996. Prior thereto, Mr. Lau was a Senior Vice President and Senior
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<PAGE>
Portfolio Manager for Fiduciary Trust Company International from 1993 to 1995,
and Vice President at Bankers Trust Company from 1991 to 1993. Prior to October
31, 1996, Mr. Lau was an employee only of Chancellor Capital.
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 TIA 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 Variable
Insurance Trust, MFS Union Standard Trust, MFS Municipal Income 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 Fund, 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
various fixed/variable annuity contracts. MFS and its wholly-owned subsidiary,
MFS Institutional Advisors, Inc., also provide investment advice to substantial
private clients.
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 $52.3
billion on behalf of approximately 2.2 million investors accounts as of November
29, 1996. As of such date, the MFS organization managed approximately $20.9
billion of assets in fixed income securities. MFS is a subsidiary of Sun Life of
Canada (U.S.) which in turn is a wholly owned 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.
David M. Calabro, a Vice President of MFS, Geoffrey L. Kurinsky, a Senior Vice
President of MFS, Judith N. Lamb, a Vice President of MFS, Lisa B. Nurme, a Vice
President of MFS, and Maura A. Shaughnessy, a Vice President of MFS, are the
Fund's portfolio managers. Mr. Calabro is the head of this portfolio management
team and a manager of the common stock portion of the Fund's portfolio. Mr.
Calabro has been employed by MFS since 1992 and served as an analyst and sector
portfolio manager with Fidelity Investments prior to that time. Mr. Kurinsky,
the manager of the Fund's fixed income securities, has been employed by MFS
since 1987. Ms. Lamb, the manager of the Fund's convertible securities, has been
employed by MFS since 1992, and served as an analyst with Fidelity Investments
prior to that time. Ms. Nurme, a manager of the common stock portion of the
Fund's portfolio, has been employed by MFS since 1987. Ms. Shaughnessy, also a
manager of the common stock portion of the Fund's portfolio, has been employed
by MFS since 1991 and served as an analyst with Harvard Management Company prior
to that time.
MFS has established a strategic alliance with Foreign & Colonial Management
Ltd. ("Foreign & Colonial"). Foreign & Colonial is a subsidiary of two of the
world's oldest financial services institutions, the London-based Foreign &
Colonial Investment Trust PLC, which pioneered the idea of investment management
in 1868, and HYPO-BANK (Bayerische Hypotheken-und Weschsel-Bank AG), the oldest
publicly listed bank in Germany, founded in 1835. As part of this alliance, the
portfolio managers and investment analysts of MFS and Foreign & Colonial will
share their views on a variety of investment related issues, such as the
economy, securities
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<PAGE>
markets, portfolio securities and their issuers, investment recommendations,
strategies and techniques, risk analysis, trading strategies and other portfolio
management matters. MFS has access to the extensive international equity
investment expertise of Foreign & Colonial, and Foreign & Colonial has access to
the extensive U.S. equity investment expertise of MFS. MFS and Foreign &
Colonial each have investment personnel working in each other's offices in
Boston and London, respectively.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for portfolios of other clients of MFS or clients of
Foreign & Colonial. Some simultaneous transactions are inevitable when several
clients receive investment advice from MFS and Foreign & Colonial, particularly
when the same security is suitable for more than one client. While in some cases
this arrangement could have a detrimental effect on the price or availability of
the security as far as the Fund is concerned, in other cases, however, it may
produce increased investment opportunities for the Fund.
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 TIA 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 $126
billion in assets in over three million shareholder accounts as of October 31,
1996. 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 $164 billion in assets as of October 31, 1996.
Robert M. Paine, D. William Kohli, Neil J. Powers and Mark J. Siegel (each a
Senior Vice President of Putnam Management) are primarily responsible for the
day-to-day management of the Portfolio. Messers. Paine, Kohli, Powers and Siegel
have been employed by Putnam Management since 1987, 1994, 1986 and 1993,
respectively. 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. Prior to 1993 Mr.
Siegel was Vice President at Solomon Brothers Ltd.
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 TIA
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 December 31, 1996 of $16
billion.
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<PAGE>
Mellon is a publicly-owned multibank holding company registered under the
Federal Bank Holding Company Act of 1956 and is the twenty-fourth largest bank
holding company in the United States, based on total assets as of December 31,
1995 of $40.6 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 led by Arthur J.
MacBride, III. Prior to joining The Boston Company in 1988, Mr. MacBride, a
Senior Vice President and Director of Fixed Income Securities 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 of Franklin and Marshall
College and holds a MBA from Fordham University.
Board of Directors
Overall responsibility for management and supervision of the Fund rests with the
Fund's Board of Directors. The Directors approve all significant agreements
between the Fund and the companies that furnish services to the Fund and each
Portfolio, including agreements with the Fund's distributor, investment
managers, investment sub-advisers, custodian and transfer agent. The Statement
of Additional Information contains background information regarding each
Director and executive officer of the Fund.
Portfolio Transactions and Distribution
SBMFM, TIA 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 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. In addition, the Van Kampen American Capital Enterprise
Portfolio may not deal with Morgan Stanley & Co., Inc. ("Morgan Stanley") (an
affiliate of VK/AC Holding, Inc.) in any transaction in which Morgan Stanley
acts as principal.
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<PAGE>
SHARES OF THE FUND
================================================================================
General
The Fund, an open-end managed investment company, was incorporated in Maryland
on February 22, 1994. The Fund has an authorized capital of 6,000,000,000 shares
with a par value of $.00001 per share. The Board of Directors has authorized the
issuance of twelve series of shares, each representing shares in one of twelve
separate Portfolios - the Smith Barney Income and Growth Portfolio, the Alliance
Growth Portfolio, the AIM Capital Appreciation Portfolio, the Van Kampen
American Capital Enterprise Portfolio, the Smith Barney International Equity
Portfolio, the Smith Barney Pacific Basin Portfolio, the TBC Managed Income
Portfolio, the Putnam Diversified Income Portfolio, the GT Global Strategic
Income Portfolio, the Smith Barney High Income Portfolio, the MFS Total Return
Portfolio and the Smith Barney Money Market Portfolio. The Directors also have
the power to create additional series of shares. The assets of each Portfolio
will be segregated and separately managed and a shareowner's interest is in the
assets of the Portfolio in which he or she holds shares.
Voting Rights
The Fund offers its shares only for purchase by insurance company separate
accounts. Thus, the insurance company is technically the shareholder of the Fund
and, under the 1940 Act, is deemed to be in control of the Fund. Nevertheless,
with respect to any Fund shareholder meeting, an insurance company will solicit
and accept timely voting instructions from its contractowners who own units in a
separate account investment division which corresponds to shares in the Fund in
accordance with the procedures set forth in the accompanying prospectus for the
applicable contract issued by the insurance company and to the extent required
by law. Shares of the Fund attributable to contractowner interests for which no
voting instructions are received will be voted by an insurance company in
proportion to the shares for which voting instructions are received.
Each share of a Portfolio represents an equal proportionate interest in that
Portfolio with each other share of the same Portfolio and is entitled to such
dividends and distributions out of the net income of that Portfolio as are
declared in the discretion of the Directors. Shareowners are entitled to one
vote for each share held and will vote by individual Portfolio except to the
extent required by the 1940 Act. The Fund is not required to hold annual
shareowner meetings, although special meetings may be called for the Fund as a
whole, or a specific Portfolio, for purposes such as electing or removing
Directors, changing fundamental policies or approving a management contract.
Shareowners may cause a meeting of shareowners to be held upon a vote of 10% of
the Fund's outstanding shares for the purpose of voting on the removal of
Directors.
Availability of the Fund
Investment in the Fund is only available to owners of either variable annuity or
variable life insurance contracts issued by insurance companies through their
separate accounts. It is possible that in the future it may become
disadvantageous for both variable annuity and variable life insurance separate
accounts to be invested simultaneously in the Fund. However, the Fund does not
currently foresee any disadvantages to the contractowners of the different
contracts which are funded by such separate accounts. The Board monitors events
for the existence of any material irreconcilable conflict between or among such
owners, and each 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
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<PAGE>
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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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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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.
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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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.
- --------------------------------------------------------------------------------
58
<PAGE>
Duff 1 - Indicates a high certainty of timely payment.
Duff 2 - Indicates a good certainty of timely payment: liquidity factors and
company fundamentals are sound.
The Thomson BankWatch ("TBW")
TBW-1 - Indicates a very high degree of likelihood that principal and interest
will be paid on a timely basis.
TBW-2 - While the degree of safety regarding timely repayment of principal and
interest is strong, the relative degree of safety is not as high as for issues
rated TBW-1.
- --------------------------------------------------------------------------------
59
<PAGE>
Vintage Tiffany Lamp
[ART]
Prospectus
L 12410 Travelers Series Fund Inc. SB Ed. 2-97
February 28, 1997
TRAVELERS SERIES FUND INC.
388 Greenwich Street
New York, New York 10013
STATEMENT OF ADDITIONAL INFORMATION
Shares of the Travelers Series Fund Inc. (the
"Fund") are offered with a choice of twelve
Portfolios:<R/>
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 Van Kampen American Capital Enterprise Portfolio seeks capital
appreciation through investment in securities believed by its investment
adviser to have above average potential for capital appreciation.
The Smith Barney International Equity Portfolio seeks total return on its
assets from growth of capital and income and will invest at least 65% of its
assets in a diversified portfolio of equity securities of established non-U.S.
issuers.
The Smith Barney Pacific Basin Portfolio seeks long-term capital appreciation
through investment primarily in equity securities of the Asian Pacific
Countries.
The TBC Managed Income Portfolio seeks high current income consistent with
what its investment adviser believes to be prudent risk of capital through
investment in various types of debt securities.
The Putnam Diversified Income Portfolio seeks high current income consistent
with preservation of capital.
The GT Global Strategic Income Portfolio primarily 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. While current income is the primary objective, the
Portfolio believes that there should be a reasonable opportunity for growth of
capital and income.
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 Travelers Series Fund Inc.
as well as matters already discussed in the Prospectus and therefore should be
read in conjunction with the February 28, 1997 Prospectus which may be
obtained from the Fund or your Financial Consultant. Shares of the Fund may
only be purchased by insurance company separate accounts.
TABLE OF CONTENTS
Directors and Officers 3
Investment Policies 5
Investment Restrictions 25
Performance Information 41
Determination of Net Asset Value 41
Redemption of Shares 41
Custodians 42
Independent Auditors 42
The Fund 42
Management Agreements 43
Voting Rights 47
Financial Statements 48
DIRECTORS AND OFFICERS
VICTOR K. ATKINS, Director
Retired; 120 Montgomery Street, San Francisco, CA. Former President of Lips
Propellers, Inc. Director of two investment companies associated with Smith
Barney Inc. ("Smith Barney"); 74.
*JESSICA M. BIBLIOWICZ, Director and President
Executive Vice President of Smith Barney; Chairman of Smith Barney Mutual
Funds Management Inc. ("SBMFM") and Travelers Investment Adviser, Inc.
("TIA"); President of thirty-nine 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; 36
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; 68.
ABRAHAM E. COHEN, Director
Consultant and Board Member, Chugai Pharma U.S.A., Inc., 520 Madison Ave.,
34th Floor, New York, New York 10022; 61
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; 69.
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; 59
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; 51
*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 SBMFM and TIA; 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; 63
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;
64.
*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 Director and
Senior Vice President of SBMFM and TIA; 38
*BRUCE D. SARGENT, Vice President
Managing Director of Smith Barney and Vice President and Director of SBMFM;
Vice President of three other investment companies associated with Smith
Barney; 52
*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; 60
*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; 40
*MARTIN HANLEY, Vice President
Vice President in the money fund group; Vice President of six investment
companies associated with Smith Barney; 30
*DAVID ISHIBASHI, Vice President
Vice President of Smith Barney; Prior to joining Smith Barney in 1993, Mr.
Ishibashi was responsible for Japanese equitie and headed the Japan dest at SG
Warburg; 42
*SCOTT KALB, Vice President
Managing Director of Smith Barney, Formerly, Vice President of Equity Research
at Drexel Burnham; 41
*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; 38
*IRVING DAVID, Controller
Vice President of the Manager. Formerly Assistant Treasurer of First
Investment Management Company; 35.
*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; 36
*CHRISTINA T. SYDOR, Secretary
Managing Director of Smith Barney, General Counsel and Secretary of SBMFM and
TIA and Secretary of forty-one investment companies associated with Smith
Barney, and of the Manager; 45
___________________
*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.
Thomas M. Reynolds is the Controller for each of the following
Portfolios: the AIM Capital Appreciation Portfolio, the Alliance Growth
Portfolio, the MFS Total Return Portfolio, the Putnam Diversified Income
Portfolio, the Smith Barney High Income Portfolio, the TBC Managed Income
Portfolio and the Van Kampen American Enterprise Portfolio.
Irving P. David is the Controller for each of the following Portfolios:
the GT Global Strategic Income Portfolio, the Smith Barney International
Equity Portfolio, the Smith Barney Pacific Basin Portfolio and the Smith
Barney Money Market Portfolio.
On January 24, 1997 Directors and officers owned in the aggregate less
than 1% of the outstanding securities of the Fund.
The following table shows the compensation paid by the Fund to each
director during the Fund's last fiscal year. None of the officers of the Fund
received any compensation from the Fund for such period. Officers and
interested directors of the Fund are compensated by Smith Barney.
COMPENSATION TABLE
Total
Pension or Compensation Number of
Retirement from Fund Funds for
Aggregate Benefits Accrued and Fund Which Director
Compensation as part of Complex Serves Within
Name of Person from Fund Fund Expenses Paid to Directors Fund Complex
Victor K. Atkins $12,220 $0 $27,400 2
Jessica M. Bibliowicz 0 0 0 12
Alger B. Chapman 12,220 0 83,900 7
Robert A. Frankel 12,220 0 75,725 8
Ranier Greeven 12,220 0 27,400 2
Susan M. Heilbron 12,220 0 27,400 2
Heath B. McLendon 0 0 0 41
James M. Shuart 12,220 0 27,400 2
INVESTMENT POLICIES
Repurchase and Reverse Repurchase Agreements. Each Portfolio may on
occasion enter into repurchase agreements, wherein the seller agrees to
repurchase a security from the Portfolio at an agreed-upon future date,
normally the next business day. The resale price is greater than the purchase
price, which reflects the agreed-upon rate of return for the period the
Portfolio holds the security and which is not related to the coupon rate on
the purchased security. Each Portfolio requires continual maintenance of the
market value of the collateral in amounts at least equal to the repurchase
price plus accrued interest, thus risk is limited to the ability of the seller
to pay the agreed-upon amount on the delivery date; however, if the seller
defaults, realization upon the collateral by the Portfolio may be delayed or
limited or the Portfolio might incur a loss if the value of the collateral
securing the repurchase agreement declines and might incur disposition costs
in connection with liquidating the collateral. A Portfolio will only enter
into repurchase agreements with broker/dealers or other financial institutions
that are deemed creditworthy by the Manager under guidelines approved by the
Board of Directors. It is the policy of each Portfolio (except the Smith
Barney Money Market Portfolio) not to invest in repurchase agreements that do
not mature within seven days if any such investment together with any other
illiquid assets held by a Portfolio amount to more than 15% of that
Portfolio's net assets. The Smith Barney Money Market Portfolio may not
invest in such securities if, together with any other illiquid assets held by
it amount to more than 10% of its total assets.
The Smith Barney International Equity Portfolio and the Smith Barney
Pacific Basin Portfolio may each enter into reverse repurchase agreements with
broker/dealers and other financial institutions with up to 5% of its net
assets. The GT Global Strategic Income Portfolio may enter into such
transactions with up to 33-1/3% of its total assets, so long as the total
amount of that Portfolio's borrowings do not exceed 33-1/3% of its total
assets. Such agreements involve the sale of portfolio securities with an
agreement to repurchase the securities at an agreed-upon price, date and
interest payment and have the characteristics of borrowing. Since the
proceeds of borrowings under reverse repurchase agreements are invested, this
would introduce the speculative factor known as "leverage." The securities
purchased with the funds obtained from the agreement and securities
collateralizing the agreement will have maturity dates no later than the
repayment date. Generally the effect of such a transaction is that the
Portfolio can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase agreement, while
in many cases it will be able to keep some of the interest income associated
with those securities. Such transactions are only advantageous if the
Portfolio has an opportunity to earn a greater rate of interest on the cash
derived from the transaction than the interest cost of obtaining that cash.
Opportunities to realize earnings from the use of the proceeds equal to or
greater than the interest required to be paid may not always be available, and
the Portfolio intends to use the reverse repurchase technique only when
management believes it will be advantageous to the Portfolio. The use of
reverse repurchase agreements may exaggerate any interim increase or decrease
in the value of the participating Portfolio's assets. The Portfolio's
custodian bank will maintain a separate account for the Portfolio with
securities having a value equal to or greater than such commitments.
Securities Lending. Each Portfolio (except the Van Kampen American
Capital Enterprise Portfolio and the Smith Barney Money Market Portfolio), may
seek to increase its net investment income by lending its securities provided
such loans are callable at any time and are continuously secured by cash or
U.S. Government securities equal to no less than the market value, determined
daily, of the securities loaned. The Portfolio will receive amounts equal to
dividends or interest on the securities loaned. It will also earn income for
having made the loan because cash collateral pursuant to these loans will be
invested in short-term money market instruments. In connection with lending
of securities the Portfolio may pay reasonable finders, administrative and
custodial fees. Management will limit such lending to not more than: (a) 33
1/3% of the value of the total assets of each of the TBC Managed Income
Portfolio and the AIM Capital Appreciation Portfolio; (b) 30% of the value of
the total assets of each of the GT Global Strategic Income Portfolio and the
MFS Total Return Portfolio; (c) 20% of the value of the total assets of each
of the Smith Barney Income and Growth Portfolio and the Smith Barney High
Income Portfolio; (d) 25% of the value of the total assets of each of the
Alliance Growth Portfolio and the Putnam Diversified Income Portfolio; and (e)
15% of the value of the total assets of each of the Smith Barney International
Equity Portfolio and the Smith Barney Pacific Basin Portfolio. Where voting
or consent rights with respect to loaned securities pass to the borrower,
management will follow the policy of calling the loan, in whole or in part as
may be appropriate, to permit the exercise of such voting or consent rights if
the issues involved have a material effect on the Portfolio's investment in
the securities loaned. Apart from lending its securities and acquiring debt
securities of a type customarily purchased by financial institutions, none of
the foregoing Portfolios will make loans to other persons. The risks in
lending portfolio securities, as with other extensions of secured credit,
consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. Loans will only be made to borrowers whom
management deems to be of good standing and will not be made unless, in the
judgment of management, the interest to be earned from such loans would
justify the risk.
By lending its securities, a Portfolio can increase its income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when U.S. Government securities are used as
collateral. Each Portfolio will adhere to the following conditions whenever
it lends its securities: (1) the Portfolio must receive at least 100% cash
collateral or equivalent securities from the borrower, which amount of
collateral will be maintained by daily marking to market; (2) the borrower
must increase the collateral whenever the market value of the securities
loaned rises above the level of the collateral; (3) the Portfolio must be able
to terminate the loan at any time; (4) the Portfolio must receive reasonable
interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities, and any increase in market value; (5)
the Portfolio may pay only reasonable custodian fees in connection with the
loan; and (6) voting rights on the loaned securities may pass to the borrower,
except that, if a material event adversely affecting the investment in the
loaned securities occurs, the Portfolio's Board of Directors must terminate
the loan and regain the Portfolio's right to vote the securities.
Foreign Investments. Each Portfolio 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 than
20% of its total assets in foreign securities, includes ADRs as well as
European Depository Receipts ("EDRs") and other securities representing
underlying securities of foreign issuers as foreign securities for purposes of
this limitation. EDRs, which sometimes are referred to as Continental
Depositary Receipts ("CDRs") are receipts issued in Europe typically by
foreign banks and trust companies that evidence ownership of either foreign or
domestic securities. Generally, ADRs, in registered form, are designed for use
in the United States securities markets, and EDRs, in bearer form, are
designed for use in European securities markets.
Emerging Markets. The Putnam Diversified Income Portfolio, the GT
Global Strategic Income Portfolio, the MFS Total Return 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.
Settlement mechanisms in emerging market securities may be less
efficient and reliable than in more developed markets. In such emerging
securities markets there may be share registration and delivery delays and
failures.
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 GT Global Strategic Income Portfolio and the MFS Total
Return Portfolio may invest in zero coupon, pay-in-kind and delayed interest
securities as well as custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain U.S. Government securities.
Zero coupon securities pay no cash income to their holders until they mature
and are issued at substantial discounts from their value at maturity. When
held to maturity, their entire return comes from the difference between their
purchase price and their maturity value. Pay-in-kind securities pay interest
through the issuance to the holders of additional securities, and delayed
interest securities are securities which do not pay interest for a specified
period. Because interest on zero coupon, pay-in-kind and delayed interest
securities is not paid on a current basis, the values of securities of this
type are subject to greater fluctuations than are the values of securities
that distribute income regularly and may be more speculative than such
securities. Accordingly, the values of these securities may be highly
volatile as interest rates rise or fall. In addition, the Portfolio's
investments in zero coupon, pay-in-kind and delayed interest securities will
result in special tax consequences. Although zero coupon securities do not
make interest payments, for tax purposes a portion of the difference between a
zero coupon security's maturity value and its purchase price is taxable income
of the Portfolio each year.
Custodial receipts evidencing specific coupon or principal payments
have the same general attributes as zero coupon U.S. Government securities but
are not considered to be U.S. Government securities. Although under the terms
of a custodial receipt a Portfolio is typically authorized to assert its
rights directly against the issuer of the underlying obligation, the Portfolio
may be required to assert through the custodian bank such rights as may exist
against the underlying issuer. Thus, in the event the underlying issuer fails
to pay principal and/or interest when due, a Portfolio may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Portfolio had purchased a direct obligation of the issuer. In
addition, in the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security would be reduced in respect of any taxes paid.
Loan Participations and Other Direct Indebtedness. The Putnam
Diversified Income Portfolio, the GT Global Strategic Income Portfolio and the
MFS Total Return Portfolio may purchase loan participations and other direct
claims against a borrower. In purchasing a loan participation, a Portfolio
acquires some or all of the interest of a bank or other lending institution in
a loan to a corporate borrower. Many such loans are secured, although some may
be unsecured. Such loans may be in default at the time of purchase. Loans that
are fully secured offer a Portfolio more protection than an unsecured loan in
the event of non-payment of scheduled interest or principal. However, there is
no assurance that the liquidation of collateral from a secured loan would
satisfy the corporate borrower's obligation, or that the collateral can be
liquidated.
These loans are made generally to finance internal growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate
activities. Such loans are typically made by a syndicate of lending
institutions, represented by an agent lending institution which has negotiated
and structured the loan and is responsible for collecting interest, principal
and other amounts due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against the borrower.
Alternatively, such loans may be structured as a novation, pursuant to which a
Portfolio would assume all of the rights of the lending institution in a loan,
or as an assignment, pursuant to which the Portfolio would purchase an
assignment of a portion of a lender's interest in a loan either directly from
the lender or through an intermediary. A Portfolio may also purchase trade or
other claims against companies, which generally represent money owed by the
company to a supplier of goods or services. These claims may also be purchased
at a time when the company is in default.
Certain of the loan participations acquired by a Portfolio may involve
revolving credit facilities or other standby financing commitments which
obligate the Portfolio to pay additional cash on a certain date or on demand.
These commitments may have the effect of requiring a Portfolio to increase its
investment in a company at a time when it might not otherwise decide to do so
(including at a time when the company's financial condition makes it unlikely
that such amounts will be repaid). To the extent that a Portfolio is committed
to advance additional funds, it will at all times hold and maintain in a
segregated account cash or other high grade debt obligations in an amount
sufficient to meet such commitments. A Portfolio's ability to receive
payments of principal, interest and other amounts due in connection with these
investments will depend primarily on the financial condition of the borrower.
In selecting the loan participations and other direct investments which a
Portfolio will purchase, management will rely upon its (and not that of the
original lending institution's) own credit analysis of the borrower. As a
Portfolio may be required to rely upon another lending institution to collect
and pass on to it amounts payable with respect to the loan and to enforce its
rights under the loan, an insolvency, bankruptcy or reorganization of the
lending institution may delay or prevent a Portfolio from receiving such
amounts. In such cases, a Portfolio will evaluate as well the
creditworthiness of the lending institution and will treat both the borrower
and the lending institution as an "issuer" of the loan participation for
purposes of certain investment restrictions pertaining to the diversification
of the Portfolio's portfolio investments. The highly leveraged nature of many
such loans may make such loans especially vulnerable to adverse changes in
economic or market conditions. Investments in such loans may involve
additional risks to a Portfolio. For example, if a loan is foreclosed, a
Portfolio could become part owner of any collateral, and would bear the costs
and liabilities associated with owning and disposing of the collateral. In
addition, it is conceivable that under emerging legal theories of lender
liability, a Portfolio could be held liable as a co-lender. It is unclear
whether loans and other forms of direct indebtedness offer securities law
protection against fraud and misrepresentation. In the absence of definitive
regulatory guidance, a Portfolio relies on management's research in an attempt
to avoid situations where fraud or misrepresentation could adversely affect
the Portfolio. In addition, loan participations and other direct investments
may not be in the form of securities or may be subject to restrictions on
transfer, and only limited opportunities may exist to resell such instruments.
As a result, a Portfolio may be unable to sell such investments at an
opportune time or may have to resell them at less than fair market value. To
the extent that management determines that any such investments are illiquid,
a Portfolio will include them in the investment limitations described below.
Mortgage-Backed Securities. The TBC Managed Income Portfolio, the
Putnam Diversified Income Portfolio and the MFS Total Return Portfolio may
invest in mortgage backed securities, which are securities representing
interests in "pools" of mortgage loans. Monthly payments of interest and
principal by the individual borrowers on mortgages are "passed through" to the
holders of the securities (net of fees paid to the issuer or guarantor of the
securities) as the mortgages in the underlying mortgage pools are paid off.
The average lives of mortgage pass-throughs are variable when issued because
their average lives depend on prepayment rates. The average life of these
securities is likely to be substantially shorter than their stated final
maturity as a result of unscheduled principal prepayment. Prepayments on
underlying mortgages result in a loss of anticipated interest, and all or part
of a premium if any has been paid, and the actual yield (or total return) to a
Portfolio may be different than the quoted yield on the securities. Mortgage
prepayments generally increase with falling interest rates and decrease with
rising interest rates. Like other fixed income securities, when interest rates
rise the value of a mortgage pass-through security generally will decline;
however, when interest rates are declining, the value of mortgage pass-through
securities with prepayment features may not increase as much as that of other
fixed-income securities.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case of
securities guaranteed by the Government National Mortgage Association (the
"GNMA"); or guaranteed by agencies or instrumentalities of the U.S. Government
(such as the Federal National Mortgage Association ("FNMA") or the Federal
Home Loan Mortgage Corporation, (FHLMC) which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities may also be issued by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers). Some of these mortgage pass-through securities may
be supported by various forms of insurance or guarantees.
Interests in pools of mortgage-related securities differ from other
forms of debt securities, which normally provide for periodic payment of
interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which consists
of both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on
their mortgage loans, net of any fees paid to the issuer or guarantor of such
securities. Additional payments are caused by prepayments of principal
resulting from the sale, refinancing or foreclosure of the underlying
property, net of fees or costs which may be incurred. Some mortgage
pass-through securities (such as securities issued by the GNMA) are described
as "modified pass-through." These securities entitle the holder to receive all
interests and principal payments owed on the mortgages in the mortgage pool,
net of certain fees, at the scheduled payment dates regardless of whether the
mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-through
securities is the GNMA. GNMA is a wholly-owned U.S. Government corporation
within the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the U.S. Government, the timely
payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed
mortgages. These guarantees, however, do not apply to the market value or
yield of mortgage pass-through securities. GNMA securities are often purchased
at a premium over the maturity value of the underlying mortgages. This premium
is not guaranteed and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are not backed by
the full faith and credit of the U.S. Government) include the FNMA and the
FHLMC. FNMA is a government-sponsored corporation owned entirely by private
stockholders. It is subject to general regulation by the Secretary of Housing
and Urban Development. FNMA purchases conventional residential mortgages
(i.e., mortgages not insured or guaranteed by any governmental agency) from a
list of approved seller/servicers which include state and federally-chartered
savings and loan associations, mutual savings banks, commercial banks, credit
unions and mortgage bankers. Pass-through securities issued by FNMA are
guaranteed as to timely payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by private
stockholders. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages (i.e., not federally insured or
guaranteed) from FHLMC's national portfolio. FHLMC guarantees timely payment
of interest and ultimate collection of principal regardless of the status of
the underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of mortgage loans. Such issuers may also be the originators
and/or servicers of the underlying mortgage-related securities. Pools created
by such non-governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no direct or
indirect government or agency guarantees of payments in the former pools.
However, timely payment of interest and principal of mortgage loans in these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers
and the mortgage poolers. There can be no assurance that the private insurers
or guarantors can meet their obligations under the insurance policies or
guarantee arrangements. A Portfolio may also buy mortgage-related securities
without insurance or guarantees.
Other Asset-Backed Securities: The TBC Managed Income Portfolio, the
Putnam Diversified Income Portfolio and the MFS Total Return Portfolio may
invest in other asset-backed securities. These securities, issued by trusts
and special purpose corporations, are backed by a pool of assets, such as
credit card and automobile loan receivables, representing the obligations of a
number of different parties.
Corporate asset-backed securities present certain risks. For instance,
in the case of credit card receivables, these securities may not have the
benefit of any security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of
which give such debtors the right to set off certain amounts owed on the
credit cards, thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the underlying
obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that
of the holders of the related automobile receivables. In addition, because of
the large number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the automobile
receivables may not have a proper security interest in all of the obligations
backing such receivables. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to support
payments on these securities.
Corporate asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To lessen the
effect of failures by obligers to make payments on underlying assets, the
securities may contain elements of credit support which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from ultimate default ensures payment through insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties. A Portfolio will not pay any additional or separate fees for credit
support. The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that anticipated
or failure of the credit support could adversely affect the return on an
instrument in such a security.
"Dollar Roll" Transactions. As described in the Prospectus, the TBC
Managed Income Portfolio, the Putnam Diversified Income Portfolio and the GT
Global Strategic Income Portfolio may enter into "dollar roll" transactions
pursuant to which they sell fixed income securities for delivery in the
current month and simultaneously contract to repurchase substantially similar
securities on a specified future date. The MFS Total Return Portfolio may
enter in similar transactions pursuant to which the Portfolio sells
mortgage-backed securities for delivery in the future and simultaneously
contracts to repurchase substantially similar securities on a specified future
date. During the roll period, a Portfolio forgoes principal and interest paid
on the securities. The Portfolio is compensated for the lost interest by the
difference between the current sales price and the lower price for the future
purchase (often referred to as the "drop") as well as by the interest earned
on the cash proceeds of the initial sale. A Portfolio may also be compensated
by receipt of a commitment fee.
Convertible Securities and Synthetic Convertible Securities. The Smith
Barney Income and Growth Portfolio, the Alliance Growth Portfolio, the AIM
Capital Appreciation Portfolio, the Van Kampen American Capital Enterprise
Portfolio, the Smith Barney International Equity Portfolio, the Smith Barney
Pacific Basin Portfolio, the TBC Managed Income Portfolio, the Putnam
Diversified Income Portfolio, the GT Global Strategic Income Portfolio, the
Smith Barney High Income Portfolio and the MFS Total Return Portfolio may
invest in convertible securities and synthetic convertible securities.
Convertible securities are fixed-income securities that may be converted at
either a stated price or stated rate into underlying shares of common stock.
Convertible securities have general characteristics similar to both fixed-
income and equity securities. Although to a lesser extent than with fixed-
income securities generally, the market value of convertible securities tends
to decline as interest rates increase and, conversely, tends to increase as
interest rates decline. In addition, because of the conversion feature, the
market value of convertible securities tends to vary with fluctuations in the
market value of the underlying common stocks and, therefore, also will react
to variations in the general market for equity securities.
Like fixed-income securities, convertible securities are investments
which provide for a stable stream of income with generally higher yields than
common stocks. Of course, like all fixed-income securities, there can be no
assurance of current income because the issuers of the convertible securities
may default on their obligations. Convertible securities, however, generally
offer lower interest or dividend yields than non-convertible securities of
similar quality because of the potential for capital appreciation. A
convertible security, in addition to providing fixed income, offers the
potential for capital appreciation through the conversion feature, which
enables the holder to benefit from increases in the market price of the
underlying common stock. However, there can be no assurance of capital
appreciation because securities prices fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds
enjoy seniority in right of payment to all equity securities, and convertible
preferred stock is senior to common stock of the same issuer. Because of the
subordination feature, however, convertible securities typically have lower
ratings than similar non-convertible securities.
Unlike a convertible security, which is a single security, a synthetic
convertible security is comprised of distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are typically created by combining non-convertible bonds or
preferred stocks with warrants or stock call options. The options that will
form elements of synthetic convertible securities may be listed on a
securities exchange or on the National Association of Securities Dealers
Automated Quotation System or may be privately traded. The components of a
synthetic convertible security generally are not offered as a unit and may be
purchased and sold by the Portfolio at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to market fluctuations. Investing in synthetic
convertible securities involves the risk normally involved in holding the
securities comprising the synthetic convertible security.
When-Issued, Delayed Delivery and Forward Commitment Securities. The
Smith Barney Income and Growth Portfolio, the Alliance Growth Portfolio, the
TBC Managed Income Portfolio, the Putnam Diversified Income Portfolio, the GT
Global Strategic Income Portfolio, the Smith Barney High Income Portfolio and
the MFS Total Return Portfolio may purchase securities on a when-issued basis,
or may purchase or sell securities for delayed delivery. In when-issued or
delayed delivery transactions, delivery of the securities occurs beyond normal
settlement periods, but no payment or delivery will be made by a Portfolio
prior to the actual delivery or payment by the other party to the transaction.
A Portfolio will not accrue income with respect to a when-issued or delayed
delivery security prior to its stated delivery date. A Portfolio will
establish with its custodian a segregated account consisting of cash, U.S.
Government securities or other liquid securities, 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 Van Kampen American Capital
Enterprise Portfolio, the GT Global Strategic Income Portfolio, the AIM
Capital Appreciation Portfolio and the High Income Portfolio may each make
short sales of securities in order to reduce market exposure and/or to
increase its income if, at all times when a short position is open, (the "AIM
Capital Appreciation Portfolio will limit investments such that nor more than
10% of the value of its nets assets will be deposited as collateral for such
sales at any time) the Portfolio owns an equal or greater amount of such
securities or owns preferred stock, debt or warrants convertible or
exchangeable into an equal or greater number of the shares of the securities
sold short. Short sales of this kind are referred to as short sales "against
the box." The broker-dealer that executes a short sale generally invests the
cash proceeds of the sale until they are paid to the Portfolio. Arrangements
may be made with the broker-dealer to obtain a portion of the interest earned
by the broker on the investment of short sale proceeds. The Portfolio will
segregate the securities against which short sales against the box have been
made in a special account with its custodian.
Commercial Bank Obligations. For the purposes of each Portfolio's
investment policies with respect to bank obligations, obligations of foreign
branches of U.S. banks and of foreign banks may be general obligations of the
parent bank in addition to the issuing bank, or may be limited by the terms of
a specific obligation and by government regulation. As with investment in
non-U.S. securities in general, investments in the obligations of foreign
branches of U.S. banks and of foreign banks may subject the Portfolio to
investment risks that are different in some respects from those of investments
in obligations of domestic issuers. Although a Portfolio will typically
acquire obligations issued and supported by the credit of U.S. or foreign
banks having total assets at the time of purchase in excess of U.S. $1 billion
(or the equivalent thereof), this U.S. $1 billion figure is not a fundamental
investment policy or restriction of the Portfolio. For calculation purposes
with respect to the U.S. $1 billion figure, the assets of a bank will be
deemed to include the assets of its U.S. and non-U.S. branches.
Commercial Paper. With respect to each Portfolio's investment policies
with respect to commercial paper, such security consists of short-term
(usually from 1 to 270 days) unsecured promissory notes issued by corporations
in order to finance their current operations. A variable amount master demand
note (which is a type of commercial paper) represents a direct borrowing
arrangement involving periodically fluctuating rates of interest under a
letter agreement between a commercial paper issuer and an institutional
lender, pursuant to which the lender may determine to invest varying amounts.
Transfer of such notes is usually restricted by the issuer, and there is no
secondary trading market for such notes. Each Portfolio (except the Smith
Barney Money Market Portfolio), therefore, may not invest in a master demand
note, if as a result more than 15% of the value of each such Portfolio's total
assets would be invested in such notes and other illiquid securities. The
Smith Barney Money Market Portfolio may not invest in such notes if more than
10% of the value of its total assets would be invested in such notes and other
illiquid securities.
Options, Futures Contracts and Related Options. The following
information on options, futures contracts and related options applies to the
Portfolios as described in the Prospectus. In addition, new options and
futures contracts and various combinations thereof continue to be developed
and the Portfolios may invest in any such options and contracts as may be
developed to the extent consistent with its investment objective and
regulatory requirements applicable to investment companies.
Writing Covered Call Options. The Smith Barney Income and Growth
Portfolio, the Alliance Growth Portfolio, the AIM Capital Appreciation
Portfolio, the Van Kampen American Capital Enterprise Portfolio, the Smith
Barney International Equity Portfolio, the Smith Barney Pacific Basin
Portfolio, the Putnam Diversified Income Portfolio, the GT Global Strategic
Income Portfolio, the High Income Portfolio and the MFS Total Return Portfolio
may write (sell) covered call options. A Portfolio may write (sell) covered
call options for hedging purposes or to increase its portfolio return.
Covered call options will generally be written on securities and currencies
which, in the opinion of management, are not expected to make any major price
moves in the near future but which, over the long term, are deemed to be
attractive investments for the Portfolio. (the "AIM Capital Appreciation
Portfolio" will not write covered call options for speculative purposes).
A call option gives the holder (buyer) the right to purchase a security
or currency at a specified price (the exercise price) at any time until a
certain date (the expiration date). So long as the obligation of the writer
of a call option continues, he may be assigned an exercise notice by the
broker-dealer through whom such option was sold, requiring him to deliver the
underlying security or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by purchasing
an option identical to that previously sold. Management believes that the
writing of covered call options is less risky than writing uncovered or
"naked" options, which the Portfolios will not do.
Portfolio securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations consistent
with each Portfolio's investment objective. When writing a covered call
option, the Portfolio, in return for the premium, gives up the opportunity for
profit from a price increase in the underlying security or currency above the
exercise price and retains the risk of loss should the price of the security
or currency decline. Unlike one who owns securities or currencies not subject
to an option, the Portfolio has no control over when it may be required to
sell the underlying securities or currencies, since the option may be
exercised at any time prior to the option's expiration. If a call option
which the Portfolio has written expires, the Portfolio will realize a gain in
the amount of the premium; however, such gain may be offset by a decline in
the market value of the underlying security or currency during the option
period. If the call option is exercised, the Portfolio will realize a gain or
loss from the sale of the underlying security or currency. The security or
currency covering the call option will be maintained in a segregated account
of the Portfolio's custodian. The Portfolio does not consider a security or
currency covered by a call option to be "pledged" as that term is used in the
Portfolio's policy which limits the pledging or mortgaging of its assets.
The premium the Portfolio receives for writing a call option is deemed
to constitute the market value of an option. The premium the Portfolio will
receive from writing a call option will reflect, among other things, the
current market price of the underlying security or currency, the relationship
of the exercise price to such market price, the historical price volatility of
the underlying security or currency, and the length of the option period. In
determining whether a particular call option should be written on a particular
security or currency, management will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will
exist for those options. The premium received by the Portfolio for writing
covered call options will be recorded as a liability in the Portfolio's
statement of assets and liabilities. This liability will be adjusted daily to
the option's current market value, which will be calculated as described in
"Determination of Net Asset Value" in the Prospectus. The liability will be
extinguished upon expiration of the option or delivery of the underlying
security or currency upon the exercise of the option. The liability with
respect to a listed option will also be extinguished upon the purchase of an
identical option in a closing transaction.
Closing transactions will be effected in order to realize a profit on
an outstanding call option, to prevent an underlying security or currency from
being called, or to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the Portfolio to
write another call option on the underlying security or currency with either a
different exercise price, expiration date or both. If the Portfolio desires
to sell a particular security or currency from its portfolio on which it has
written a call option or purchases a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is no assurance that the Portfolio will be able to effect
such closing transactions at a favorable price. If the Portfolio cannot enter
into such a transaction, it may be required to hold a security or currency
that it might otherwise have sold, in which case it would continue to be a
market risk with respect to the security or currency.
Each Portfolio will pay transaction costs in connection with the
writing of options and in entering into closing purchase contracts.
Transaction costs relating to options activity are normally higher than those
applicable to purchases and sales of portfolio securities.
Call options written by each Portfolio will normally have expiration
dates of less than nine months from the date written. The exercise price of
the options may be below, equal to or above the current market values of the
underlying securities or currencies at the time the options are written. From
time to time, the Portfolio may purchase an underlying security or currency
for delivery in accordance with the exercise of an option, rather than
delivering such security or currency from its portfolio. In such cases,
additional costs will be incurred.
Each Portfolio will realize a profit or loss from a closing purchase
transaction if the cost of the transaction is less or more, respectively, than
the premium received from the writing of the option. Because increases in the
market price of a call option will generally reflect increases in the market
price of the underlying security or currency, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security or currency owned by the Portfolio.
Purchasing Put Options. The Smith Barney Income and Growth Portfolio,
the Alliance Growth Portfolio, the Van Kampen American Capital Enterprise
Portfolio, the Smith Barney International Equity Portfolio, the Smith Barney
Pacific Basin Portfolio, the Putnam Diversified Income Portfolio, the GT
Global Strategic Income Portfolio, the Smith Barney High Income Portfolio and
the MFS Total Return Portfolio may purchase put options. As the holder of a
put option, the Portfolio has the right to sell the underlying security or
currency at the exercise price at any time during the option period. The
Portfolio may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire.
Each Portfolio may purchase a put option on an underlying security or
currency (a "protective put") owned by the Portfolio as a hedging technique in
order to protect against an anticipated decline in the value of the security
or currency. Such hedge protection is provided only during the life of the
put option when the Portfolio, as the holder of the put option, is able to
sell the underlying security or currency at the put exercise price regardless
of any decline in the underlying security's market price or currency's
exchange value. For example, a put option may be purchased in order to
protect unrealized appreciation of a security or currency when management
deems it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.
Each Portfolio may also purchase put options at a time when the
Portfolio does not own the underlying security or currency. By purchasing put
options on a security or currency it does not own, the Portfolio seeks to
benefit from a decline in the market price of the underlying security or
currency. If the put option is not sold when it has remaining value, and if
the market price of the underlying security or currency remains equal to or
greater than the exercise price during the life of the put option, the
Portfolio will lose its entire investment in the put option. In order for the
purchase of a put option to be profitable, the market price of the underlying
security or currency must decline sufficiently below the exercise price to
cover the premium and transaction costs, unless the put option is sold in a
closing sale transaction.
The premium paid by a Portfolio when purchasing a put option will be
recorded as an asset in the Portfolio's statement of assets and liabilities.
This asset will be adjusted daily to the option's current market value, which
will be calculated as described in "Determination of Net Asset Value" in the
Prospectus. The asset will be extinguished upon expiration of the option or
the delivery of the underlying security or currency upon the exercise of the
option. The asset with respect to a listed option will also be extinguished
upon the writing of an identical option in a closing transaction.
Purchasing Call Options. The Smith Barney Income and Growth Portfolio,
the Alliance Growth Portfolio, the Van Kampen American Capital Enterprise
Portfolio, the Smith Barney International Equity Portfolio, the Smith Barney
Pacific Basin Portfolio, the Putnam Diversified Income Portfolio, the GT
Global Strategic Income Portfolio, the Smith Barney High Income Portfolio and
the MFS Total Return Portfolio may purchase call options. As the holder of a
call option, a Portfolio has the right to purchase the underlying security or
currency at the exercise price at any time during the option period. The
Portfolio may enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. Call options may be
purchased by the Portfolio for the purpose of acquiring the underlying
security or currency for its portfolio. Utilized in this fashion, the
purchase of call options enables the Portfolio to acquire the security or
currency at the exercise price of the call option plus the premium paid. At
times the net cost of acquiring the security or currency in this manner may be
less than the cost of acquiring the security or currency directly. This
technique may also be useful to the Portfolio in purchasing a large block of
securities that would be more difficult to acquire by direct market purchases.
So long as it holds such a call option rather than the underlying security or
currency itself, the Portfolio is partially protected from any unexpected
decline in the market price of the underlying security or currency and in such
event could allow the call option to expire, incurring a loss only to the
extent of the premium paid for the option.
A Portfolio may also purchase call options on underlying securities or
currencies it owns in order to protect unrealized gains on call options
previously written by it. A call option would be purchased for this purpose
where tax considerations make it inadvisable to realize such gains through a
closing purchase transaction. Call options may also be purchased at times to
avoid realizing losses that would result in a reduction of the Portfolio's
current return. It is a policy of the GT Global Strategic Income Portfolio
that aggregate premiums paid for put and call options will not exceed 5% of
the Portfolio's total assets at the time of purchase.
Interest Rate, Securities Index, Financial Futures and Currency Futures
Contracts. The Alliance Growth Portfolio, the Smith Barney International
Equity Portfolio, the Smith Barney Pacific Basin Portfolio, the Putnam
Diversified Income Portfolio, the GT Global Strategic Income Portfolio, the
Smith Barney High Income Portfolio and the MFS Total Return Portfolio may
enter into interest rate, securities index, financial futures and currency
futures contracts ("Futures" or "Futures Contracts"). The AIM Capital
Appreciation Portfolio may enter into stock index futures contracts and the
Van Kampen 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.
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 Van
Kampen American Capital Enterprise Portfolio, the Smith Barney International
Equity Portfolio, the Smith Barney Pacific Basin Portfolio, the Putnam
Diversified Income Portfolio, the GT Global Strategic Income Portfolio, the
Smith Barney High Income Portfolio and the MFS Total Return Portfolio may
enter into options on Futures Contracts. Options on Futures Contracts are
similar to options on securities or currencies except that options on Futures
Contracts give the purchaser the right, in return for the premium paid, to
assume a position in a Futures Contract (a long position if the option is a
call and a short position if the option is a put), rather than to purchase or
sell the Futures Contract, at a specified exercise price at any time during
the period of the option. Upon exercise of the option, the delivery of the
Futures position by the writer of the option to the holder of the option will
be accompanied by delivery of the accumulated balance in the writer's Futures
margin account which represents the amount by which the market price of the
Futures Contract, at exercise, exceeds (in the case of a call) or is less than
(in the case of a put) the exercise price of the option on the Futures
Contract. If an option is exercised on the last trading day prior to the
expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the
closing level of the securities or currencies upon which the Futures Contracts
are based on the expiration date. Purchasers of options who fail to exercise
their options prior to the exercise date suffer a loss of the premium paid.
As an alternative to purchasing call and put options on Futures, each
Portfolio may purchase call and put options on the underlying securities or
currencies themselves (see "Purchasing Put Options" and "Purchasing Call
Options" above). Such options would be used in a manner identical to the use
of options on Futures Contracts.
To reduce or eliminate the leverage then employed by the Portfolio or
to reduce or eliminate the hedge position then currently held by the
Portfolio, the Portfolio may seek to close out an option position by selling
an option covering the same securities or currency and having the same
exercise price and expiration date. The ability to establish and close out
positions on options on Futures Contracts is subject to the existence of a
liquid market. It is not certain that this market will exist at any specific
time.
In order to assure that the Portfolios will not be deemed to be
"commodity pools" for purposes of the Commodity Exchange Act, regulations of
the Commodity Futures Trading Commission ("CFTC") require that each Portfolio
enter into transactions in Futures Contracts and options on Futures Contracts
only (i) for bona fide hedging purposes (as defined in CFTC regulations), or
(ii) for non-hedging purposes, provided that the aggregate initial margin and
premiums on such non-hedging positions does not exceed 5% of the liquidation
value of the Portfolio's assets.
Forward Currency Contracts and Options on Currency. The Alliance
Growth Portfolio, the Smith Barney International Equity Portfolio, the Smith
Barney Pacific Basin Portfolio, the Putnam Diversified Income Portfolio, the
GT Global Strategic Income Portfolio, the Smith Barney High Income Portfolio
and the MFS Total Return Portfolio may enter into forward currency contracts
and options on currency. A forward currency contract is an obligation to
purchase or sell a currency against another currency at a future date and
price as agreed upon by the parties. A Portfolio may either accept or make
delivery of the currency at the maturity of the forward contract or, prior to
maturity, enter into a closing transaction involving the purchase or sale of
an offsetting contract. A Portfolio engages in forward currency transactions
in anticipation of, or to protect itself against, fluctuations in exchange
rates. The Portfolio might sell a particular foreign currency forward, for
example, when it holds bonds denominated in that currency but anticipates, and
seeks to be protected against, decline in the currency against the U.S.
dollar. Similarly, the Portfolio might sell the U.S. dollar forward when it
holds bonds denominated in U.S. dollars but anticipates, and seeks to be
protected against, a decline in the U.S. dollar relative to other currencies.
Further, the Portfolio might purchase a currency forward to "lock in" the
price of securities denominated in that currency which it anticipates
purchasing.
The matching of the increase in value of a forward contract and the
decline in the U.S. dollar equivalent value of the foreign currency
denominated asset that is the subject of the hedge generally will not be
precise. In addition, the Portfolio may not always be able to enter into
foreign currency forward contracts at attractive prices and this will limit
the Portfolio's ability to use such contract to hedge or cross-hedge its
assets. Also, with regard to the Portfolio's use of cross-hedges, there can
be no assurance that historical correlations between the movement of certain
foreign currencies relative to the U.S. dollar will continue. Thus, at any
time poor correlation may exist between movements in the exchange rates of the
foreign currencies underlying the Portfolio's cross-hedges and the movements
in the exchange rates of the foreign currencies in which the Portfolio's
assets that are the subject of such cross-hedges are denominated. The MFS
Total Return Portfolio may also enter into forward currency contracts for non-
hedging purposes, subject to applicable law.
Forward contracts are traded in an interbank market conducted directly
between currency traders (usually large commercial banks) and their customers.
A forward contract generally has no deposit requirement and is consummated
without payment of any commission. A Portfolio, however, may enter into
forward contracts with deposit requirements or commissions.
A put option on currency gives the Portfolio, as purchaser, the right
(but not the obligation) to sell a specified amount of currency at the
exercise price until the expiration of the option. A call option gives the
Portfolio, as purchaser, the right (but not the obligation) to purchase a
specified amount of currency at the exercise price until its expiration. The
Portfolio might purchase a currency put option, for example, to protect itself
during the contract period against a decline in the value of a currency in
which it holds or anticipates holding securities. If the currency's value
should decline, the loss in currency value should be offset, in whole or in
part, by an increase in the value of the put. If the value of the currency
instead should rise, any gain to the Portfolio would be reduced by the premium
it had paid for the put option. A currency call option might be purchased,
for example, in anticipation of, or to protect against, a rise in the value of
a currency in which the Portfolio anticipates purchasing securities.
A Portfolio's ability to establish and close out positions in foreign
currency options is subject to the existence of a liquid market. There can be
no assurance that a liquid market will exist for a particular option at any
specific time. In addition, options on foreign currencies are affected by all
of those factors that influence foreign exchange rates and investments
generally.
A position in an exchange-listed option may be closed out only on an
exchange that provides a secondary market for identical options. Exchange
markets for options on foreign currencies exist but are relatively new, and
the ability to establish and close out positions on the exchanges is subject
to maintenance of a liquid secondary market. Closing transactions may be
effected with respect to options traded in the over-the-counter ("OTC")
markets (currently the primary markets for options on foreign currencies) only
by negotiating directly with the other party to the option contract or in a
secondary market for the option if such market exists. Although the Portfolio
intends to purchase only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market will
exist for any particular option at any specific time. In such event, it may
not be possible to effect closing transactions with respect to certain
options, with the result that the Portfolio would have to exercise those
options which it has purchased in order to realize any profit. Any OTC
options acquired by each Portfolio and assets used as "cover" for OTC options
written by the Portfolio would be considered illiquid and subject to each
Portfolio's limitation on investing in such securities.
Options on Securities Indices. The Alliance Growth Portfolio, the Van
Kampen American Capital Enterprise Portfolio, the Smith Barney International
Equity Portfolio, the Smith Barney Pacific Basin Portfolio, the Putnam
Diversified Income Portfolio, the GT Global Strategic Income Portfolio, the
Smith Barney High Income Portfolio and the MFS Total Return Portfolio may
enter into options on securities indices. Through the writing or purchase of
index options, a Portfolio can achieve many of the same objectives as through
the use of options on individual securities. Options on securities indices
are similar to options on a security except that, rather than the right to
take or make delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less
than, in the case of a put, the exercise price of the option. This amount of
cash is equal to the difference between the closing price of the index and the
exercise price of the option. The writer of the option is obligated, in
return for the premium received, to make delivery of this amount. Unlike
options on securities (which require, upon exercise, delivery of the
underlying security), settlements of options on securities indices, upon
exercise thereof, are in cash, and the gain or loss of an option on an index
depends on price movements in the market generally (or in a particular
industry or segment of the market on which the underlying index base) rather
than price movements in individual securities, as is the case with respect to
options on securities.
When the Portfolio writes an option on a securities index, it will be
required to deposit with its custodian eligible securities equal in value to
100% of the exercise price in the case of a put, or the contract's value in
the case of a call. In addition, where the Portfolio writes a call option on
a securities index at a time when the contract value exceeds the exercise
price, the Portfolio will segregate, until the option expires or is closed
out, cash or cash equivalents equal in value to such excess.
Options on securities and index options involve risks similar to those
risks relating to transactions in financial futures described above. Also, an
option purchased by the Portfolio may expire worthless, in which case the
Portfolio would lose the premium paid therefor.
The staff of the Securities and Exchange Commission ("SEC") has taken
the position that purchased over-the-counter options and assets used to cover
written over-the-counter options are illiquid and, therefore, together with
other illiquid securities cannot, exceed a certain percentage of a Portfolio's
assets (the "SEC illiquidity ceiling"). Although management disagrees with
this position, it intends to limit each Portfolio's writing of over-the-
counter options in accordance with the following procedure. Except as
provided below, each Portfolio intends to write over-the-counter options only
with primary U.S. Government securities dealers recognized by the Federal
Reserve Bank of New York. Also, the contracts which each Portfolio has in
place with such primary dealers will provide that each Portfolio has the
absolute right to repurchase an option it writes at any time at a price which
represents the fair market value, as determined in good faith through
negotiation between the parties, but which in no event will exceed a price
determined pursuant to a formula in the contract. Although the specific
formula may vary between contracts with different primary dealers, the formula
will generally be based on a multiple of the premium received by a Portfolio
for writing the option, plus the amount, if any, of the option's intrinsic
value (i.e., the amount that the option is in-the-money). The formula may
also include a factor to account for the difference between the price of the
security and the strike price of the option if the option is written out-of-
money. Each Portfolio will treat all or a part of the formula price as
illiquid for purposes of the SEC illiquidity ceiling. Each Portfolio may also
write over-the-counter options with non-primary dealers, including foreign
dealers, and will treat the assets used to cover these options as illiquid for
purposes of such SEC illiquidity ceiling.
Yield Curve Options. The MFS Total Return Portfolio may also enter
into options on the "spread," or yield differential, between two fixed income
securities, in transactions referred to as "yield curve" options. In contrast
to other types of options, a yield curve option is based on the difference
between the yields of designated securities, rather than the prices of the
individual securities, and is settled through cash payments. Accordingly, a
yield curve option is profitable to the holder if this differential widens (in
the case of a call) or narrows (in the case of a put), regardless of whether
the yields of the underlying securities increase or decrease.
Yield curve options may be used for the same purposes as other options
on securities. Specifically, the Portfolio may purchase or write such options
for hedging purposes. For example, the Portfolio may purchase a call option
on the yield spread between two securities, if it owns one of the securities
and anticipates purchasing the other security and wants to hedge against an
adverse change in the yield spread between the two securities. The Portfolio
may also purchase or write yield curve options for other than hedging purposes
(i.e., in an effort to increase its current income) if, in the judgment of
management, the Portfolio will be able to profit from movements in the spread
between the yields of the underlying securities. The trading of yield curve
options is subject to all of the risks associated with the trading of other
types of options. In addition, however, such options present risk of loss
even if the yield of one of the underlying securities remains constant, if the
spread moves in a direction or to an extent which was not anticipated. Yield
curve options written by the Portfolio will be "covered". A call (or put)
option is covered if the Portfolio holds another call (or put) option on the
spread between the same two securities and maintains in a segregated account
with its custodian cash or cash equivalents sufficient to cover the
Portfolio's net liability under the two options. Therefore, the Portfolio's
liability for such a covered option is generally limited to the difference
between the amount of the Portfolio's liability under the option written by
the Portfolio less the value of the option held by the Portfolio. Yield curve
options may also be covered in such other manner as may be in accordance with
the requirements of the counterparty with which the option is traded and
applicable laws and regulations. Yield curve options are traded over-the-
counter and because they have been only recently introduced, established
trading markets for these securities have not yet developed.
Swaps and Swap Related Products. Among the hedging transactions into
which the Smith Barney International Equity Portfolio, the Smith Barney
Pacific Basin Portfolio, the GT Global Strategic Income Portfolio, the Smith
Barney High Income Portfolio and the MFS Total Return Portfolio may enter are
interest rate swaps, currency swaps and other types of swap agreements such as
caps, collars and floors. Each Portfolio expects to enter into these
transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio or to protect against any increase in
the price of securities the Portfolio anticipates purchasing at a later date.
Each Portfolio intends to use these transactions as a hedge and not as a
speculative investment. Swap agreements may be individually negotiated and
structured to include exposure to a variety of different types of investments
or market factors. Depending on their structure, swap agreements may increase
or decrease a Portfolio's exposure to long or short-term interest rates (in
the U.S. or abroad), foreign currency values, mortgage securities, corporate
borrowing rates, or other factors such as securities prices or inflation
rates. Swap agreements can take many different forms and are known by a
variety of names. A Portfolio is not limited to any particular form or
variety of swap agreement if management determines it is consistent with the
Portfolio's investment objective and policies.
A Portfolio may enter into swaps, caps and floors on either an asset-
based or liability-based basis, depending on whether it is hedging its assets
or its liabilities, and will usually enter into interest rate swaps on a net
basis, i.e., the two payment streams are netted but, with the Portfolio
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these hedging transactions are entered into for good
faith hedging purposes, management and the Portfolios believe such obligations
do not constitute senior securities and, accordingly will not treat them as
being subject to its borrowing restrictions. The net amount of the excess, if
any, of a Portfolio's obligations over its entitlements with respect to each
interest rate swap will be accrued on a daily basis and an amount of cash or
liquid securities having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by its custodian.
If a Portfolio enters into a swap agreement on other than a net basis, it will
maintain cash or liquid assets with a value equal to the full amount of such
Portfolio's accrued obligations under the agreement. The Portfolios will not
enter into any swap, cap, floor or collar transaction unless the unsecured
senior debt or the claims-paying ability of the other party thereto is rated
in the highest rating category of at least one nationally recognized rating
organization at the time of entering into such transaction. The most
significant factor in the performance of swaps, caps, floors and collars is
the change in specific interest rate, currency or other factor that determines
the amount of payments to be made under the arrangement. If management is
incorrect in its forecasts of such factors, the investment performance of the
Portfolio would be less than what it would have been if these investment
techniques had not been used. If a swap agreement calls for payments by the
Portfolio the Portfolio must be prepared to make such payments when due. In
addition, if the counterparty's creditworthiness declined, the value of the
swap agreement would be likely to decline, potentially resulting in losses.
If the counterparty defaults, the Portfolio's risk of loss consists of the net
amount of payments that the Portfolio is contractually entitled to receive.
The Portfolio anticipates that it will be able to eliminate or reduce its
exposure under these arrangements by assignment or other disposition or by
entering into an offsetting agreement with the same or another counterparty.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing swap documentation. As a result, the swap market has become
relatively liquid. Caps and floors are more recent innovations for which
standardized documentation has not yet been developed and, accordingly, they
are less liquid than swaps.
Additional Policies
Options (Smith Barney Income and Growth Portfolio). Although the Smith
Barney Income and Growth Portfolio may buy or sell covered put and covered
call options up to 15% of its net assets, provided such options are listed on
a national securities exchange, the Portfolio does not currently intend to
commit more than 5% of its assets to be invested in or subject to put and call
options.
Selection of Debt Investments (GT Global Strategic Income Portfolio).
In determining the appropriate distribution of investments among various
countries and geographic regions for the Portfolio, management ordinarily
considers the following factors: prospects for relative economic growth among
the different countries in which the Portfolio may invest; expected levels of
inflation; government policies influencing business conditions; the outlook
for currency relationships; and the range of the individual investment
opportunities available to international investors.
Although the Portfolio values assets daily in terms of U.S. dollars,
the Portfolio does not intend to convert holdings of foreign currencies into
U.S. dollars on a daily basis. The Portfolio will do so from time to time, and
investors should be aware of the costs of currency conversion. Although
foreign exchange dealers do not charge a fee for conversion, they do realize a
profit based on the difference ("spread") between the prices at which they are
buying and selling various currencies. Thus, a dealer may offer to sell a
foreign currency to the Portfolio at one rate, while offering a lesser rate of
exchange should the Portfolio desire to sell that currency to the dealer.
The Portfolio may invest in the following types of money market
instruments (i.e., debt instruments with less than 12 months remaining until
maturity) denominated in U.S. dollars or other currencies: (a) obligations
issued or guaranteed by the U.S. or foreign governments, their agencies,
instrumentalities or municipalities; (b) obligations of international
organizations designed or supported by multiple foreign governmental entities
to promote economic reconstruction or development; (c) finance company
obligations, corporate commercial paper and other short-term commercial
obligations: (d) bank obligations (including certificates of deposit, time
deposits, demand deposits and bankers' acceptances), subject to the
restriction that the Portfolio may not invest more than 25% of its total
assets in bank securities; (e) repurchase agreements with respect to all the
foregoing; and (f) other substantially similar short-term debt securities with
comparable characteristics.
Investments in Other Investment Companies (GT Global Strategic Income
Portfolio). With respect to certain countries, investments by the Portfolio
presently may be made only by acquiring shares of other investment companies
with local governmental approval to invest in those countries. The Portfolio
may invest in the securities of closed-end investment companies within the
limits of the 1940 Act. These limitations currently provide that, in general,
the Portfolio may purchase shares of a closed-end investment company unless
(a) such a purchase would cause the Portfolio to own in the aggregate more
than 3 percent of the total outstanding voting securities of the investment
company or (b) such a purchase would cause the Portfolio to have more than
5 percent of its total assets invested in the investment company or more than
10 percent of its aggregate assets invested in an aggregate of all such
investment companies. Investment in such investment companies may also involve
the payment of substantial premiums above the value of such companies'
portfolio securities. The Portfolio does not intend to invest in such vehicles
or funds unless, in the judgment of management, the potential benefits of such
investments justify the payment of any applicable premiums. The yield of such
securities will be reduced by operating expenses of such companies including
payments to the investment managers of those investment companies. At such
time as direct investment in these countries is allowed, the Portfolio will
anticipate investing directly in these markets.
Samurai and Yankee Bonds (GT Global Strategic Income Portfolio and
Putnam Diversified Income Portfolio). Subject to their fundamental investment
restrictions, these Portfolios 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 Portfolios to invest in Samurai or Yankee
bond issues only after taking into account considerations of quality and
liquidity, as well as yield.
Warrants or Rights (GT Global Strategic Income Portfolio and AIM
Capital Appreciation Portfolio). Warrants or rights may be acquired by each
Portfolio in connection with other securities or separately and provide the
Portfolio with the right to purchase at a later date other securities of the
issuer. Each Portfolio has undertaken that its investment in warrants or
rights, valued at the lower of cost or market, will not exceed 5% of the value
of its net assets and not more than 2% of such assets will be invested in
warrants and rights which are not listed on the American or New York Stock
Exchange. Warrants or rights acquired by a Portfolio in units or attached to
securities will be deemed to be without value for purposes of this
restriction.
Special Situations (Aim Capital Appreciation Portfolio). Although AIM
Capital Appreciation Portfolio does not currently intend to do so, it may
invest in "special situations." A special situation arises when, in the
opinion of management, the securities of a particular company will, within a
reasonably estimable period of time, be accorded market recognition at an
appreciated value solely by reason of a development applicable to that
company, and regardless of general business conditions or movements of the
market as a whole. Developments creating special situations might include,
among others: liquidations, reorganizations, recapitalizations, mergers,
material litigation, technical breakthroughs and new management or management
policies. Although large and well known companies may be involved, special
situations more often involve comparatively small or unseasoned companies.
Investments in unseasoned companies and special situations often involve much
greater risk than is inherent in ordinary investments securities. The
Portfolio will not, however, purchase securities of any company with a record
of less than three year's continuous operation (including that of
predecessors) if such purchase cause the Portfolio's investment in all such
companies, taken at cost, to exceed 5% of the value of its total assets.
INVESTMENT RESTRICTIONS
The Portfolios have adopted the following restrictions and fundamental
policies that cannot be changed unless Sections 8(b)(1) and 13(a) of the 1940
Act or any SEC or SEC staff interpretations thereof are amended or modified or
unless approved by a "vote of a majority of the outstanding voting securities"
of each Portfolio affected by the change as defined in the 1940 Act and Rule
18f-2 thereunder (see "Voting"). If a Portfolio adheres to a percentage
restriction at the time of investment, a later increase or decrease in
percentage resulting from a change in values of portfolio securities or amount
of total or net assets will not be considered a violation of any of the
following policies.
Each of the Smith Barney Income and Growth, Smith Barney International
Equity and Smith Barney Pacific Basin Portfolios may not:
1. With respect to 75% of its total assets, invest more than 5% of its
total assets in the securities of any single issuer and purchase more than 10%
of the outstanding voting securities of an issuer (except securities of the
U.S. Government and its agencies and instrumentalities).
2. Invest more than 25% of its total assets in a particular industry.
This limitation shall not apply to any obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
3. Purchase or sell real estate, although the Portfolio may purchase
securities of issuers which engage in real estate operations and securities
secured by real estate or interests therein.
4. Invest in securities of another investment company except as
permitted by Section 12(d)(1)(a) 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, except to the extent that in Portfolio may purchase securities of
other investment companies.
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 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 Van Kampen 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 Van Kampen
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 Van
Kampen American Capital Enterprise Portfolio, but are not fundamental and
accordingly may be changed by approval of the Board of Directors. The
Portfolio may not:
1. Invest more than 5% of the value of its total assets in securities
of companies which (including predecessor companies or operations) have been
in business less than three years, provided, however, that this limitation
excludes shares of other open-end investment companies owned by the Portfolio
but includes the Portfolio's pro rata portion of the securities and other
assets owned by any such company.
2. Acquire any private placement if it would cause more than 2% of the
net assets of the Portfolio, as determined at the time the Portfolio agrees to
any such acquisition, to be invested in private placements and other assets
not having readily available market quotations, provided, however, that this
limitation excludes shares of other open-end investment companies owned by the
Portfolio but includes the Portfolio's pro rata portion of the securities and
other assets owned by any such company; and, provided further, that this
limitation excludes securities that have been issued pursuant to Rule 144A
under the 1933 Act ("Rule 144A securities").
3. Purchase or retain securities of a company which has an officer or
director who is an officer or director of the Portfolio or its investment
adviser if, to the knowledge of the Portfolio, one or more such persons own
beneficially more than 1/2 of 1% of the shares of the company, and all such
persons own more than 5%.
4. Invest more than 5% of its net assets in warrants or rights valued
at the lower of cost or market, not more than 2% of its net assets in warrants
or rights (valued on such basis) which are not listed on the New York or
American Stock Exchanges. Warrants or rights acquired in units or attached to
other securities are not subject to the foregoing limitations.
5. Invest more than 15% of its net assets (determined at the time of
investment) in illiquid securities (excluding Rule 144A securities) and
repurchase agreements that have a maturity of longer than seven days.
6. Invest in interests in oil, gas, or other mineral exploration or
developmental programs.
7. Sell short or buy on margin, but the Portfolio may engage in
transactions in options, futures contracts and related options and make margin
deposits and payments in connection therewith. Short sales against the box
are not subject to this restriction.
8. Make any investment in any security about which information is not
available with respect to history, management, assets, earnings, and income of
the issuer except to acquire shares of other open-end investment companies to
the extent permitted by rule or order of the SEC exempting the Portfolio from
the limitations imposed by Section 12(d)(1) of the 1940 Act.
9. Make any investment which involves promotion or business management
by the Portfolio or which would subject the Portfolio to unlimited liability.
10. Invest in companies for the purpose of exercising control.
11. Acquire securities of any other domestic or foreign investment
company or investment fund except in connection with a plan of merger or
consolidation with or acquisition of substantially all the assets of such
other investment company or to acquire shares of other open-end investment
companies to the extent permitted by rule or order of the SEC exempting the
Portfolio from the limitations imposed by Section 12(d)(1) of the 1940 Act.
The TBC Managed Income Portfolio may not:
1. Concentrate the portfolio investments in any industry by investing
more than 25% of its gross assets in any one industry. There shall be no
limitation on the purchase of U.S. Government securities by the Portfolio when
it adopts a defensive position.
2. Make investments in real estate or commodities or commodity
contracts, although the Portfolio may purchase securities of issuers which
deal in real estate and may purchase securities which are secured by interests
in real estate.
3. Act as securities underwriter.
4. Make loans, except that the Portfolio may (i) purchase bonds,
debentures and other securities of a like nature, (ii) make loans in the form
of call loans or loans maturing in not more than one year which are secured by
marketable collateral and are in amounts and on terms similar to those
currently in effect in the case of loans made by national banks, (iii) enter
into repurchase agreements to the extent set forth in the Prospectus and (iv)
lend its portfolio securities.
5. Borrow money, except that (a) the Portfolio may borrow money for
temporary administrative purposes provided that the aggregate of such
borrowing does not exceed 5%.
6. Lend its portfolio securities in an amount in excess of 1/3 of the
total assets taken at value. Any loans of portfolio securities will be made
according to guidelines established by the SEC and the Directors, including
the borrower's maintaining collateral equal at all times to the value of the
securities loaned.
7. Purchase "illiquid" securities, including repurchase agreements
maturing in more then seven days, securities lacking readily available market
quotations and securities which cannot be sold without registration or the
filing of a notification under Federal or state securities laws, if as a
result, such investment would exceed 15 % of the value of the Portfolio's net
assets.
8. Purchase securities of companies for the purpose of exercising
control.
9. Purchase securities on margin, except short-term credits as are
necessary for the purchase and sale of securities, or effect short sales.
10. As to 75% of the total assets of the Portfolio, purchase securities
of any issuer, if immediately thereafter (a) more than 5% of total assets
(taken at market value) would be invested in the securities of such issuer, or
(b) more than 10% of the outstanding securities of any class of such issuer
would be held by the Portfolio, provided that this limitation does not apply
to U.S. Government securities.
11. Purchase securities of any other investment company except as part
of a plan of merger or consolidation.
12. Purchase securities of companies which together with predecessors
have a record of less than three years' continuous operation, if, as a result,
more than 5% of the Portfolio's net assets would then be invested in such
securities.
13. Invest in puts, calls, straddles, spreads and any combination
thereof.
14. Invest in oil, gas or other mineral exploration or development
programs, provided, however, this shall not prohibit the Portfolio from
purchasing publicly traded securities of companies engaging in whole or in
part in such activities.
15. Purchase securities from or sell securities to any of its officers
or Directors, except with respect to its own shares and as is permissible
under applicable statues, rules and regulations.
Notwithstanding any other investment restriction of the TBC Managed
Income Portfolio, the Portfolio may invest all of its investable assets in an
open-end management investment company having the same investment objective
and restrictions as the Portfolio.
The Putnam Diversified Income Portfolio may not:
1. Borrow money in excess of 10% of the value (taken at the lower of
cost or current value) of its total assets (not including the amount borrowed)
at the time the borrowing is made, and then only from banks as a temporary
measure to facilitate the meeting of redemption requests (not for leverage)
which might otherwise require the untimely disposition of portfolio
investments or for extraordinary or emergency purposes. Such borrowings will
be repaid before any additional investments are purchased.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 15% its total assets (taken at current value) and then only to
secure borrowings permitted by restriction 1 above. (The deposit of
underlying securities and other assets in escrow and other collateral
arrangements in connection with the writing of put or call options and
collateral arrangements with respect to margin for futures contracts and
related options or letters of credit obtained solely for purposes of
participating in a captive insurance company sponsored by the Investment
Company Institute to provide fidelity and directors and officers liability
insurance, are not considered to be pledges or other encumbrances.)
3. Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities, and
except that it may make margin payments in connection with transactions in
futures contracts and related options.
4. Make short sales of securities or maintain a short position for the
account of the Portfolio unless at all times when a short position is open the
Portfolio owns an equal amount of such securities or owns securities which,
without payment of any further consideration, are convertible into or
exchangeable for securities of the same issue as, and equal in amount to, the
securities sold short.
5. Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, it may
be deemed to be an underwriter under certain federal securities laws.
6. Purchase or sell real estate, although it may purchase securities
of issuers which deal in real estate, securities which are secured by
interests in real estate and securities representing interests in real estate.
7. Purchase or sell commodities or commodity contracts, except that it
may purchase or sell futures contracts, options on futures, forward contracts
and options on foreign currencies.
8. Make loans, except by purchase of debt obligations in which the
Portfolio may invest consistent with its investment policies, by entering into
repurchase agreements with respect to not more than 25% of its total assets
(taken at current value), or through the lending of its portfolio securities
with respect to not more than 25% of its assets.
9. Invest in securities of any issuer if, to the knowledge of the
Putnam Management, officers and Directors of Putnam Management who
beneficially own more than 0.5% of the securities of that issuer together
beneficially own more than 5%.
10. Invest in securities of any issuer if, immediately after such
investment, more than 5% of the total assets of the Portfolio (taken at
current value) would be invested in the securities of such issuer; provided
that this limitation does not apply to U.S. Government securities, or, with
respect to 25% of the Portfolio's total assets, securities of any foreign
government, its agencies or instrumentalities, securities of supranational
entities, and securities backed by the credit of a governmental entity.
11. Acquire more than 10% of the voting securities of any issuer.
12. Invest more than 25% of the value of its total assets in any one
industry. (U.S. Government securities and securities of any foreign
government, its agencies or instrumentalities, securities of supranational
entities, and securities backed by the credit of a governmental entity are not
considered to represent an industry).
13. Purchase securities the disposition of which is restricted under
federal securities laws, if, as a result, such investments would exceed 15% of
the value of the Portfolio's net assets, excluding restricted securities that
have been determined by the Directors of the Fund (or the person designated by
them to make such determinations) to be readily marketable.
14. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts.
15. Make investments for the purpose of gaining control of a company's
management.
16. Issue any senior securities except as permitted by the 1940 Act or
any rule, order or interpretation thereunder.
In addition, the following policy has also been adopted by the Putnam
Diversified Income Portfolio, but is not fundamental and accordingly may be
changed by approval of the Board of Directors. The Portfolio may not:
1. Invest in securities of other registered open-end investment
companies except as they may be acquired as part of a merger or consolidation
or acquisition of assets.
Notwithstanding any other investment restriction of the Putnam
Diversified Income Portfolio, the Portfolio may invest all of its investable
assets in an open-end management investment company having the same investment
objective and restrictions as the Portfolio.
The GT Global Strategic Income Portfolio may not:
1. Invest 25% or more of the value of its total assets in the
securities of issuers conducting their principal business activities in the
same industry, (provided, however, that the Portfolio may invest all of its
investable assets in an open-end management investment company with
substantially the same investment objectives, policies and limitations as the
Portfolio) except that this limitation shall not apply to securities issued or
guaranteed as to principal and interest by the U.S. Government or any of its
agencies or instrumentalities.
2. Invest in companies for the purpose of exercising control or
management (provided, however, that the Portfolio may invest all of its
investable assets in an open-end management investment company with
substantially the same investment objectives, policies and limitations as the
Portfolio).
3. Buy or sell real estate (including real estate limited partnerships)
or commodities or commodity contracts; however, the Portfolio may invest in
debt securities secured by real estate or interests therein or issued by
companies which invest in real estate or interests therein, including real
estate investment trusts, and may purchase or sell currencies (including
forward currency exchange contracts), futures contracts and related options
generally as described in the Prospectus and Statement of Additional
Information and subject to (13) below.
4. Engage in the business of underwriting securities of other issuers,
except to the extent that the disposal of an investment position may
technically cause it to be considered an underwriter as that term is defined
under the 1933 Act.
5. Make loans, except that the Portfolio may invest in loans and
participations, purchase debt securities and enter into repurchase agreements
and make loans of portfolio securities.
6. Sell securities short, except to the extent that the Portfolio
contemporaneously owns or has the right to acquire at no additional cost
securities identical to those sold short.
7. Purchase securities on margin, provided that the Portfolio obtain
such short-term credits as may be necessary for the clearance of purchases and
sales of securities; except that it may make margin deposits in connection
with futures contracts subject to (13) below.
8. Borrow money in excess of 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 GT Global Strategic Income Portfolio's
concentration policy contained in limitation (1) above, the Portfolio intends
to comply with the SEC staff positions that securities issued or guaranteed as
to principal and interest by any single foreign government or any
supranational organizations in the aggregate are considered to be securities
of issuers in the same industry.
In addition, the following investment policies are not fundamental
investment policies and may be changed by the approval of the Fund's Board of
Directors without shareholder approval. 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 AIM
Capital Appreciation Portfolio, the Van Kampen American Capital Enterprise
Portfolio, the TBC Managed Income Portfolio, the Putnam Diversified Income
Portfolio, the Smith Barney High Income Portfolio, the MFS Total Return
Portfolio and the Smith Barney Money Market Portfolio are held in the custody
of PNC Bank, National Association, 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103 (foreign securities, if any, will be held in the custody of
The Barclays Bank, PLC).
Portfolio securities and cash owned by the Fund on behalf of the Smith
Barney International Equity Portfolio, the Smith Barney Pacific Basin
Portfolio and the GT Global Strategic Income Portfolio are held in the custody
of The Bank of New York, 48 Wall Street, New York, New York 10005.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has
been selected as the Fund's independent auditors for its fiscal year ending
October 31, 1997, 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 Van
Kampen American Capital Enterprise Portfolio, the Smith Barney International
Equity Portfolio, the Smith Barney Pacific Basin Portfolio, the TBC Managed
Income Portfolio, the Putnam Diversified Income Portfolio, the GT Global
Strategic Income Portfolio, the Smith Barney High Income Portfolio, the MFS
Total Return Portfolio and the Smith Barney Money Market Portfolio. Pursuant
to such authority, the Directors may also authorize the creation of additional
series of shares and additional classes of shares within any series (which
would be used to distinguish among the rights of different categories of
shareholders, as might be required by future regulations or other unforeseen
circumstances). The investment objectives, policies and restrictions
applicable to additional Portfolios would be established by the Directors at
the time such Portfolios were established and may differ from those set forth
in the Prospectus and this Statement of Additional Information. In the event
of liquidation or dissolution of a Portfolio or of the Fund, shares of a
Portfolio are entitled to receive the assets belonging to that Portfolio and a
proportionate distribution, based on the relative net assets of the respective
Portfolios, of any general assets not belonging to any particular Portfolio
that are available for distribution.
The Articles of Incorporation may be amended only upon the vote of a
majority of the shares of capital stock of the Fund outstanding and entitled
to vote, and in accordance with applicable law, except for certain amendments
that may be made by the Directors.
The Articles of Incorporation further provide that the Fund shall
indemnify its directors, officers and employees against any liability to the
Fund or to a shareowner, except as such liability may arise from his or its
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his or its duties. With the exceptions stated, the Articles of Incorporation
provide that a Director, officer or employee is entitled to be indemnified
against all liability in connection with the affairs of the Fund.
The Fund shall continue without limitation of time subject to the
provisions in the Articles of Incorporation concerning termination of the
corporation or any of the series of the corporation by action of the
shareowners or by action of the Directors upon notice to the shareowners.
MANAGEMENT AGREEMENTS
The Directors are responsible for the direction and supervision of
the Fund's business and operations. Smith Barney Mutual Funds Management Inc.
("SBMFM" or the "Manager") manages the investment operations of the Smith
Barney Income and Growth Portfolio, the Smith Barney International Equity
Portfolio, the Smith Barney Pacific Basin Portfolio, the Smit Barney High
Income Portfolio and the Smith Barney Money Market Portfolio pursuant to
Management Agreements entered into by the Fund on behalf of each such
Portfolio. Travelers Investment Adviser, Inc. ("TIA" or the "Manager"), an
affiliate of SBMFM, manages the investment operations of the Alliance Growth
Portfolio, the AIM Capital Appreciation Portfolio, the Putnam Diversified
Income Portfolio, the MFS Total Return Portfolio, the GT Global Strategic
Income Portfolio, the Van Kampen American Capital Enterprise Portfolio and the
TBC Managed Income Portfolios (each, a "TIA Portfolio") pursuant to management
agreements entered into by the Fund on behalf of each TIA Portfolio. Under
each management agreement SBMFM or TIA, as the case may be, 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 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. Each Portfolio receives
discretionary advisory services provided by the Manager or by a Sub-Adviser
(pursuant to a Subadvisory Agreement) who is identified, retained, supervised
and compensated by the Manager. SBMFM and TIA are each located at 388
Greenwich Street, New York, New York 10013. SBMFM is a wholly-owned
subsidiary of Smith Barney Holdings Inc. Smith Barney Holdings Inc., which is
a wholly-owned subsidiary of Travelers Group Inc. ("Travelers"), is also the
parent company of Smith Barney Inc. ("Smith Barney"), the Fund's distributor.
TIA is a wholly-owned subsidiary of The Plaza Corporation, a wholly-owned
subsidiary of the Travelers Insurance Company ("TIC"). TIC is a wholly-owned
subsidiary of Travelers.
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 SBMFM 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 SBMFM; 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 Van Kampen
American Capital Enterprise Portfolio, the TBC Managed Income Portfolio, the
Putnam Diversified Income Portfolio, the Smith Barney High Income Portfolio,
the MFS Total Return Portfolio and the Smith Barney Money Market Portfolio,
exclusive of taxes, brokerage, interest and extraordinary expenses, such as
litigation and indemnification expenses, exceed 1.25% of the average daily net
assets for any fiscal year of each such Portfolio. The Manager has agreed to
waive its fee to the extent that the aggregate expenses of each of the Smith
Barney International Equity Portfolio, the Smith Barney Pacific Basin
Portfolio and the GT Global Strategic Income Portfolio exclusive of taxes,
brokerage, interest and extraordinary expenses, exceed 1.50% of the average
daily net assets for any fiscal year of each such Portfolio. Each of these
voluntary expense limitations shall be in effect until it is terminated by
notice to shareowners and by supplement to the then current Statement of
Additional Information.
Each Management and Subadvisory Agreement (collectively, the "Investment
Agreements") provides further that if in any fiscal year the aggregate
expenses of a Portfolio (including fees pursuant to such agreements, but
excluding interest, taxes, brokerage and extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over such Portfolio,
SBMFM, TIA 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 SBMFM or
TIA 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 SBMFM, TIA or the
Portfolio for any error of judgment or mistake of law or for any loss suffered
by SBMFM, TIA, or the Portfolio so long as it acted in good faith without
willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations and duties
under the Subadvisory Agreement.
Each Investment Agreement shall continue for an initial two-year term
and shall be continued from year to year if specifically approved at least
annually as required by the 1940 Act. Each Investment Agreement further
provides that it shall terminate automatically in the event of its assignment
(as defined in the 1940 Act) and that it may be terminated without penalty by
either party on not less than 60 days' written notice.
For the periods shown, each Portfolio paid the following management fee:
Period Ended* Year Ended
Year Ended
10-31-94 10-31-95 10-
31-96
Smith Barney Income and Growth Portfolio $11,567 116,605
564,232
Alliance Growth Portfolio 27,111 421,756
1,624,602
AIM Capital Appreciation Portfolio N/A 2,595**
503,898
Van Kampen American Capital Enterprise Portfolio 11,354 93,346
482,803
Smith Barney International Equity Portfolio 24,422 263,820
887,811
Smith Barney Pacific Basin Portfolio 12,450
47,987+ 86,702
TBC Managed Income Portfolio 7,369 47,986
123,774
Putnam Diversified Income Portfolio 11,520 122,559
428,803
GT Global Strategic Income Portfolio 5,389
40,549++ 89,913
Smith Barney High Income Portfolio 7,951 53,173
262,657
MFS Total Return Portfolio 13,651 187,388
744,834
Smith Barney Money Market Portfolio 9,916 100,040
425,361+++
*From June 16, 1994 (commencement of operations) through October
31, 1994.
**From October 10, 1995 (commencement of operations) through
October 31, 1995.
+The Manager waived $21,803 of the management fees shown.
++The Manager waived $23,349 of the management fees shown.
+++ The Manager waived $60,833 of the managemen fees shown.
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 on behalf of each of
the AIM Capital Appreciation Portfolio, Alliance Growth Portfolio, the Van
Kampen American Capital Enterprise Portfolio, the TBC Managed Income
Portfolio, the Putnam Diversified Income Portfolio, the GT Global Strategic
Income Portfolio and the MFS Total Return Portfolio. Pursuant to each
Subadvisory Agreement among TIA, 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 TIA 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.
TIA has also entered into a Sub-Administrative Services Agreement with
SBMFM pursuant to which SBMF will: (a) assist TIA in supervising all aspects
of each Portfolio's operations; (b) supply each Portfolio with office
facilities, statistical and research services, data processing services,
clerical, accounting and bookkeeping services; and (c) prepare reports to each
TIA Portfolio's shareholders snd prepare reports to and filings with the
Securities and Exchange Commission and state blue sky authorities, if
applicable. TIA pays SBMFM, as Sub-Administrator, a fee in an amount equal to
an annual rate of 0.10% of each TIA Portfolio's average daily net assets.
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.
The Alliance Capital is a leading international investment manager
supervising client accounts with assets as of June 30, 1996 of more than $168
billion (of which more than $55 billion represented the assets of investment
companies). The Adviser's clients are primarily major corporate employee
benefit funds, public employee retirement systems, investment companies,
foundations and endowment funds and included, as of June 30, 1996, 33 of the
Fortune 100 Companies. As of that date, Alliance Capital and its subsidiaries
employed more than 1, 450 employees who operated out of domestic offices and
the overseas offices of subsidiaries in Bombay, Istanbul, London, Sao Paulo,
Sydney, Tokyo, Toronto, Bahrain, Luxembourg and Singapore. The 50 registered
investment companies comprising more than 100 separate investment portfolios
managed by Alliance Capital currrently having over more than two million
shareholders.
Alliance Capital Management Corporation, sole general partner of, and
the owner of a 1% general partnership interest in, the Adviser, 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 and a wholly-owned subsidiary of The Equitable Companies
Incorporated ("ECI"), a holding company controlled by AXA, a French insurance
holding company. As of June 30, 1996, ACMC, Inc. and Equitable Capital
Management Corporation, each a wholly-owned direct or indirect subsidiary of
Equitable, together with Equitable, owned in the aggregate approximately 59%
of the issued and outstanding units representing assignments of beneficial
ownership of limited partnership interests in the Adviser ("Units"). As of
June 30, 1996, approximately 32% and 10% of the Units were owned by the public
and employees of the Adviser and its subsidiaries, respectively, including
employees of the Adviser who serve as Trustees of the Trust.
AXA owns approximately 63.9% of the outstanding voting shares of common
stock of ECI. AXA is the holding company for an international group of
insurance and related financial services companies. AXA's insurance
operations are comprised of activities in life insurance, property and
casualty insurance and reinsurance. The insurance operations are diverse
geographically with activities in France, the United States, the United
Kingdom, Canada and other countries, principally in Europe. AXA is also
engaged in asset management, investment banking and brokerage, real estate and
other financial services activities in the United States and Europe. Based on
information provided by AXA, as of March 1, 1996, 42.1% of the voting shares
(representing 53.4% of the voting power) of AXA were owned by Midi
Participations, a French holding company ("MIDI"). The shares of Midi were,
in turn, owned 61.4% (representing 62.5% of the voting power) by Finaxa, a
French holding company, and 38.6% (representing 37.5% of the voting power) by
subsidiaries of Assicurazioni Generali S.p.A., an Italian corporation (one of
which, Belgica Insurance Holding S.A., a Belgian Corporation, owned 30.8%,
representing 33.1% of the voting power). As of March 1, 1996, 61.1% of the
voting shares (representing 73.4% of the voting power) of Finaxa were owned by
Five French mutual insurance companies (the "Mutuelles AXA") (one of which,
AXA Assurance I.A.R..D. Mutuelle, owned 34.7% of the voting shares
representing 40.4% of the voting power), and 25.5% of the voting shares
(representing 16% of the voting power) of Finaxa were owned by Banque Paribas,
a French Bank. Including the ordinary shares owned by Midi, as of March 1,
1996, the Mutuelles AXA directly or indirectly owned 51% of the issued
ordinary shares (representing 64.7% of the voting power) of AXA. Acting as a
group, the Mutuelles AXA control AXA, Midi and Finaxa.
The AIM Capital Appreciation Portfolio is advised by A I M 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 A
I M Advisors, Inc., which is a wholly-owned subsidiary of A I M 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. See "The Sub-Advisers" in the
Prospectus for information regarding AIM Managements proposed merger witha
subsidiary of INVESCO plc.
The Van Kampen American Capital Enterprise Portfolio is advised by Van
Kampen American Capital Asset Management, Inc. ("VKAC"). VKAC is located at
One Parkview Plaza, Oakbrook Terrace, IL 60181 and is a wholly-owned
subsidiary of Van Kampen American Capital, Inc., which is a wholly-owned
subsidiary of VK/AC Holding, Inc. For the services provided by VKAC, the
Manager pays to VKAC an annual fee calculated at the rate of 0.325% of the
Portfolio's average daily net assets, paid monthly.
The TBC Managed Income Portfolio is advised by The Boston Company Asset
Management, Inc. ("TBCAM"). TBCAM is located at One Boston Place, Boston,
Massachusetts 02108, and is a wholly-owned subsidiary of The Boston Company,
Inc., which is an indirect wholly-owned subsidiary of Mellon Bank Corporation.
For the services provided by TBCAM, the Manager pays to TBCAM an annual fee
calculated at the rate of 0.30% of the Portfolio's average daily net assets,
paid monthly.
The Putnam Diversified Income Portfolio is advised by Putnam Investment
Management, Inc. ("Putnam Management"). Putnam Management is located at One
Post Office Square, Boston, Massachusetts 02109. Putnam Management is a
subsidiary of Putnam Investments, Inc., which is a wholly-owned subsidiary of
Marsh & McLennan Companies, Inc. For the services provided by Putnam
Management, the Manager pays Putnam Management an annual fee calculated at the
rate of 0.35% of the Portfolio's average daily net assets, paid monthly.
The GT Global Strategic Income Portfolio is advised by Chancellor LGT
Asset Management, Inc. ("Chancellor LGT"). The U.S. offices of Chancellor LGT
are located at 50 California Street, San Francisco, California 94111 and 1166
Avenue of the Americas, New York, New York 11036. Chancellor LGT is a member
of Liechtenstein Global Trust, formerly BIL GT Group. Other worldwide
affiliates of Liechtenstein Global Trust include LGT Bank in Liechtenstein
formerly Bank in Liechtenstein, an international financial services
institution founded in 1920. LGT Bank in Liechtenstein has principal offices
in Vaduz, Liechtenstein. Its subsidiaries currently include LGT Bank in
Liechtenstein (Deutschland) GmbH, formerly Bank in Liechtenstein (Frankfurt)
GmbH, and LGT Asset Management AG, formerly Bilfinanz and Verwaltung AG,
located in Zurich, Switzerland.
Worldwide asset management affiliates also currently include Chancellor
LGT Trust Company, Chancellor LGT Senior Secured Management, Inc., Chancellor
LGT Venture Partners, Inc., LGT Asset Management PLC, formerly G.T. Management
PLC in London, England; LGT Asset Management Ltd., formerly G.T. Management
(Asia) Ltd. in Hong Kong; LGT Investment Trust Management Ltd., formerly G.T.
Management (Japan) in Tokyo; LGT Asset Management Pte. Ltd., formerly G.T.
Management (Singapore) PTE Ltd. located in Singapore; LGT Asset Management
Ltd., formerly G.T. Management (Australia) Ltd., located in Sydney; and LGT
Asset Management GmbH, formerly BIL Asset Management GmbH, located in
Frankfurt, Germany.
For the services provided by Chancellor LGT, the Manager pays to
Chancellor LGT 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 wholly owned 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. In addition, the Van
Kampen American Capital Enterprise Portfolio may not deal with Morgan Stanley
& Co., Inc. ("Morgan Stanley") (an affiliate of VK/AC Holding, Inc.) in any
transaction in which Morgan Stanley acts as principal.
Shown below are the total brokerage fees paid by the Fund for the period
June 16, 1994 (commencement of operations) through October 31, 1994 and for
the fiscal years ended October 31, 1995 and October 31, 1996 on behalf of the
Portfolios, the portion paid to Smith Barney and the portion paid to other
brokers for the execution of orders allocated in consideration of research and
statistical services or solely for their ability to execute the order. During
the period from June 16, 1994 through October 31, 1994 the total amount of
commissionable transactions was $ 52,150,191.44; $8,792,558.77(16.86%) of
which was directed to Smith Barney and executed by unaffiliated brokers and
$43,357,632.67(83.14%) of which was directed to other brokers. During the
fiscal year ended October 31, 1995 the total amount of commissionable
transactions was $340,500,090; $21,792,006 (6.4%) of which was directed to
Smith Barney and executed by unaffiliated brokers and $318,708,084 (93.6%) of
which was directed to other brokers. During the fiscal year ended October 31,
1996 the total amount of commissionable transactions was $948,677,922,
$86,585,294 (9.13%) of which was directed to Smith Barney and executed by
unaffiliated brokers and $862,093,228 (90.87%) of which was directed to
other brokers.
Commissions
To Others
Total To Smith Barney For Execution Only
6/16/94 - $171,937 $28,574(16.62%) $143,363(83.38)
10/31/94
Year ended 684,356 43,728(6.4%) 640,628(93.6%)
10/31/95
Year ended
10/31/96 1,862,443 142,038 (7.63%) 1,720,405(92.37%)
The Fund attempts to obtain the most favorable execution of each portfolio
transaction that is, the best combination of net price and prompt reliable
execution. In making its decision as to which broker or brokers are most
likely to provide the most favorable execution, the management of the Fund
takes into account the relevant circumstances. These include, in varying
degrees, the size of the order, the importance of prompt execution, the
breadth and trends of the market in the particular security, anticipated
commission rates, the broker's familiarity with such security including its
contacts with possible buyers and sellers and its level of activity in the
security, the possibility of a block transaction and the general record of the
broker for prompt, competent and reliable service in all aspects of order
processing, execution and settlement.
Commissions are negotiated and take into account the difficulty involved in
execution of a transaaction, the time it took to conclude, the extent of the
broker's commitment of its own capital, if any, and the price received.
Anticipated commission rates are an important consideration in all trades and
are weighed along with the other relevant factors affecting order execution
set forth above. In allocating brokerage among those brokers who are believed
to be capable of providing equally favorable execution, the Fund takes into
consideration the fact that a particular broker may, in addition to execution
capability, provide other services to the Fund such as reasearch and
statistical information. It is not possible to place a dollar value on such
services nor does their availability reduce the Manager's expenses in a
determinable amount. These various services may, however, be useful to the
Manager or Smith Barney in connection with its services rendered to other
advisory clients and not all such services may be used in connection with the
Fund.
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.
FINANCIAL STATEMENTS
The financial information contained under the following headings is
hereby incorporated by reference to the Fund's 1996 Annual Reports to
Shareholders:
Annual Report of: Pages(s) in:
Smith Barney Income and Growth Portfolio
Alliance Growth Portfolio
Van Kampen American Capital Enterprise Portfolio
Schedule of Investments 10-21
Statements of Assets and Liabilities 22
Statements of Operations 23
Statements of Changes in Net Assets 24-26
Notes to Financial Statements 27-30
Financial Highlights (for a share 31-33
of capital stock of each series
outstanding through each year)
Independent Auditors' Report 34
MFS Total Return Portfolio
TBC Managed Income Portfolio
Smith Barney Money Market Portfolio
Schedule of Investments 9-24
Statements of Assets and Liabilities 26
Statements of Operations 27
Statements of Changes in Net Assets 28-30
Notes to Financial Statements 31-34
Financial Highlights (for a share 35-37
of capital stock of each series
outstanding through each year)
Independent Auditors' Report 38
Smith Barney High Income Portfolio
Putnam Diversified Income Portfolio
Schedule of Investments 10-30
Statements of Assets and Liabilities 32
Statements of Operations 33
Statements of Changes in Net Assets 34-35
Notes to Financial Statements 36-40
Financial Highlights (for a share 41-42
of capital stock of each series
Annual Report of : Pages(s) in:
outstanding through each year)
Independent Auditors' Report 43
Smith Barney International Equity Portfolio
Smith Barney Pacific Basin Portfolio
Annual Report of : Pages(s) in:
GT Global Strategic Income Portfolio
Schedule of Investments 14-23
Statements of Assets and Liabilities 24
Statements of Operations 25
Statements of Changes in Net Assets 26-28
Notes to Financial Statements 29-36
Financial Highlights (for a share 37-39
of capital stock of each series
outstanding through each year)
Independent Auditors' Report 40
AIM Capital Appreciation Portfolio
Schedule of Investments 6-14
Statements of Assets and Liabilities 15
Statements of Operations 16
Statements of Changes in Net Assets 17
Notes to Financial Statements 18-21
Financial Highlights (for a share 22
of capital stock of each series
outstanding through each year)
Independent Auditors' Report 23
PART C. Other Information
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Location In:
Part A Part B
Statements of Assets and Liabilities
dated October 31, 1996
*
Statements of Operations for the *
period ended October 31, 1996
Statements Changes in Net Assets for
the period ended October 31, 1996 and 1995 *
Notes to Financial Statements *
Independent Auditors' Report *
* The Registrant's Annual Reports for the fiscal year ended October 31,
1996
and the Reports of Independent Accountants dated December 23, 1996
are incorporated by reference to the N-30D filed on January 21, 1997
as Accession # 0000091155-97-000025.
All other statements and schedules are omitted because they are not
applicable or the required information is shown in the financial statements
or notes thereto.
(b) Exhibits
(1) (a) Articles of Incorporation dated as of February 18, 1994
is incorporated by reference to Exhibit 1(a) to the Registration Statement
on February 23, 1994.
(b) Amendment to Articles of Incorporation dated as of May 26,
1994 is incorporated by reference to Exhibit 1(b) to Pre-Effective Amendment
No. 1 on June 10, 1994.
(c) Amendment to Articles of Incorporation dated as of June 7, 1994
is incorporated by reference to Exhibit 1(c) to Pre-Effective Amendment No. 1
on
June 10, 1994.
(2) Bylaws of the Fund are incorporated by reference to Exhibit 2 to
Pre-Effective Amendment No. 1 on June 10, 1994.
(3) Not applicable.
(4) Not applicable.
(5) (a) Management Agreement between Registrant on
behalf of the Smith Barney Income and Growth Portfolio and Mutual Management
Corp. is incorporated by reference to Exhibit 5(a) to Pre-Effective Amendment
No. 1
on June 10, 1994. Transfer and Assumption of Management Agreement**
(b) Management Agreement between Registrant on behalf of the
Alliance Growth Portfolio and Mutual Management Corp. is incorporated by
reference to Exhibit 5(b) to Pre-Effective Amendment No. 1 on June 10, 1994.
Transfer
and Assumption of Management Agreement**
(c) Management Agreement between Registrant on behalf of the American
Capital Enterprise Portfolio and Mutual Management Corp. is incorporated by
reference to
Exhibit 5(c) to Pre-Effective Amendment No. 1 on June 10, 1994. Transfer and
Assumption of Management Agreement
**
(d) Management Agreement between Registrant on behalf of the Smith
Barney International Equity Portfolio and Mutual Management Corp. is
incorporated
by reference to Exhibit 5(d) to Pre-Effective Amendment No. 1 on June 10,
1994.
Transfer and Assumption of Management Agreement **
(e) Management Agreement between Registrant on behalf of the Smith
Barney Pacific Basin Portfolio and Mutual Management Corp. is incorporated by
reference to Exhibit 5(e) to Pre-Effective Amendment No.1 on June 10, 1994.
Transfer and
Assumption of Management Agreement
**
(f) Management Agreement between Registrant on behalf of the TBC
Managed Income Portfolio and Mutual Management Corp. is incorporated by
reference to Exhibit 5(f) to Pre-Effective Amendment No. 1 on June
10, 1994. Transfer and Assumption of Management Agreement **
(g) Management Agreement between Registrant on behalf of the Putnam
Diversified Income Portfolio and Mutual Management Corp. is incorporated by
reference to Exhibit 5(g) to Pre-Effective Amendment No. 1 on June 10, 1994.
Transfer and
Assumption of Management Agreement **
(h) Management Agreement between Registrant on behalf of the GT
Global Strategic Income Portfolio and Mutual Management Corp. is incorporated
by reference to Exhibit 5(h) to Pre-Effective Amendment No. 1 on June 10,
1994. Transfer and
Assumption of Management Agreement **
(i) Management Agreement between Registrant on behalf of the Smith
Barney High Income Portfolio and Mutual Management Corp. is incorporated by
reference to Exhibit 5(i) to Pre-Effective Amendment No. 1 on June 10, 1994.
Transfer and
Assumption of Management Agreement **
(j) Management Agreement between Registrant on behalf of the MFS Total
Return Portfolio and Mutual Management Corp. is incorporated by reference to
Exhibit 5(j) to Pre-Effective Amendment No. 1 on June 10, 1994. Transfer
and Assumption of Management Agreement**
(k) Management Agreement between Registrant on behalf of the Smith
Barney Money Market Portfolio and Mutual Management Corp. is incorporated
by reference to Exhibit 5(k) to Pre-Effective Amendment No. 1 on June 10,
1994.
Transfer and Assumption of Management Agreement**
(l) Subadvisory Agreement among Registrant, Mutual Management Corp.
and Alliance Capital Management L.P. is incorporated by reference to Exhibit
5(l)
to Pre-Effective Amendment No. 1 on June 10, 1994. Transfer and Assumption of
Subadvisory Agreement **
(m) Subadvisory Agreement among Registrant, Mutual Management Corp.
and American Capital Asset Management, Inc. is incorporated by reference to
Exhibit 5(m)
to Pre-Effective Amendment No. 1 on June 10, 1994. Transfer and Assumption
of Subadvisory Agreement **
(n) Subadvisory Agreement among Registrant, Mutual Management Corp.
and The Boston Company Asset Management, Inc. is incorporated by reference to
Exhibit 5(n) to Pre-Effective Amendment No. 1 on June 10, 1994. Transfer and
Assumption of Subadvisory Agreement **
(o) Subadvisory Agreement among Registrant, Mutual Management Corp.
and Putnam Investment Management, Inc. is incorporated by reference to
Exhibit 5(o) to Pre-Effective Amendment No. 1 on June 10, 1994.
Transfer and Assumption of Subadvisory Agreement **
(p) Subadvisory Agreement among Registrant, Mutual Management Corp.
and G.T. Capital Management, Inc. is incorporated by reference to Exhibit
5(p) to Pre-Effective Amendment No. 1 on June 10, 1994. Transfer and
Assumption of Subadvisory Agreement**
(q) Subadvisory Agreement among Registrant, Mutual Management Corp.
and Massachusetts Financial Services Company is incorporated by reference
to Exhibit 5(q) to Pre-Effective Amendment No. 1 on June 10, 1994.
Transfer and Assumption of Subadvisory Agreement **
(r) Subadvisory Agreement between Mutual Management Corp. and Smith Barney
Inc. is incorporated by reference to Exhibit 5(r) to Pre-Effective Amendment
No. 1 on
June 10, 1994. Transfer and Assumption of Subadvisory Agreement **
(s) Management Agreement among Registrant, Smith Barney Mutual Funds
Management Inc.and AIM Capital Management, Inc.is incorporated by reference to
Post-Effective Amendment No. 4 filed on February 28, 1996
(t) Subadvisory Agreement among Registrant, Smith Barney Mutual Funds
Management Inc. and AIM Capital Management, Inc. is incorporated by reference
to Post-
Effective Amendment No. 4 filed on February 28, 1996
(6) Distribution Agreement between Registrant and Smith Barney Inc. is
incorporated
by reference to Exhibit 6 to Pre-Effective Amendment No. 1.
(7) Not applicable.
(8) (a) Custodian Agreement between Registrant and PNC Bank, National
Association **
(b) Global Custody Agreement between Barclays Bank PLC and PNC Bank**
(c) Custodian Agreement between Registrant and Morgan Guaranty Trust
Company of New York is incorporated by reference to Exhibit 8(c) to Post-
Effective Amendment No. 4 filed on February 28, 1996.
(d) Global Custody Agreement between The Chase Manahattan Bank and the
Customer.
(9) (a) Transfer Agency Agreement between Registrant and The Shareholder
Services Group Inc. is incorporated by reference to Exhibit (9) to Post-
Effective Amendment No. 4 filed on February 28, 1996.
(b) Transfer Agency and Registrar Agreement between Travelers Series Fund Inc.
and The Shareholder Services Group Inc.
(10) Opinion and Consent of Sullivan & Cromwell is incorporated by reference
to
Exhibit 10 to Pre-Effective Amendment No. 1 on June 10, 1994.
(11) (a) Auditors' Report (filed herewith).
(b) Auditors' Consent (filed herewith).
(12) Not applicable.
(13) Subscription Agreement between Registrant and The Travelers, Inc. **.
(14) Not applicable.
(15) Not applicable.
(16) Schedule for Computation of Performance Quotations **.
(17) Financial Data Schedule. (filed herewith)
(18) Not Applicable.
__________________________
** Filed with Post-Effective Amendment No. 1 on December 29, 1994.
Item 25. Persons Controlled by or under Common Control with Registrant
The Registrant is not controlled directly or indirectly by any person.
Information with respect to
the Registrant's investment manager and each sub-adviser is set forth under
the caption
"Management" in the prospectus included in Part A of this Amendment to
the Registration Statement on Form N-1A.
Item 26. Number of Holders of Securities
Number of Recordholders Title of Class on January 31, 1997
SB Income and Growth Portfolio 2
Alliance Growth Portfolio 1
American Capital Enterprise Portfolio 1
SB International Equity Portfolio 3
SB Pacific Basin Portfolio 2
TBC Managed Income Portfolio 1
Putnam Diversified Income Portfolio 1
GT Global Strategic Income Portfolio 1
SB High Income Portfolio 2
MFS Total Return Portfolio 1
SB Money Market Portfolio 3
AIM Capital Appreciaiton Portfolio 2
Item 27. Indemnification
Reference is made to ARTICLE IX of Registrant's Charter for a complete
statement
of its terms.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue."
Item 28. Business and other Connections of the Manager and each Sub-Adviser
See the material under the caption "Management" included in Part A
(Prospectus) of this
Registration Statement and the material appearing under the caption
"Management Agreements"
included in Part B (Statement of Additional Information) of this Registration
Statement.
Information as to the Directors and Officers of Smith Barney Mutual
Funds Management Inc. is
included in its Form ADV (File No. 801-8314), filed with the Commission, which
is incorporated
herein by reference thereto.
Information as to the Directors and Officers of Alliance Capital
Management L.P. is included in
its Form ADV (File No. 801-32361), filed with the Commission, which is
incorporated herein by
reference thereto.
Information as to the Directors and Officers of The Boston Company Asset
Management Inc. is
included in its Form ADV (File No. 801-6829), filed with the Commission, which
is incorporated
herein by reference thereto.
Information as to the Directors and Officers of Putnam Investment
Management, Inc. is included in its Form ADV (File No. 801-07974), filed with
the Commission, which is incorporated herein by
reference thereto.
Information as to the Directors and Officers of LGT Capital Management,
Inc. is included in its
Form ADV (File No. 801-10254), filed with the Commission, which is
incorporated herein by
reference thereto.
Information as to the Directors and Officers of Van Kampen American
Capital Asset Management, Inc. is included in its Form ADV (File No. 801-
01669), filed with the Commission, which is incorporated herein by reference
thereto.
Information as to the Directors and Officers of Massachusetts Financial
Services Company is
included in its Form ADV (File No. 801-07352 and 801-17352), filed with the
Commission, which is
incorporated herein by reference thereto.
Information as to the Directors and Officers of AIM Capital Management,
Inc. is included in its Form ADV (File No.801-15211), with the Commission,
which is incorporated herein by reference thereto.
Item 29. Principal Underwriters.
Smith Barney Inc. ("Smith Barney") also serves as distributor for each of the
following investment companies:
(a) Smith Barney Managed Municipals Fund Inc.
Smith Barney Managed Government Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Principal Return Fund
Smith Barney Income Funds
Smith Barney Equity Funds
Smith Barney Investment Funds Inc.
Smith Barney Natural Resources Fund Inc.
Smith Barney Telecommunications Trust
Smith Barney Arizona Municipals Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Series Fund
Consulting Group Capital Markets Funds
Smith Barney Investment Trust
Smith Barney Institutional Cash Managment Fund Inc.
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Oregon Municipals Fund
Smith Barney Funds, Inc.
Smith Barney Muni Funds
Smith Barney World Funds, Inc.
Smith Barney Money Funds, Inc.
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Variable Account Funds
Greenwich Street California Municipal Fund Inc.
Greenwich Street Municipal Fund Inc.
High Income Opportunity Fund Inc.
The Inefficient-Market Fund, Inc.
The Italy Fund Inc.
Managed High Income Fund Inc.
Managed Municipals Portfolio Inc.
Managed Municipals Portfolio II Inc.
Municipal High Income Fund
Smith Barney Intermediate Municipal Fund, Inc.
Smith Barney Municipal Fund Inc.
Zenix Income Fund Inc.
(b) The information required by this Item 29 with respect to each
director and officer of Smith Barney is incorporated by reference to
Schedule A of Form BD filed by Smith Barney pursuant to the Securities
Exchange Act of 1934 (SEC File No. 8-8177)
(c) not applicable
Item 30. Location of Accounts and Records
PNC Bank, National Association,17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103, will maintain the custodian records for the Smith Barney
Income and Growth Portfolio, Alliance
Growth Portfolio, AIM Capital Appreciation Portfolio, Van Kampen American
Capital Enterprise
Portfolio, TBC Managed Income Portfolio, Putnam Diversified Income Portfolio,
Smith Barney High
Income Portfolio, MFS Total Return Portfolio and Smith Barney Money Market
Portfolio and The Chase
Manhattan Bank, Chase Metrotech Center, Brooklyn, NY 11245 will maintain the
custodian records for the Smith Barney International Equity Portfolio, Smith
Barney Pacific Basin Portfolio and GT
Global Strategic Income Portfolio, each as required by Section 31 (a) of the
Investment
Company Act of 1940, as amended (the "1940 Act").
First Data Investor Services Group, Inc., (formerly The Shareholder
Services Group Inc.) 53 State Street, Boston, Massachusetts 02109-2873, will
maintain the shareholder servicing agent records, required by Section 31 (a)
of the 1940 Act.
All other records required by Section 31 (a) of the 1940 Act are
maintained at the offices of the
Registrant at 388 Greenwich Street, New York, New York 10013 (and preserved
for the periods
specified by Rule 31a-2 of the 1940 Act).
Item 31. Management Services
Not Applicable
Item 32. Undertakings
(a) Not Applicable
(b) Not Applicable
(c) Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of Registrant's latest report to shareholders, upon
request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485 (b) under the Securities Act of
1933 and has duly caused this Post-Effective Amendment to its Registration
Statement to be signed on its behalf by the undersigned and where applicable,
the true and lawful attorney-in-fact, thereto duly authorized, in the City of
New York, and State of New York on the 24th of February, 1997
TRAVELERS SERIES FUND INC.
By /s/Heath B. McLendon
(Heath B. McLendon, Chairman of the Board and Chief Executive
Officer)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
Signature Title Date
/s/Heath B. McLendon President February 24,
1997
(Heath B. McLendon) (Chief Executive Officer)
/s/ Victor K. Atkins* Director February 24, 1997
(Victor K. Atkins)
/s/ Jessica Bibliowicz Director and February 24, 1997
(Jessica Bibliowicz) President
/s/ Alger B. Chapman* Director February 24 1997
(Alger B. Chapman)
/s/ Robert A. Frankel* Director February 24, 1997
(Robert A. Frankel)
/s/ Rainer Greeven* Director February 24, 1997
(Rainer Greeven)
/s/ Susan M. Heilbron* Director February 24, 1997
(Susan M. Heilbron)
/s/ James Shuart* Director February 24, 1997
(James Shuart)
/s/Lewis E. Daidone Treasurer (Principal Financial February 24, 1997
(Lewis E. Daidone) and Accounting Officer)
*By:/s/Lewis E. Daidone February 24, 1997
Lewis E. Daidone
Pursuant to Power of Attorney
EXHIBIT INDEX
Exhibit No. Exhibit Page Number
8(d) Global Custody Agreement between The Chase Manhattan Bank and the Customer
9(b) Transfer Agency and Registrar Agreement between Travelers Series Fund Inc.
and The Shareholder Services Group Inc.
11(b) Auditor's Consent
17 Financial Data Schedule
GLOBAL CUSTODY AGREEMENT
This AGREEMENT is effective ___________________, 199_, and is between
THE CHASE MANHATTAN BANK ("Bank") and
("Customer").
1. Customer Accounts.
Bank shall establish and maintain the following accounts ("Accounts"):
(a) A custody account in the name of Customer ("Custody Account") for
any and all stocks, shares, bonds, debentures, notes, mortgages or other
obligations for the payment of money, bullion, coin and any certificates,
receipts, warrants or other instruments representing rights to receive,
purchase or subscribe for the same or evidencing or representing any other
rights or interests therein and other similar property whether certificated or
uncertificated as may be received by Bank or its Subcustodian (as defined in
Section 3) for the account of Customer ("Securities"); and
(b) A deposit account in the name of Customer ("Deposit Account") for
any and all cash in any currency received by Bank or its Subcustodian for the
account of Customer, which cash shall not be subject to withdrawal by draft or
check.
Customer warrants its authority to: 1) deposit the cash and Securities
("Assets") received in the Accounts and 2) give Instructions (as defined in
Section 11) concerning the Accounts. Bank may deliver securities of the same
class in place of those deposited in the Custody Account.
Upon written agreement between Bank and Customer, additional Accounts
may be established and separately accounted for as additional Accounts
hereunder.
2. Maintenance of Securities and Cash at Bank and Subcustodian Locations.
Unless Instructions specifically require another location acceptable to
Bank:
(a) Securities shall be held in the country or other jurisdiction in
which the principal trading market for such Securities is located, where such
Securities are to be presented for payment or where such Securities are
acquired; and
(b) Cash shall be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and Bank can comply with such
Instructions, Bank is authorized to maintain cash balances on deposit for
Customer with itself or one of its "Affiliates" at such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as Customer may direct, if acceptable to Bank. For purposes
hereof, the term "Affiliate" shall mean an entity controlling, controlled by,
or under common control with, Bank.
If Customer wishes to have any of its Assets held in the custody of an
institution other than the established Subcustodians as defined in Section 3
(or their securities depositories), such arrangement must be authorized by a
written agreement, signed by Bank and Customer.
3. Subcustodians and Securities Depositories.
Bank may act hereunder through the subcustodians listed in Schedule A
hereof with which Bank has entered into subcustodial agreements
("Subcustodians"). Customer authorizes Bank to hold Assets in the Accounts in
accounts which Bank has established with one or more of its branches or
Subcustodians. Bank and Subcustodians are authorized to hold any of the
Securities in their account with any securities depository in which they
participate.
Bank reserves the right to add new, replace or remove Subcustodians.
Customer shall be given reasonable notice by Bank of any amendment to Schedule
A. Upon request by Customer, Bank shall identify the name, address and
principal place of business of any Subcustodian of Customer's Assets and the
name and address of the governmental agency or other regulatory authority that
supervises or regulates such Subcustodian.
4. Use of Subcustodian.
(a) Bank shall identify the Assets on its books as belonging to
Customer.
(b) A Subcustodian shall hold such Assets together with assets
belonging to other customers of Bank in accounts identified on such
Subcustodian's books as custody accounts for the exclusive benefit of
customers of Bank.
(c) Any Assets in the Accounts held by a Subcustodian shall be subject
only to the instructions of Bank or its agent. Any Securities held in a
securities depository for the account of a Subcustodian shall be subject only
to the instructions of such Subcustodian.
(d) Any agreement Bank enters into with a Subcustodian for holding
Bank's customers' assets shall provide that such assets shall not be subject
to any right, charge, security interest, lien or claim of any kind in favor of
such Subcustodian except for safe custody or administration, and that the
beneficial ownership of such assets shall be freely transferable without the
payment of money or value other than for safe custody or administration. The
foregoing shall not apply to the extent of any special agreement or
arrangement made by Customer with any particular Subcustodian.
5. Deposit Account Transactions.
(a) Bank or its Subcustodians shall make payments from the Deposit
Account upon receipt of Instructions which include all information required by
Bank.
(b) In the event that any payment to be made under this Section 5
exceeds the funds available in the Deposit Account, Bank, in its discretion,
may advance Customer such excess amount which shall be deemed a loan payable
on demand, bearing interest at the rate customarily charged by Bank on similar
loans.
(c) If Bank credits the Deposit Account on a payable date, or at any
time prior to actual collection and reconciliation to the Deposit Account,
with interest, dividends, redemptions or any other amount due, Customer shall
promptly return any such amount upon oral or written notification: (i) that
such amount has not been received in the ordinary course of business or (ii)
that such amount was incorrectly credited. If Customer does not promptly
return any amount upon such notification, Bank shall be entitled, upon oral or
written notification to Customer, to reverse such credit by debiting the
Deposit Account for the amount previously credited. Bank or its Subcustodian
shall have no duty or obligation to institute legal proceedings, file a claim
or a proof of claim in any insolvency proceeding or take any other action with
respect to the collection of such amount, but may act for Customer upon
Instructions after consultation with Customer.
6. Custody Account Transactions.
(a) Securities shall be transferred, exchanged or delivered by Bank or
its Subcustodian upon receipt by Bank of Instructions which include all
information required by Bank. Settlement and payment for Securities received
for, and delivery of Securities out of, the Custody Account may be made in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of Securities to a
purchaser, dealer or their agents against a receipt with the expectation of
receiving later payment and free delivery. Delivery of Securities out of the
Custody Account may also be made in any manner specifically required by
Instructions acceptable to Bank.
(b) Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect to any sale,
exchange or purchase of Securities. Otherwise, such transactions shall be
credited or debited to the Accounts on the date cash or Securities are
actually received by Bank and reconciled to the Account.
(i) Bank may reverse credits or debits made to the Accounts in
its discretion if the related transaction fails to settle within a
reasonable period, determined by Bank in its discretion, after the
contractual settlement date for the related transaction.
(ii) If any Securities delivered pursuant to this Section 6 are
returned by the recipient thereof, Bank may reverse the credits and
debits of the particular transaction at any time.
7. Actions of Bank.
Bank shall follow Instructions received regarding assets held in the
Accounts. However, until it receives Instructions to the contrary, Bank
shall:
(i) Present for payment any Securities which are called,
redeemed or retired or otherwise become payable and all coupons and
other income items which call for payment upon presentation, to the
extent that Bank or Subcustodian is actually aware of such
opportunities.
(ii) Execute in the name of Customer such ownership and other
certificates as may be required to obtain payments in respect of
Securities.
(iii) Exchange interim receipts or temporary Securities for
definitive Securities.
(iv) Appoint brokers and agents for any transaction involving the
Securities, including, without limitation, Affiliates of Bank or any
Subcustodian.
(v) Issue statements to Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
Bank shall send Customer an advice or notification of any transfers of
Assets to or from the Accounts. Such statements, advices or notifications
shall indicate the identity of the entity having custody of the Assets.
Unless Customer sends Bank a written exception or objection to any Bank
statement within sixty (60) days of receipt, Customer shall be deemed to have
approved such statement. In such event, or where Customer has otherwise
approved any such statement, Bank shall, to the extent permitted by law, be
released, relieved and discharged with respect to all matters set forth in
such statement or reasonably implied therefrom as though it had been settled
by the decree of a court of competent jurisdiction in an action where Customer
and all persons having or claiming an interest in Customer or Customer's
Accounts were parties.
All collections of funds or other property paid or distributed in
respect of Securities in the Custody Account shall be made at the risk of
Customer. Bank shall have no liability for any loss occasioned by delay in
the actual receipt of notice by Bank or by its Subcustodians of any payment,
redemption or other transaction regarding Securities in the Custody Account in
respect of which Bank has agreed to take any action hereunder.
8. Corporate Actions; Proxies; Tax Reclaims.
(a) Corporate Actions. Whenever Bank receives information concerning
the Securities which requires discretionary action by the beneficial owner of
the Securities (other than a proxy), such as subscription rights, bonus
issues, stock repurchase plans and rights offerings, or legal notices or other
material intended to be transmitted to securities holders ("Corporate
Actions"), Bank shall give Customer notice of such Corporate Actions to the
extent that Bank's central corporate actions department has actual knowledge
of a Corporate Action in time to notify its customers.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, Bank shall endeavor to obtain
Instructions from Customer or its Authorized Person, but if Instructions are
not received in time for Bank to take timely action, or actual notice of such
Corporate Action was received too late to seek Instructions, Bank is
authorized to sell such rights entitlement or fractional interest and to
credit the Deposit Account with the proceeds or take any other action it
deems, in good faith, to be appropriate in which case it shall be held
harmless for any such action.
(b) Proxy Voting. Bank shall provide proxy voting services, if elected
by Customer, in accordance with the terms of the proxy voting services rider
hereto. Proxy voting services may be provided by Bank or, in whole or in
part, by one or more third parties appointed by Bank (which may be Affiliates
of Bank).
(c) Tax Reclaims.
(i) Subject to the provisions hereof, Bank shall apply for a
reduction of withholding tax and any refund of any tax paid or tax
credits which apply in each applicable market in respect of income
payments on Securities for the benefit of Customer which Bank believes
may be available to such Customer.
(ii) The provision of tax reclaim services by Bank is conditional
upon Bank receiving from the beneficial owner of Securities (A) a
declaration of its identity and place of residence and (B) certain other
documentation (pro forma copies of which are available from Bank).
Customer acknowledges that, if Bank does not receive such declarations,
documentation and information, additional United Kingdom taxation shall
be deducted from all income received in respect of Securities issued
outside the United Kingdom and that U.S. non-resident alien tax or U.S.
backup withholding tax shall be deducted from U.S. source income.
Customer shall provide to Bank such documentation and information as it
may require in connection with taxation, and warrants that, when given,
this information shall be true and correct in every respect, not
misleading in any way, and contain all material information. Customer
undertakes to notify Bank immediately if any such information requires
updating or amendment.
(iii) Bank shall not be liable to Customer or any third party for
any tax, fines or penalties payable by Bank or Customer, and shall be
indemnified accordingly, whether these result from the inaccurate
completion of documents by Customer or any third party, or as a result
of the provision to Bank or any third party of inaccurate or misleading
information or the withholding of material information by Customer or
any other third party, or as a result of any delay of any revenue
authority or any other matter beyond the control of Bank.
(iv) Customer confirms that Bank is authorized to deduct from any
cash received or credited to the Deposit Account any taxes or levies
required by any revenue or governmental authority for whatever reason in
respect of the Securities or Cash Accounts.
(v) Bank shall perform tax reclaim services only with respect to
taxation levied by the revenue authorities of the countries notified to
Customer from time to time and Bank may, by notification in writing, at
its absolute discretion, supplement or amend the markets in which the
tax reclaim services are offered. Other than as expressly provided in
this sub-clause, Bank shall have no responsibility with regard to
Customer's tax position or status in any jurisdiction.
(vi) Customer confirms that Bank is authorized to disclose any
information requested by any revenue authority or any governmental body
in relation to Customer or the Securities and/or Cash held for Customer.
(vii) Tax reclaim services may be provided by Bank or, in whole or
in part, by one or more third parties appointed by Bank (which may be
Affiliates of Bank); provided that Bank shall be liable for the
performance of any such third party to the same extent as Bank would
have been if it performed such services itself.
9. Nominees.
Securities which are ordinarily held in registered form may be
registered in a nominee name of Bank, Subcustodian or securities depository,
as the case may be. Bank may without notice to Customer cause any such
Securities to cease to be registered in the name of any such nominee and to be
registered in the name of Customer. In the event that any Securities
registered in a nominee name are called for partial redemption by the issuer,
Bank may allot the called portion to the respective beneficial holders of such
class of security in any manner Bank deems to be fair and equitable. Customer
shall hold Bank, Subcustodians, and their respective nominees harmless from
any liability arising directly or indirectly from their status as a mere
record holder of Securities in the Custody Account.
10. Authorized Persons.
As used herein, the term "Authorized Person" means employees or agents
including investment managers as have been designated by written notice from
Customer or its designated agent to act on behalf of Customer hereunder. Such
persons shall continue to be Authorized Persons until such time as Bank
receives Instructions from Customer or its designated agent that any such
employee or agent is no longer an Authorized Person.
11. Instructions.
The term "Instructions" means instructions of any Authorized Person
received by Bank, via telephone, telex, facsimile transmission, bank wire or
other teleprocess or electronic instruction or trade information system
acceptable to Bank which Bank believes in good faith to have been given by
Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which Bank may specify.
Unless otherwise expressly provided, all Instructions shall continue in full
force and effect until canceled or superseded.
Any Instructions delivered to Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which confirmation
may bear the facsimile signature of such Person), but Customer shall hold Bank
harmless for the failure of an Authorized Person to send such confirmation in
writing, the failure of such confirmation to conform to the telephone
instructions received or Bank's failure to produce such confirmation at any
subsequent time. Bank may electronically record any Instructions given by
telephone, and any other telephone discussions with respect to the Custody
Account. Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which Bank shall make available
to Customer or its Authorized Persons.
12. Standard of Care; Liabilities.
(a) Bank shall be responsible for the performance of only such duties
as are set forth herein or expressly contained in Instructions which are
consistent with the provisions hereof as follows:
(i) Bank shall use reasonable care with respect to its
obligations hereunder and the safekeeping of Assets. Bank shall be
liable to Customer for any loss which shall occur as the result of the
failure of a Subcustodian to exercise reasonable care with respect to
the safekeeping of such Assets to the same extent that Bank would be
liable to Customer if Bank were holding such Assets in New York. In the
event of any loss to Customer by reason of the failure of Bank or its
Subcustodian to utilize reasonable care, Bank shall be liable to
Customer only to the extent of Customer's direct damages, to be
determined based on the market value of the property which is the
subject of the loss at the date of discovery of such loss and without
reference to any special conditions or circumstances. Bank shall have
no liability whatsoever for any consequential, special, indirect or
speculative loss or damages (including, but not limited to, lost
profits) suffered by Customer in connection with the transactions
contemplated hereby and the relationship established hereby even if Bank
has been advised as to the possibility of the same and regardless of the
form of the action. Bank shall not be responsible for the insolvency of
any Subcustodian which is not a branch or Affiliate of Bank.
(ii) Bank shall not be responsible for any act, omission, default
or the solvency of any broker or agent which it or a Subcustodian
appoints unless such appointment was made negligently or in bad faith.
(iii) Bank shall be indemnified by, and without liability to
Customer for any action taken or omitted by Bank whether pursuant to
Instructions or otherwise within the scope hereof if such act or
omission was in good faith, without negligence. In performing its
obligations hereunder, Bank may rely on the genuineness of any document
which it believes in good faith to have been validly executed.
(iv) Customer shall pay for and hold Bank harmless from any
liability or loss resulting from the imposition or assessment of any
taxes or other governmental charges, and any related expenses with
respect to income from or Assets in the Accounts.
(v) Bank shall be entitled to rely, and may act, upon the advice
of counsel (who may be counsel for Customer) on all matters and shall be
without liability for any action reasonably taken or omitted pursuant to
such advice.
(vi) Bank need not maintain any insurance for the benefit of
Customer.
(vii) Without limiting the foregoing, Bank shall not be liable for
any loss which results from: 1) the general risk of investing, or 2)
investing or holding Assets in a particular country including, but not
limited to, losses resulting from malfunction, interruption of or error
in the transmission of information caused by any machines or system or
interruption of communication facilities, abnormal operating conditions,
nationalization, expropriation or other governmental actions; regulation
of the banking or securities industry; currency restrictions,
devaluations or fluctuations; and market conditions which prevent the
orderly execution of securities transactions or affect the value of
Assets.
(viii) Neither party shall be liable to the other for any
loss due to forces beyond their control including, but not limited to
strikes or work stoppages, acts of war (whether declared or undeclared)
or terrorism, insurrection, revolution, nuclear fusion, fission or
radiation, or acts of God.
(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that Bank shall have no duty or
responsibility to:
(i) question Instructions or make any suggestions to Customer or
an Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to
investments or the retention of Securities;
(iii) advise Customer or an Authorized Person regarding any
default in the payment of principal or income of any security other than
as provided in Section 5(c) hereof;
(iv) evaluate or report to Customer or an Authorized Person
regarding the financial condition of any broker, agent or other party to
which Securities are delivered or payments are made pursuant hereto; and
(v) review or reconcile trade confirmations received from
brokers. Customer or its Authorized Persons (as defined in Section 10)
issuing Instructions shall bear any responsibility to review such
confirmations against Instructions issued to and statements issued by
Bank.
(c) Customer authorizes Bank to act hereunder notwithstanding that
Bank or any of its divisions or Affiliates may have a material interest in a
transaction, or circumstances are such that Bank may have a potential conflict
of duty or interest including the fact that Bank or any of its Affiliates may
provide brokerage services to other customers, act as financial advisor to the
issuer of Securities, act as a lender to the issuer of Securities, act in the
same transaction as agent for more than one customer, have a material interest
in the issue of Securities, or earn profits from any of the activities listed
herein.
13. Fees and Expenses.
Customer shall pay Bank for its services hereunder the fees set forth in
Schedule B hereto or such other amounts as may be agreed upon in writing,
together with Bank's reasonable out-of-pocket or incidental expenses,
including, but not limited to, legal fees. Bank shall have a lien on and is
authorized to charge any Accounts of Customer for any amount owing to Bank
under any provision hereof
14. Miscellaneous.
(a) Foreign Exchange Transactions. To facilitate the administration
of Customer's trading and investment activity, Bank is authorized to enter
into spot or forward foreign exchange contracts with Customer or an Authorized
Person for Customer and may also provide foreign exchange through its
subsidiaries, Affiliates or Subcustodians. Instructions, including standing
instructions, may be issued with respect to such contracts but Bank may
establish rules or limitations concerning any foreign exchange facility made
available. In all cases where Bank, its subsidiaries, Affiliates or
Subcustodians enter into a foreign exchange contract related to Accounts, the
terms and conditions of the then current foreign exchange contract of Bank,
its subsidiary, Affiliate or Subcustodian and, to the extent not inconsistent,
this Agreement shall apply to such transaction.
(b) Certification of Residency, etc. Customer certifies that it is a
resident of the United States and shall notify Bank of any changes in
residency. Bank may rely upon this certification or the certification of such
other facts as may be required to administer Bank's obligations hereunder.
Customer shall indemnify Bank against all losses, liability, claims or demands
arising directly or indirectly from any such certifications.
(c) Access to Records. Bank shall allow Customer's independent public
accountant reasonable access to the records of Bank relating to the Assets as
is required in connection with their examination of books and records
pertaining to Customer's affairs. Subject to restrictions under applicable
law, Bank shall also obtain an undertaking to permit Customer's independent
public accountants reasonable access to the records of any Subcustodian which
has physical possession of any Assets as may be required in connection with
the examination of Customer's books and records.
(d) Governing Law; Successors and Assigns, Captions THIS AGREEMENT
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN NEW YORK and shall not be assignable by
either party, but shall bind the successors in interest of Customer and Bank.
The captions given to the sections and subsections of this Agreement are for
convenience of reference only and are not to be used to interpret this
Agreement.
(e) Entire Agreement; Applicable Riders. Customer represents that the
Assets deposited in the Accounts are (Check one):
Employee Benefit Plan or other assets subject to the Employee
Retirement Income Security Act of 1974, as amended ("ERISA");
Investment Company assets subject to certain U.S. Securities and
Exchange Commission rules
and regulations;
Neither of the above.
This Agreement consists exclusively of this document together with
Schedules A and B, Exhibits I - _______ and the following Rider(s)
[Check applicable rider(s)]:
ERISA
INVESTMENT COMPANY
__ PROXY VOTING
SPECIAL TERMS AND CONDITIONS
There are no other provisions hereof and this Agreement supersedes any
other agreements, whether written or oral, between the parties. Any amendment
hereto must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions hereof are
held invalid, illegal or unenforceable in any respect on the basis of any
particular circumstances or in any jurisdiction, the validity, legality and
enforceability of such provision or provisions under other circumstances or in
other jurisdictions and of the remaining provisions shall not in any way be
affected or impaired.
(g) Waiver. Except as otherwise provided herein, no failure or delay
on the part of either party in exercising any power or right hereunder
operates as a waiver, nor does any single or partial exercise of any power or
right preclude any other or further exercise, or the exercise of any other
power or right. No waiver by a party of any provision hereof, or waiver of
any breach or default, is effective unless in writing and signed by the party
against whom the waiver is to be enforced.
(h) Representations and Warranties. (i) Customer hereby represents
and warrants to Bank that: (A) it has full authority and power to deposit and
control the Securities and cash deposited in the Accounts; (B) it has all
necessary authority to use Bank as its custodian; (C) this Agreement is its
legal, valid and binding obligation, enforceable in accordance with its
terms; (D) it shall have full authority and power to borrow moneys and enter
into foreign exchange transactions; and (E) it has not relied on any oral or
written representation made by Bank or any person on its behalf, and
acknowledges that this Agreement sets out to the fullest extent the duties of
Bank. (ii) Bank hereby represents and warrants to Customer that: (A) it has
the power and authority to perform its obligations hereunder, (B) this
Agreement constitutes a legal, valid and binding obligation on it;
enforceable in accordance with its terms; and (C) that it has taken all
necessary action to authorize the execution and delivery hereof.
(i) Notices. All notices hereunder shall be effective when actually
received. Any notices or other communications which may be required
hereunder are to be sent to the parties at the following addresses or such
other addresses as may subsequently be given to the other party in writing:
(a) Bank: The Chase Manhattan Bank, 4 Chase MetroTech Center, Brooklyn, NY
11245, Attention: Global Custody Division; and (b) Customer:
,
,
(j) Termination. This Agreement may be terminated by Customer or Bank
by giving sixty (60) days written notice to the other, provided that such
notice to Bank shall specify the names of the persons to whom Bank shall
deliver the Assets in the Accounts. If notice of termination is given by
Bank, Customer shall, within sixty (60) days following receipt of the notice,
deliver to Bank Instructions specifying the names of the persons to whom Bank
shall deliver the Assets. In either case Bank shall deliver the Assets to the
persons so specified, after deducting any amounts which Bank determines in
good faith to be owed to it under Section 13. If within sixty (60) days
following receipt of a notice of termination by Bank, Bank does not receive
Instructions from Customer specifying the names of the persons to whom Bank
shall deliver the Assets, Bank, at its election, may deliver the Assets to a
bank or trust company doing business in the State of New York to be held and
disposed of pursuant to the provisions hereof, or to Authorized Persons, or
may continue to hold the Assets until Instructions are provided to Bank.
(k) Money Laundering. Customer warrants and undertakes to Bank for
itself and its agents that all Customer's customers are properly identified in
accordance with U.S. Money Laundering Regulations as in effect from time to
time.
(l) Imputation of certain information. Bank shall not be held
responsible for and shall not be required to have regard to information held
by any person by imputation or information of which Bank is not aware by
virtue of a "Chinese Wall" arrangement. If Bank becomes aware of confidential
information which in good faith it feels inhibits it from effecting a
transaction hereunder Bank may refrain from effecting it.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first-above written.
CUSTOMER
By:____________________________________________
Title:
Date:
THE CHASE MANHATTAN BANK
By:____________________________________________
Title:
Date:
78111
STATE OF )
: ss.
COUNTY OF )
On this day of
, 199 , before me personally came
, to me known, who
being by me duly sworn, did depose and say that he/she resides in
at
, that he/she is
of
, the entity described in and which executed the foregoing
instrument; that he/she knows the seal of said entity, that the seal affixed
to said instrument is such seal, that it was so affixed by order of said
entity, and that he/she signed his/her name thereto by like order.
Sworn to before me this
day of , 199 .
Notary
STATE OF NEW YORK )
: ss.
COUNTY OF NEW YORK )
On this day of
, 199 , before me personally came
, to me known, who being by me duly sworn, did depose and say that
he/she resides in at
; that
he/she is a Vice President of THE CHASE MANHATTAN BANK, the corporation
described in and which executed the foregoing instrument; that he/she knows
the seal of said corporation, that the seal affixed to said instrument is such
corporate seal, that it was so affixed by order of the Board of Directors of
said corporation, and that he/she signed his/her name thereto by like order.
Sworn to before me this
day of , 199 .
Notary
Investment Company Rider to Global Custody Agreement
Between The Chase Manhattan Bank and
_________________________________________
effective __________________
Customer represents that the Assets being placed in Bank's custody are
subject to the Investment Company Act of 1940, as amended (the "1940 Act"), as
the same may be amended from time to time.
Except to the extent that Bank has specifically agreed to comply with a
condition of a rule, regulation, interpretation promulgated by or under the
authority of the Securities and Exchange Commission ("SEC") or the Exemptive
Order applicable to accounts of this nature issued to Bank (1940 Act, Release
No. 12053, November 20, 1981), as amended, or unless Bank has otherwise
specifically agreed, Customer shall be solely responsible to assure that the
maintenance of Assets hereunder complies with such rules, regulations,
interpretations or exemptive order promulgated by or under the authority of
the Securities Exchange Commission.
The following modifications are made to the Agreement:
Section 3. Subcustodians and Securities Depositories.
Add the following language to the end of Section 3:
The terms Subcustodian and securities depositories as used herein shall
mean a branch of a qualified U.S. bank, an eligible foreign custodian or
an eligible foreign securities depository, which are further defined as
follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined
in Rule 17f-5 under the 1940 Act;
(b) "eligible foreign custodian" shall mean (i) a banking institution
or trust company, incorporated or organized under the laws of a country
other than the United States, that is regulated as such by that
country's government or an agency thereof and that has shareholders'
equity in excess of $200 million in U.S. currency (or a foreign currency
equivalent thereof) as of the close of its fiscal year most recently
completed prior to the date hereof, (ii) a majority owned direct or
indirect subsidiary of a qualified U.S. bank or bank holding company
that is incorporated or organized under the laws of a country other than
the United States and that has shareholders' equity in excess of $100
million in U.S. currency (or a foreign currency equivalent thereof) as
of the close of its fiscal year most recently completed prior to the
date hereof, (iii) a banking institution or trust company incorporated
or organized under the laws of a country other than the United States or
a majority owned direct or indirect subsidiary of a qualified U.S. bank
or bank holding company that is incorporated or organized under the laws
of a country other than the United States which has such other
qualifications as shall be specified in Instructions and approved by
Bank; or (iv) any other entity that shall have been so qualified by
exemptive order, rule or other appropriate action of the SEC; and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws
of a country other than the United States, which operates (i) the
central system for handling securities or equivalent book-entries in
that country, or (ii) a transnational system for the central handling of
securities or equivalent book-entries.
Customer represents that its Board of Directors has approved each of the
Subcustodians listed in Schedule A hereto and the terms of the subcustody
agreements between Bank and each Subcustodian, which are attached as Exhibits
I through of Schedule A, and further represents that its Board has
determined that the use of each Subcustodian and the terms of each subcustody
agreement are consistent with the best interests of the Fund(s) and its
(their) shareholders. Bank shall supply Customer with any amendment to
Schedule A for approval. Customer has supplied or shall supply Bank with
certified copies of its Board of Directors resolution(s) with respect to the
foregoing prior to placing Assets with any Subcustodian so approved.
Section 11. Instructions.
Add the following language to the end of Section 11:
Deposit Account Payments and Custody Account Transactions made pursuant
to Section 5 and 6 hereof may be made only for the purposes listed
below. Instructions must specify the purpose for which any transaction
is to be made and Customer shall be solely responsible to assure that
Instructions are in accord with any limitations or restrictions
applicable to Customer by law or as may be set forth in its prospectus.
(a) In connection with the purchase or sale of Securities at prices as
confirmed by Instructions;
(b) When Securities are called, redeemed or retired, or otherwise
become payable;
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment;
(d) Upon conversion of Securities pursuant to their terms into other
securities;
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities;
(f) For the payment of interest, taxes, management or supervisory fees,
distributions or operating expenses;
(g) In connection with any borrowings by Customer requiring a pledge of
Securities, but only against receipt of amounts borrowed;
(h) In connection with any loans, but only against receipt of adequate
collateral as specified in Instructions which shall reflect any
restrictions applicable to Customer;
(i) For the purpose of redeeming shares of the capital stock of
Customer and the delivery to, or the crediting to the account of, Bank,
its Subcustodian or Customer's transfer agent, such shares to be
purchased or redeemed;
(j) For the purpose of redeeming in kind shares of Customer against
delivery to Bank, its Subcustodian or Customer's transfer agent of such
shares to be so redeemed;
(k) For delivery in accordance with the provisions of any agreement
among Customer, Bank and a broker-dealer registered under the Securities
Exchange Act of 1934 and a member of The National Association of
Securities Dealers, Inc., relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by
Customer;
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released only
upon payment to Bank of monies for the premium due and a receipt for the
Securities which are to be held in escrow. Upon exercise of the option,
or at expiration, Bank shall receive from brokers the Securities
previously deposited. Bank shall act strictly in accordance with
Instructions in the delivery of Securities to be held in escrow and
shall have no responsibility or liability for any such Securities which
are not returned promptly when due other than to make proper request for
such return;
(m) For spot or forward foreign exchange transactions to facilitate
security trading, receipt of income from Securities or related
transactions;
(n) For other proper purposes as may be specified in Instructions
issued by an officer of Customer which shall include a statement of the
purpose for which the delivery or payment is to be made, the amount of
the payment or specific Securities to be delivered, the name of the
person or persons to whom delivery or payment is to be made, and a
certification that the purpose is a proper purpose under the instruments
governing Customer; and
(o) Upon the termination hereof as set forth in Section 14(j).
Section 12. Standard of Care; Liabilities.
Add the following at the end of Section as 12:
(d) Bank hereby warrants to Customer that in its opinion, after due
inquiry, the established procedures to be followed by each of its
branches, each branch of a qualified U.S. Bank, each eligible foreign
custodian and each eligible foreign securities depository holding
Customer's Securities pursuant hereto afford protection for such
Securities at least equal to that afforded by Bank's established
procedures with respect to similar securities held by Bank and its
securities depositories in New York.
Section 14. Access to Records.
Add the following language to the end of Section 14(c):
Upon reasonable request from Customer, Bank shall furnish Customer such
reports (or portions thereof) of Bank's system of internal accounting
controls applicable to Bank's duties hereunder. Bank shall endeavor to
obtain and furnish Customer with such similar reports as it may
reasonably request with respect to each Subcustodian and securities
depository holding Assets.
GLOBAL PROXY SERVICE RIDER
To Global Custody Agreement
Between
THE CHASE MANHATTAN BANK
AND
____________________________________
dated 199_.
1. Global Proxy Services ("Proxy Services") shall be provided for the
countries listed in the procedures and guidelines ("Procedures")
furnished to Customer, as the same may be amended by Bank from time to
time on prior notice to Customer. The Procedures are incorporated by
reference herein and form a part of this Rider.
2. Proxy Services shall consist of those elements as set forth in the
Procedures, and shall include (a) notifications ("Notifications") by
Bank to Customer of the dates of pending shareholder meetings,
resolutions to be voted upon and the return dates as may be received by
Bank or provided to Bank by its Subcustodians or third parties, and (b)
voting by Bank of proxies based on Customer Directions. Original proxy
materials or copies thereof shall not be provided. Notifications shall
generally be in English and, where necessary, shall be summarized and
translated from such non-English materials as have been made available
to Bank or its Subcustodian. In this respect Bank's only obligation is
to provide information from sources it believes to be reliable and/or to
provide materials summarized and/or translated in good faith. Bank
reserves the right to provide Notifications, or parts thereof, in the
language received. Upon reasonable advance request by Customer, backup
information relative to Notifications, such as annual reports,
explanatory material concerning resolutions, management recommendations
or other material relevant to the exercise of proxy voting rights shall
be provided as available, but without translation.
3. While Bank shall attempt to provide accurate and complete Notifications,
whether or not translated, Bank shall not be liable for any losses or
other consequences that may result from reliance by Customer upon
Notifications where Bank prepared the same in good faith.
4 Notwithstanding the fact that Bank may act in a fiduciary capacity with
respect to Customer under other agreements or otherwise under the
Agreement, in performing Proxy Services Bank shall be acting solely as
the agent of Customer, and shall not exercise any discretion with regard
to such Proxy Services.
5. Proxy voting may be precluded or restricted in a variety of
circumstances, including, without limitation, where the relevant
Securities are: (i) on loan; (ii) at registrar for registration or
reregistration; (iii) the subject of a conversion or other corporate
action; (iv) not held in a name subject to the control of Bank or its
Subcustodian or are otherwise held in a manner which precludes voting;
(v) not capable of being voted on account of local market regulations or
practices or restrictions by the issuer; or (vi) held in a margin or
collateral account.
6 Customer acknowledges that in certain countries Bank may be unable to
vote individual proxies but shall only be able to vote proxies on a net
basis (e.g., a net yes or no vote given the voting instructions received
from all customers).
7. Customer shall not make any use of the information provided hereunder,
except in connection with the funds or plans covered hereby, and shall
in no event sell, license, give or otherwise make the information
provided hereunder available, to any third party, and shall not directly
or indirectly compete with Bank or diminish the market for Proxy
Services by provision of such information, in whole or in part, for
compensation or otherwise, to any third party.
8. The names of Authorized Persons for Proxy Services shall be furnished to
Bank in accordance with 10 of the Agreement. Proxy Services fees shall
be as set forth in 13 of the Agreement or as separately agreed.
SPECIAL TERMS AND CONDITIONS RIDER
GLOBAL CUSTODY AGREEMENT
WITH
___________________________________
DATE
___________________________________
DOMESTIC ONLY
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Securities (the latter if held in
DTC), the following provisions shall apply rather than the provisions of
Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of
Bank's nominee or the nominee of a central depository) and
communications with respect to Securities in the Custody Account
as call for voting or relate to legal proceedings within a
reasonable time after sufficient copies are received by Bank for
forwarding to its customers. In addition, Bank shall follow
coupon payments, redemptions, exchanges or similar matters with
respect to Securities in the Custody Account and advise Customer
or the Authorized Person for such Account of rights issued, tender
offers or any other discretionary rights with respect to such
Securities, in each case, of which Bank has received notice from
the issuer of the Securities, or as to which notice is published
in publications routinely utilized by Bank for this purpose.
Fees
The fees referenced in Section 13 hereof cover only domestic and euro-dollar
holdings. There shall be no Schedule A hereto, as there are no foreign assets
in the Accounts.
DOMESTIC AND GLOBAL
SPECIAL TERMS AND CONDITIONS RIDER
Domestic Corporate Actions and Proxies
With respect to domestic U.S. and Canadian Securities (the latter if held in
DTC), the following provisions shall apply rather than the pertinent
provisions of Section 8 of the Agreement and the Global Proxy Service rider:
Bank shall send to Customer or the Authorized Person for a Custody
Account, such proxies (signed in blank, if issued in the name of
Bank's nominee or the nominee of a central depository) and
communications with respect to Securities in the Custody Account
as call for voting or relate to legal proceedings within a
reasonable time after sufficient copies are received by Bank for
forwarding to its customers. In addition, Bank shall follow
coupon payments, redemptions, exchanges or similar matters with
respect to Securities in the Custody Account and advise Customer
or the Authorized Person for such Account of rights issued, tender
offers or any other discretionary rights with respect to such
Securities, in each case, of which Bank has received notice from
the issuer of the Securities, or as to which notice is published
in publications routinely utilized by Bank for this purpose.
8
2
2
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1
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FORM OF
TRANSFER AGENCY AND REGISTRAR AGREEMENT
AGREEMENT, dated as of ___________, 1995 between Smith Barney/
Travelers Series Funds, Inc.., (the "Fund"), a corporation organized under the
laws of Maryland and having its principal place of business at 388
Greenwich Street New York, NY 10013, and The Shareholder Services Group, Inc.
Inc. (MA) (the"Transfer Agent"), a Massachusetts corporation with principal
offices at One Exchange Place, 53 State Street, Boston, Massachusetts 02109.
W I T N E S S E T H
That for and in consideration of the mutual covenants and promises
hereinafter set forth, the Fund and the Transfer Agent agree as follows:
1. Definitions. Whenever used in this Agreement, the following words
and phrases, unless the context otherwise requires, shall have the following
meanings:
(a) "Articles of Incorporation" shall mean the Articles of
Incorporation, Declaration of Trust, Partnership Agreement, or similar
organizational document as the case may be, of the Fund as the same may be
amended from time to time.
(b) "Authorized Person" shall be deemed to include any person,
whether or not such person is an officer or employee of the Fund, duly
authorized to give Oral Instructions or Written Instructions on behalf of the
Fund as indicated in a certificate furnished to the Transfer Agent pursuant
to Section 4(c) hereof as may be received by the Transfer Agent from time
to time.
(c) "Board of Directors" shall mean the Board of Directors, Board
of Trustees or, if the Fund is a limited partnership, the General Partner(s)
of the Fund, as the case may be.
(d) "Commission" shall mean the Securities and Exchange
Commission.
(e) "Custodian" refers to any custodian or subcustodian of
securities and other property which the Fund may from time to time deposit,
or cause to be deposited or held under the name or account of such a
custodian pursuant to a Custodian Agreement.
(f) "Fund" shall mean the entity executing this Agreement, and if
it is a series fund, as such term is used in the 1940 Act, such term shall
mean each series of the Fund hereafter created, except that appropriate
documentation with respect to each series must be presented to the Transfer
Agent before this Agreement shall become effective with respect to each such
series.
(g) "1940 Act" shall mean the Investment Company Act of 1940.
(h) "Oral Instructions" shall mean instructions, other than
Written Instructions, actually received by the Transfer Agent
from a person reasonably
believed by the Transfer Agent to be an Authorized Person;
(i) "Prospectus" shall mean the most recently dated Fund
Prospectus and Statement of Additional Information, including any supplements
thereto if any, which has become effective under the Securities Act of 1933
and the 1940 Act.
(j) "Shares" refers collectively to such shares of capital stock,
beneficial interest or limited partnership interests, as the case may be, of
the Fund as may be issued from time to time and, if the Fund is a closed-end or
a series fund, as such terms are used in the 1940 Act any other classes or
series of stock, shares of beneficial interest or limited partnership
interests that may be issued from time to time.
(k) "Shareholder" shall mean a holder of shares of capital stock,
beneficial interest or any other class or series, and also refers to partners
of limited partnerships.
(l) "Written Instructions" shall mean a written communication
signed by a person reasonably believed by the Transfer Agent to be an
Authorized Person and actually received by the Transfer Agent. Written
Instructions shall include manually executed originals and authorized
electronic transmissions,including telefacsimile of a manually executed
original or other process.
2. Appointment of the Transfer Agent. The Fund hereby appoints and
constitutes the Transfer Agent as transfer agent, registrar and dividend
disbursing agent for Shares of the Fund and as shareholder servicing agent
for the Fund. The Transfer Agent accepts such appointments and agrees to
perform the duties hereinafter set forth.
3. Compensation.
(a) The Fund will compensate or cause the Transfer Agent to
be compensated for the performance of its obligations hereunder in accordance
with the fees set forth in the written schedule of fees annexed hereto as
Schedule A and incorporated herein. The Transfer Agent will transmit an
invoice to theFund as soon as practicable after the end of each calendar
month which will be detailed in accordance with Schedule A, and the Fund
will pay to the Transfer Agent the amount of such invoice within thirty (30)
days after the Fund's receipt of the invoice.
In addition, the Fund agrees to pay, and will be billed separately for,
reasonable out-of-pocket expenses incurred by the Transfer Agent in the
performance of its duties hereunder. Out-of-pocket expenses shall include,
but shall not be limited to, the items specified in the written schedule of
out-of-pocket charges annexed hereto as Schedule B and incorporated herein.
Unspecified out-of-pocket expenses shall be limited to those out-of-pocket
expenses reasonably incurred by the Transfer Agent in the performance of its
obligations hereunder. Reimbursement by the Fund for expenses incurred by
the Transfer Agent in any month shall be made as soon as practicable but no
later than 15 days after the receipt of an itemized bill from the Transfer
Agent.
(b) Any compensation agreed to hereunder may be adjusted from
time to time by attaching to Schedule A, a revised fee schedule executed and
dated by the parties hereto.
4. Documents. In connection with the appointment of the Transfer Agent
the Fund shall deliver or caused to be delivered to the Transfer Agent the
following documents on or before the date this Agreement goes into effect,
but in any case within a reasonable period of time for the Transfer Agent to
prepare to perform its duties hereunder:
(a)If applicable, specimens of the certificates for Shares of
the Fund;
(b) All account application forms and other documents relating to
Shareholder accounts or to any plan, program or service offered by the Fund;
(c) A signature card bearing the signatures of any officer of the
Fund or other Authorized Person who will sign Written Instructions or is
authorized to give Oral Instructions.
(d) A certified copy of the Articles of Incorporation, as
amended;
(e) A certified copy of the By-laws of the Fund, as amended;
(f) A copy of the resolution of the Board of Directors
authorizing the execution and delivery of this Agreement;
(g) A certified list of Shareholders of the Fund with the name,
address and taxpayer identification number of each Shareholder, and the
number of Shares of the Fund held by each, certificate numbers and
denominations (if any certificates have been issued), lists of any accounts
against which stop transfer orders have been placed, together with the
reasons therefore, and the number of Shares redeemed by the Fund; and
(h) An opinion of counsel for the Fund with respect to the
validity of the Shares and the status of such Shares under the Securities
Act of 1933,as amended.
5. Further Documentation. The Fund will also furnish the Transfer
Agent with copies of the following documents promptly after the same shall
becomeavailable:
(a) each resolution of the Board of Directors authorizing the
issuance of Shares;
(b) any registration statements filed on behalf of the Fund and
all pre-effective and post-effective amendments thereto filed with the
Commission;
(c) a certified copy of each amendment to the Articles of
Incorporation or the By-laws of the Fund;
(d) certified copies of each resolution of the Board of Directors
or other authorization designating Authorized Persons; and
(e) such other certificates, documents or opinions as the
TransferAgent may reasonably request in connection with the performance of
its duties hereunder.
6. Representations of the Fund. The Fund represents to the Transfer
Agent that all outstanding Shares are validly issued, fully paid and non-
assessable. When Shares are hereafter issued in accordance with the terms of
the Fund'sArticles of Incorporation and its Prospectus, such Shares shall be
validly issued, fully paid and non-assessable.
7. Distributions Payable in Shares. In the event that the Board of
Directors of the Fund shall declare a distribution payable in Shares, the
Fund shall deliver or cause to be delivered to the Transfer Agent written
notice of such declaration signed on behalf of the Fund by an officer
thereof, upon which the Transfer Agent shall be entitled to rely for all
purposes, certifying (i) the identity of the Shares involved, (ii) the
number of Shares involved, and (iii) that all appropriate action has been
taken.
8. Duties of the Transfer Agent. The Transfer Agent shall be
responsible for administering and/or performing those functions typically
performed by a transfer agent; for acting as service agent in connection
with dividend and distribution functions; and for performing shareholder
account and administrative agent functions in connection with the issuance,
transfer and redemption or repurchase (including coordination with the
Custodian) of Shares in accordance with the terms of the Prospectus and
applicable law. The operating standards and procedures to be followed shall
be determined from time to time by agreement between the Fund and the
Transfer Agent and shall initially be as described in
Schedule C attached hereto. In addition, the Fund shall deliver to the
Transfer Agent all notices issued by the Fund with respect to the Shares in
accordance with and pursuant to the Articles of Incorporation or By-laws of
the Fund or as required by law and shall perform such other specific duties
as are set forth in the Propspectus
9. Record Keeping and Other Information. The Transfer Agent shall
create and maintain all records required of it pursuant to its duties
hereunder and as set forth in Schedule C in accordance with all applicable
laws, rules and regulations, including records required by Section 31(a) of
the 1940 Act. All records shall be available during regular business hours
for inspection and use by the Fund. Where applicable, such records shall be
maintained by the Transfer Agent for the periods and in the places required
by Rule 31a-2 under the 1940 Act.
Upon reasonable notice by the Fund, the Transfer Agent shall make
available during regular business hours such of its facilities and premises
employed in connection with the performance of its duties under this
Agreement for reasonable visitation by the Fund, or any person retained by
the Fund as may be necessary for the Fund to evaluate the quality of the
services performed by the Transfer Agent pursuant hereto.
10. Other Duties. In addition to the duties set forth in Schedule C,
the Transfer Agent shall perform such other duties and functions, and shall
be paid such amounts therefor, as may from time to time be agreed upon in
writing between the Fund and the Transfer Agent. The compensation for such
other duties and functions shall be reflected in a written amendment to
Schedule A or B and the duties and functions shall be reflected in an
amendment to Schedule C,both dated and signed by authorized persons of the
parties hereto.
11. Reliance by Transfer Agent; Instructions
(a) The Transfer Agent will have no liability when acting upon
Written or Oral Instructions believed to have been executed or orally
communicated by an Authorized Person and will not be held to have any notice
of any change of authority of any person until receipt of a Written
Instruction thereof from the Fund pursuant to Section 4(c). The Transfer
Agent will also have no liability when processing Share certificates which
it reasonably believes to bear the proper manual or facsimile signatures of
the officers of the Fund and the proper countersignature of the Transfer
Agent.
(b) At any time, the Transfer Agent may apply to any Authorized
Person of the Fund for Written Instructions and may seek advice from legal
counsel for the Fund, or its own legal counsel, with respect to any matter
arising in connection with this Agreement, and it shall not be liable for
any action taken or not taken or suffered by it in good faith in accordance
with such Written Instructions or in accordance with the opinion of counsel
for the Fund or for the Transfer Agent. Written Instructions requested by
the Transfer Agent will be provided by the Fund within a reasonable period of
time. In addition, the Transfer Agent, its officers, agents or employees,
shall accept Oral Instructions or Written Instructions given to them by any
person representing or acting on behalf of the Fund only if said
representative is an Authorized Person. The Fund agrees that all Oral
Instructions shall be followed within one business day by confirming
Written Instructions, and that the Fund's failure to so confirm shall not
impair in any respect the Transfer Agent's right to rely on Oral
Instructions. The Transfer Agent shall have no duty or obligation to
inquire into, nor shall the Transfer Agent be responsible for, the legality
of any act done by it upon the request or direction of a person reasonably
believed by the Transfer Agent to be an Authorized Person.
(c) Notwithstanding any of the foregoing provisions of this
Agreement, the Transfer Agent shall be under no duty or obligation to inquire
into, and shall not be liable for: (i) the legality of the issuance or sale
of any Shares or the sufficiency of the amount to be received therefor;
(ii) the legality of the redemption of any Shares, or the propriety of the
amount to be paid therefor; (iii) the legality of the declaration of any
dividend by the Board of Directors, or the legality of the issuance of any
Shares in payment of any dividend; or (iv)
the legality of any recapitalization or readjustment of the Shares.
12. Acts of God, etc. The Transfer Agent will not be liable or
responsible for delays or errors by acts of God or by reason of
circumstances beyond its control, including acts of civil or military
authority, national emergencies,labor difficulties, mechanical breakdown,
insurrection, war, riots, or failure or unavailability of transportation,
communication or power supply, fire, flood or other catastrophe.
13. Duty of Care and Indemnification. Each party hereto (the
"Indemnifying Party') will indemnify the other party (the "Indemnified
Party")against and hold it harmless from any and all losses, claims, damages,
liabilities or expenses of any sort or kind (including reasonable counsel
fees and expenses) resulting from any claim, demand, action or suit or other
proceeding (a"Claim") unless such Claim has resulted from a negligent
failure to act or omission to act or bad faith of the Indemnified Party in
the performance of its duties hereunder. In addition, the Fund will
indemnify the Transfer Agent against and hold it harmless from any Claim,
damages, liabilities or expenses (including reasonable counsel
fees) that is a result of: (i) any action taken in accordance with Written or
Oral Instructions, or any other instructions, or share certificates
reasonably believed by the Transfer Agent to be genuine and to be signed,
countersigned or executed, or orally communicated by an Authorized Person;
(ii) any action taken in accordance with written or oral advice reasonably
believed by the Transfer Agent to have been given by counsel for the Fund or
its own counsel; or (iii) any action taken as a result of any error or
omission in any record (including but not limited to
magnetic tapes, computer printouts, hard copies and microfilm copies)
delivered, or caused to be delivered by the Fund to the Transfer Agent in
connection with this Agreement.
In any case in which the Indemnifying Party may be asked to indemnify or
hold the Indemnified Party harmless, the Indemnifying Party shall be advised
of all pertinent facts concerning the situation in question. The
Indemnified Party will notify the Indemnifying Party promptly after
identifying any situation which it believes presents or appears likely to
present a claim for indemnification against the Indemnifying Party although
the failure to do so shall not prevent recovery by the Indemnified Party.
The Indemnifying Party shall have the option to defend
the Indemnified Party against any Claim which may be the subject of this
indemnification, and, in the event that the Indemnifying Party so elects,
such defense shall be conducted by counsel chosen by the Indemnifying Party
and satisfactory to the Indemnified Party, and thereupon the Indemnifying
Party shall take over complete defense of the Claim and the Indemnified
Party shall sustain no further legal or other expenses in respect of such
Claim. The Indemnified Party will not confess any Claim or make any
compromise in any case in which the Indemnifying Party will be asked to
provide indemnification, except with the Indemnifying Party's prior written
consent. The obligations of the parties
hereto under this Section shall survive the termination of this Agreement.
14. Consequential Damages. In no event and under no circumstances
shall either party under this Agreement be liable to the other party for
indirect loss of profits, reputation or business or any other special
damages under any
provision of this Agreement or for any act or failure to act hereunder.
15. Term and Termination.
(a) This Agreement shall be effective on the date first written
above and shall continue until September 2, 1994, and thereafter shall
automatically continue for successive annual periods ending on
the anniversary of the date first written above, provided that it
may be terminated by either
party upon written notice given at least 60 days prior to termination.
(b) In the event a termination notice is given by the Fund, it
shall be accompanied by a resolution of the Board of Directors, certified by
the Secretary of the Fund, designating a successor transfer agent or
transfer agents. Upon such termination and at the expense of the Fund, the
Transfer Agent will deliver to such successor a certified list of
shareholders of the Fund (with names and addresses), and all other relevant
books, records, correspondence and
other Fund records or data in the possession of the Transfer Agent, and
the Transfer Agent will cooperate with the Fund and any successor transfer
agent or agents in the substitution process.
16. Confidentiality. Both parties hereto agree that any non public
information obtained hereunder concerning the other party is confidential and
may not be disclosed to any other person without the consent of the other
party, except as may be required by applicable law or at the request of the
Commission or other governmental agency. The parties further agree that a
breach of this provision would irreparably damage the other party and
accordingly agree that each of them is entitled, without bond or other
security, to an injunction or injunctions to prevent breaches of this
provision.
17. Amendment. This Agreement may only be amended or modified by a
written instrument executed by both parties.
18. Subcontracting. The Fund agrees that the Transfer Agent may, in
its discretion, subcontract for certain of the services described under this
Agreement or the Schedules hereto; provided that the appointment of
any such Transfer Agent shall not relieve the Transfer Agent of its
responsibilities hereunder.
19. Miscellaneous.
(a) Notices. Any notice or other instrument authorized or
required by this Agreement to be given in writing to the Fund or the
Transfer Agent, shall be sufficiently given if addressed to that party
and received by it at its office set forth below or at such other place as
it may from time to time designate in writing.
To the Fund:
Smith Barney/Travelers Series Fund Inc.
388 Greenwich Street, 22 Floor
New York, NY 10013
Attention:Heath B. McLendon
To the Transfer Agent:
The Shareholder Services Group
One Exchange Place
53 State Street
Boston, Massachusetts 02109
(b) Successors. This Agreement shall extend to and shall be
binding upon the parties hereto, and their respective successors and assigns,
provided, however, that this Agreement shall not be assigned to any person
other than a person controlling, controlled by or under common control with
theassignor without the written consent of the other party, which consent
shall not be unreasonably withheld.
(c) Governing Law. This Agreement shall be governed
exclusively by the laws of the State of New York without reference to the
choice of law provisions thereof. Each party hereto hereby agrees that (i)
the Supreme Court of New York sitting in New York County shall have
exclusive jurisdiction over any and all disputes arising hereunder; (ii)
hereby consents to the personal jurisdiction of such court over the parties
hereto, hereby waiving any defense of lack of personal jurisdiction; and
(iii) appoints the person to whom notices hereunder are to be sent as agent
for service of process.
(d) Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original; but such
counterparts shall, together, constitute only one instrument.
(e) Captions. The captions of this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hreof or otherwise affect their construction or effect.
(f) Use of Transfer Agent's Name. The Fund shall not use the
name of the Transfer Agent in any Prospectus, Statement of Additional
Information, shareholders' report, sales literature or other material
relating to the Fund in a manner not approved prior thereto in writing;
provided, that the Transfer Agent need only receive notice of all reasonable
uses of its name which merely refer in accurate terms to its appointment
hereunder or which are required by any government agency or applicable law
or rule. Notwithstanding the
foregoing, any reference to the Transfer Agent shall include a statement to
the effect that it is a wholly owned subsidiary of First Data Corporation.
(g) Use of Fund's Name. The Transfer Agent shall not use the
name of the Fund or material relating to the Fund on any documents or forms
for other than internal use in a manner not approved prior thereto in
writing; provided, that the Fund need only receive notice of all reasonable
uses of its name which merely refer in accurate terms to the appointment of
the Transfer Agent or which are required by any government agency or
applicable law or rule.
(h) Independent Contractors. The parties agree that they are
independent contractors and not partners or co-venturers.
(i) Entire Agreement; Severability. This Agreement and the
Schedules attached hereto constitute the entire agreement of the parties
hereto relating to the matters covered hereby and supersede any previous
agreements. If any provision is held to be illegal, unenforceable or
invalid for any reason, the remaining provisions shall not be affected or
impaired thereby.
IN WITNESS WHEREOF, the parties hereto have caused
this Agreement to be executed by their duly authorized officers, as of the
day and year first above written.
SMITH BARNEY/TRAVELERS SERIES FUND INC.
By: _______________
Heath B. McLendon
President
THE SHAREHOLDER SERVICES GROUP, INC.
By:__________________
Michael G. McCarthy
Vice President
A-1
Transfer Agent Fee
Schedule A
Class A shares
The Fund shall pay the Transfer Agent an annualized fee of $11.00 per
shareholder account that is open during any monthly period. Such fee shall be
billed by the Transfer Agent monthly in arrears on a prorated basis of 1/12
of the annualized fee for all accounts that are open during such a month.
The Fund shall pay the Transfer Agent an additional fee of $.125 per closed
account per month applicable to those shareholder accounts which close in a
given month and remain closed through the following month-end billing cycle.
Such fee shall be billed by the Transfer Agent monthly in arrears.
Class B shares
The Fund shall pay the Transfer Agent an annualized fee of $12.50 per
shareholder account that is open during any monthly period. Such fee shall be
billed by the Transfer Agent monthly in arrears on a prorated basis of 1/12
of the annualized fee for all accounts that are open during such a month.
The Fund shall pay the Transfer Agent an additional fee of $.125 per closed
account per month applicable to those shareholder accounts which close in a
given month and remain closed through the following month-end billing cycle.
Such fee shall be billed by the Transfer Agent monthly in arrears.
Class C shares
The Fund shall pay the Transfer Agent an annualized fee of $8.50 per
shareholder account that is open during any monthly period. Such fee
shall be billed by
the Transfer Agent monthly in arrears on a prorated basis of 1/12 of the
annualized fee for all accounts that are open during such a month.
The Fund shall pay the Transfer Agent an additional fee of $.125 per closed
account per month applicable to those shareholder accounts which close in a
given month and remain closed through the following month-end billing cycle.
Such fee shall be billed by the Transfer Agent monthly in arrears.
A-2
Class D shares
The Fund shall pay the Transfer Agent an annualized fee of $9.50 per
shareholder account that is open during any monthly period. Such fee
shall be billed by
the Transfer Agent monthly in arrears on a prorated basis of 1/12 of the
annualized fee for all accounts that are open during such a month.
The Fund shall pay the Transfer Agent an additional fee of $.125 per closed
account per month applicable to those shareholder accounts which close in a
given month and remain closed through the following month-end billing cycle.
Such fee shall be billed by the Transfer Agent monthly in arrears.
B-1
Schedule B
OUT-OF-POCKET EXPENSES
The Fund shall reimburse the Transfer Agent monthly for applicable
out-of-pocket expenses, including, but not limited to the following items:
- Microfiche/microfilm production
- Magnetic media tapes and freight
- Printing costs, including certificates, envelopes, checks and
stationery
- Postage (bulk, pre-sort, ZIP+4, barcoding, first class) direct
pass through to the Fund
- Due diligence mailings
- Telephone and telecommunication costs, including
all lease, maintenance and line costs
- Proxy solicitations, mailings and tabulations
- Daily & Distribution advice mailings
- Shipping, Certified and Overnight mail and insurance
- Year-end form production and mailings
- Terminals, communication lines, printers and other equipment
and any expenses incurred in connection with such terminals and lines
- Duplicating services
- Courier services
- Incoming and outgoing wire charges
- Federal Reserve charges for check clearance
- Record retention, retrieval and destruction costs, including,
but not limited to exit fees charged by third party record keeping vendors
- Third party audit reviews
- Insurance
- Such other miscellaneous expenses reasonably incurred by the
Transfer Agent in performing its duties and responsibilities under this
Agreement.
The Fund agrees that postage and mailing expenses will be paid on the
day of or prior to mailing as agreed with the Transfer Agent. In addition,
the Fund will promptly reimburse the Transfer Agent for any other unscheduled
expenses incurred by the Transfer Agent whenever the Fund and the
Transfer Agent mutually agree that such expenses are not otherwise properly
borne by the Transfer Agent as part of its duties and obligations under
the Agreement.
C-1
Schedule C
DUTIES OF THE TRANSFER AGENT
1. Shareholder Information. The Transfer Agent or its agent
shall maintain a record of the number of Shares held by each holder of
record which shall include name, address, taxpayer identification and
which shall indicate
whether such Shares are held in certificates or uncertificated form.
2. Shareholder Services. The Transfer Agent or its agent will
investigate all inquiries from shareholders of the Fund relating to
Shareholder accounts and will respond to all communications from
Shareholders and others relating to its duties hereunder and such other
correspondence as may from
time to time be mutually agreed upon between the Transfer Agent and the Fund.
The Transfer Agent shall provide the Fund with reports concerning shareholder
inquires and the responses thereto by the Transfer Agent, in such form and at
such times as are agreed to by the Fund and the Transfer Agent.
3. Share Certificates.
(a) At the expense of the Fund, it shall supply the Transfer
Agent or its agent with an adequate supply of blank share certificates to
meet the Transfer Agent or its agent's requirements therefor. Such Share
certificates shall be properly signed by facsimile. The Fund agrees that,
notwithstanding the death, resignation, or removal of any officer of the Fund
whose signature appears on such certificates, the Transfer Agent or its
agent may continue to countersign certificates which bear such signatures
until otherwise directed by Written Instructions.
(b) The Transfer Agent or its agent shall issue replacement Share
certificates in lieu of certificates which have been lost, stolen or
destroyed, upon receipt by the Transfer Agent or its agent of properly
executed affidavits and lost certificate bonds, in form satisfactory to
the Transfer Agent or its agent, with the Fund and the Transfer Agent or
its agent as obligees under the bond.
(c) The Transfer Agent or its agent shall also maintain a record
of each certificate issued, the number of Shares represented thereby and the
holder of record. With respect to Shares held in open accounts or
uncertificated form,i.e., no certificate being issued with respect thereto,
the Transfer Agent or its agent shall maintain comparable records of the
record holders thereof, including their names, addresses and taxpayer
identification. The Transfer Agent or its agent shall further maintain a
stop transfer record on lost and/or replaced certificates.
C-2
4. Mailing Communications to Shareholders; Proxy Materials. The
Transfer Agent or its agent will address and mail to
Shareholders of the Fund, all reports to Shareholders, dividend and
distribution notices and proxy material for the Fund's meetings of
Shareholders. In connection with meetings of Shareholders, the Transfer
Agent or its Agent will prepare Shareholder lists, mail and certify as to
the mailing of proxy materials, process and tabulate returned proxy cards,
report on proxies voted prior to meetings,act as inspector of election at
meetings and certify Shares voted at meetings.
5. Sales of Shares
(a) Suspension of Sale of Shares. The Transfer Agent or its
agent shall not be required to issue any Shares of the Fund where it has
received a Written Instruction from the Fund or official notice from any
appropriate authority that the sale of the Shares of the Fund has been
suspended or discontinued. The existence of such Written Instructions or
such official notice shall be conclusive evidence of the right of the
Transfer Agent or its agent to rely on such Written Instructions or official
notice.
(b) Returned Checks. In the event that any check or other order
for the payment of money is returned unpaid for any reason, the Transfer
Agent or its agent will:(i) give prompt notice of such return to the Fund
or its designee; (ii) place a stop transfer order against all Shares issued
as a result of such check or order; and (iii) take such actions as the
Transfer Agent may from time to time deem appropriate.
6. Transfer and Repurchase
(a) Requirements for Transfer or Repurchase of Shares. The
Transfer Agent or its agent shall process all requests to transfer or redeem
Shares in accordance with the transfer or repurchase procedures set forth
in the Fund's Prospectus.
The Transfer Agent or its agent will transfer or repurchase Shares
upon receipt of Oral or Written Instructions or otherwise pursuant to the
Prospectus and Share certificates, if any, properly endorsed for transfer or
redemption, accompanied by such documents as the Transfer Agent or its agent
reasonably may deem necessary.
The Transfer Agent or its agent reserves the right to refuse to
transfer or repurchase Shares until it is satisfied that the endorsement on
the instructions is valid and genuine. The Transfer Agent or its agent also
reserves the right to refuse to transfer or repurchase Shares until it is
satisfied that the requested transfer or repurchase is legally authorized,
and it shall incur no liability for the refusal, in good faith, to make
transfers or repurchases which the TransferAgent or its agent, in C-3
its good judgement, deems improper or unauthorized, or until it is reasonably
satisfied that there is no basis to any claims adverse
to such transfer or repurchase.
(b) Notice to Custodian and Fund. When Shares are redeemed, the
Transfer Agent or its agent shall, upon receipt of the instructions and
documents in proper form, deliver to the Custodian and the Fund or its
designee a notification setting forth the number of Shares to be repurchased.
Such repurchased shares shall be reflected on appropriate accounts
maintained by the Transfer Agent or its agent reflecting outstanding Shares
of the Fund and Shares attributed to individual accounts.
(c) Payment of Repurchase Proceeds. The Transfer Agent or its
agent shall, upon receipt of the moneys paid to it by the Custodian for the
repurchase of Shares, pay such moneys as are received from the Custodian, all
in accordance with the procedures described in the written instruction
received by the Transfer Agent or its agent from the Fund.
The Transfer Agent or its agent shall not process or effect any
repurchase with respect to Shares of the Fund after receipt by the Transfer
Agent or its agent of notification of the suspension of the determination of
the net asset value of the Fund.
7. Dividends
(a) Notice to Agent and Custodian. Upon the declaration of each
dividend and each capital gains distribution by the Board of Directors of the
Fund with respect to Shares of the Fund, the Fund shall furnish or cause to
be furnished to the Transfer Agent or its agent a copy of a resolution of
the Fund's Board of Directors certified by the Secretary of the Fund
setting forth the date of the declaration of such dividend or distribution,
the ex-dividend date, the date of payment thereof, the record date as of
which shareholders entitled to payment
shall be determined, the amount payable per Share to the shareholders of
record as of that date, the total amount payable to the Transfer Agent or
its agent on the payment date and whether such dividend or distribution is
to be paid in Shares of such class at net asset value.
On or before the payment date specified in such resolution of the
Board of Directors, the Custodian of the Fund will pay to the Transfer Agent
sufficient cash to make payment to the shareholders of record as of such
payment date.
(b) Insufficient Funds for Payments. If the Transfer Agent or
its agent does not receive sufficient cash from the Custodian to make total
dividend and/or distribution payments to all shareholders of the Fund as of
the record date, the Transfer
C-4
Agent or its agent will, upon notifying the Fund, withhold payment to all
Shareholders of record as of the record date until sufficient cash is
provided to the Transfer Agent or its agent.
C-5
Exhibit 1
to
Schedule C
Summary of Services
The services to be performed by the Transfer Agent or its agent shall be
as follows:
A. DAILY RECORDS
Maintain daily the following information with respect to each
Shareholder account as received:
o Name and Address (Zip Code)
o Class of Shares
o Taxpayer Identification Number
o Balance of Shares held by Agent
o Beneficial owner code: i.e., male, female, joint tenant,
etc.
o Dividend code (reinvestment)
o Number of Shares held in certificate form
B. OTHER DAILY ACTIVITY
o Answer written inquiries relating to Shareholder accounts
(matters relating to portfolio management, distribution of
Shares and other management policy questions will be
referred to the Fund).
o Process additional payments into established Shareholder
accounts in accordance with Written Instruction from the
Agent.
o Upon receipt of proper instructions and all required
documentation, process requests for repurchase of Shares.
o Identify redemption requests made with respect to accounts
in which Shares have been purchased within an
agreed-upon period of time for determining whether good
funds have been collected with respect to such purchase
and process as agreed by the Agent in accordance with
written instructions set forth by the Fund.
o Examine and process all transfers of Shares, ensuring that
all transfer requirements and legal documents have been
supplied.
C-6
o Issue and mail replacement checks.
o Open new accounts and maintain records of exchanges
between accounts
C. DIVIDEND ACTIVITY
o Calculate and process Share dividends and distributions as
instructed by the Fund.
o Compute, prepare and mail all necessary reports to
Shareholders or various authorities as requested by the
Fund. Report to the Fund reinvestment plan share
purchases and determination of the reinvestment price.
D. MEETINGS OF SHAREHOLDERS
o Cause to be mailed proxy and related material for all
meetings of Shareholders. Tabulate returned proxies
(proxies must be adaptable to mechanical equipment of the
Agent or its agents) and supply daily reports when
sufficient proxies have been received.
o Prepare and submit to the Fund an Affidavit of Mailing.
o At the time of the meeting, furnish a certified list of
Shareholders, hard copy, microfilm or microfiche and, if
requested by the Fund, Inspection of Election.
E. PERIODIC ACTIVITIES
o Cause to be mailed reports, Prospectuses, and any other enclosures
requested by the Fund (material must be adaptable to mechanical
equipment of Agent or its agents).
o Receive all notices issued by the Fund with respect to the
Preferred Shares in accordance with and pursuant to the Articles of
Incorporation and the Indenture and perform such other specific
duties as are set forth in the Articles of Incorporation including a
giving of notice of a special meeting and notice of redemption in
the circumstances and otherwise in accordance with all relevant
provisions of the Articles of Incorporation.
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Travelers Series Fund Inc.
We consent to the use of our reports, as listed below, with respect to the
Portfolios of Travelers Series Fund Inc. incorporated herein by reference
and to the references to our Firm under the headings "Financial Highlights"
in the Prospectus and "Independent Auditors" in the Statement of Additional
Information.
Portfolio Date of Independent Auditors' Report
Smith Barney Income and Growth Portfolio December 17, 1996
Alliance Growth Portfolio December 17, 1996
AIM Capital Appreciation Portfolio December 12, 1996
Van Kampen American Capital Enterprise Portfolio December 17, 1996
Smith Barney International Equity Portfolio December 19, 1996
Smith Barney Pacific Basin Portfolio December 19, 1996
TBC Managed Income Portfolio December 12, 1996
Putnam Diversified Income Portfolio December 23, 1996
GT Global Strategic Income Portfolio December 19, 1996
Smith Barney High Income Portfolio December 23, 1996
MFS Total Return Portfolio December 12, 1996
Smith Barney Money Market Portfolio December 12, 1996
KPMG Peat Marwick LLP
New York, New York
February 24, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000919557
<NAME> SMITH BARNEY/TRAVELERS SERIES FUND INC.
<SERIES>
<NUMBER> 1
<NAME> SMITH BARNEY INCOME AND GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 122,414,066
<INVESTMENTS-AT-VALUE> 138,575,336
<RECEIVABLES> 551,505
<ASSETS-OTHER> 368
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 139,127,209
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 414,890
<TOTAL-LIABILITIES> 414,890
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 118,970,155
<SHARES-COMMON-STOCK> 94
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,807,717
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,773,083
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,161,270
<NET-ASSETS> 138,712,319
<DIVIDEND-INCOME> 2,216,753
<INTEREST-INCOME> 467,543
<OTHER-INCOME> 0
<EXPENSES-NET> 637,678
<NET-INVESTMENT-INCOME> 2,046,618
<REALIZED-GAINS-CURRENT> 1,773,083
<APPREC-INCREASE-CURRENT> 13,610,166
<NET-CHANGE-FROM-OPS> 17,429,867
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 735,738
<DISTRIBUTIONS-OF-GAINS> 199,857
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 82,911,406
<NUMBER-OF-SHARES-REDEEMED> 992,481
<SHARES-REINVESTED> 935,595
<NET-CHANGE-IN-ASSETS> 99,348,792
<ACCUMULATED-NII-PRIOR> 496,837
<ACCUMULATED-GAINS-PRIOR> 199,857
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 564,232
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 637,678
<AVERAGE-NET-ASSETS> 87,036,914
<PER-SHARE-NAV-BEGIN> 12.12
<PER-SHARE-NII> 00.32
<PER-SHARE-GAIN-APPREC> 02.62
<PER-SHARE-DIVIDEND> 00.17
<PER-SHARE-DISTRIBUTIONS> 00.05
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.84
<EXPENSE-RATIO> 00.73
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000919557
<NAME> SMITH BARNEY/TRAVELERS SERIES FUND INC.
<SERIES>
<NUMBER> 2
<NAME> ALLIANCE GROWTH PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 245,543,467
<INVESTMENTS-AT-VALUE> 297,781,138
<RECEIVABLES> 1,316,981
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 224,240
<TOTAL-ASSETS> 299,322,359
<PAYABLE-FOR-SECURITIES> 4,422,735
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 303,738
<TOTAL-LIABILITIES> 4,726,473
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 239,034,683
<SHARES-COMMON-STOCK> 18,072,508
<SHARES-COMMON-PRIOR> 8,404,307
<ACCUMULATED-NII-CURRENT> 353,728
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,969,804
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 43,237,671
<NET-ASSETS> 294,595,886
<DIVIDEND-INCOME> 2,106,181
<INTEREST-INCOME> 491,363
<OTHER-INCOME> 0
<EXPENSES-NET> 1,791,115
<NET-INVESTMENT-INCOME> 806,429
<REALIZED-GAINS-CURRENT> 11,897,595
<APPREC-INCREASE-CURRENT> 34,972,974
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 9,488,140
<NUMBER-OF-SHARES-REDEEMED> 142,507
<SHARES-REINVESTED> 322,568
<NET-CHANGE-IN-ASSETS> 183,023,038
<ACCUMULATED-NII-PRIOR> 659,256
<ACCUMULATED-GAINS-PRIOR> 3,286,516
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,624,602
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 204,280,345
<PER-SHARE-NAV-BEGIN> 13.28
<PER-SHARE-NII> 00.04
<PER-SHARE-GAIN-APPREC> 03.39
<PER-SHARE-DIVIDEND> 00.09
<PER-SHARE-DISTRIBUTIONS> 00.32
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 16.30
<EXPENSE-RATIO> 00.87
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
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<NAME> SMITH BARNEY\TRAVELERS SERIES FUNDS INC.
<SERIES>
<NUMBER> 3
<NAME> AMERICAN CAPITAL ENTERPRISE PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<INVESTMENTS-AT-COST> 93,527,825
<INVESTMENTS-AT-VALUE> 108,908,972
<RECEIVABLES> 1,270,487
<ASSETS-OTHER> 20,071
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 110,199,530
<PAYABLE-FOR-SECURITIES> 6,204,629
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 303,772
<TOTAL-LIABILITIES> 6,508,401
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 88,402,636
<SHARES-COMMON-STOCK> 6,744,697
<SHARES-COMMON-PRIOR> 2,499,224
<ACCUMULATED-NII-CURRENT> 367,123
<OVERDISTRIBUTION-NII> 309,474
<ACCUMULATED-NET-GAINS> (286,655)
<OVERDISTRIBUTION-GAINS> (402,195)
<ACCUM-APPREC-OR-DEPREC> 15,381,147
<NET-ASSETS> 103,691,129
<DIVIDEND-INCOME> 761,062
<INTEREST-INCOME> 183,291
<OTHER-INCOME> (627)
<EXPENSES-NET> 567,603
<NET-INVESTMENT-INCOME> 367,123
<REALIZED-GAINS-CURRENT> (286,655)
<APPREC-INCREASE-CURRENT> 14,042,324
<NET-CHANGE-FROM-OPS> 14,122,792
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 144,600
<DISTRIBUTIONS-OF-GAINS> 1,364,193
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 4,145,450
<NUMBER-OF-SHARES-REDEEMED> 35,328
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<NAME> SMITH BARNEY/TRAVELERS SERIES FUND INC.
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<NAME> SMITH BARNEY\TRAVELERS SERIES FUND INC.
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