<PAGE>
ANNUAL REPORT
1997
1997
1997
1997
1997
TRAVELERS SERIES
FUND INC.
AIM CAPITAL
APPRECIATION
PORTFOLIO
- ---------------------------------------------
October 31, 1997
[LOGO] SMITH BARNEY MUTUAL FUNDS
Investing for your future.
Every day.
<PAGE>
- -------------------------------------------------------------------------------
AIM CAPITAL APPRECIATION PORTFOLIO
- -------------------------------------------------------------------------------
Dear Shareholder:
We are pleased to provide the annual report of the Travelers Series Fund Inc. --
AIM Capital Appreciation Portfolio ("Portfolio") for the year ended October 31,
1997. In this report, we summarize the period's prevailing economic and market
conditions and outline our portfolio strategy. A detailed summary of performance
and current holdings can be found in the appropriate sections that follow.
Portfolio Performance Update
Since the AIM Capital Appreciation Portfolio's mid-year report covering the
six-months ended April 30, 1997, the Portfolio has staged a dramatic turnaround.
Whereas the Portfolio's six-month total return as of April 30, 1997 was
negative, we are pleased to report that the Portfolio's total return for its
full fiscal year was 17.96%. In contrast, the Standard & Poor's Midcap 400
Index* ("S&P 400 Index") returned 32.67% and the Lipper Mid-Cap Fund Index**
generated a total return of 22.71%.
Market Recap
There was a pronounced shift in market sentiment beginning in May 1997. Small-
and mid-capitalization stocks were out of favor throughout 1996 and the first
part of 1997. Yet from May through September 1997, many small- and
mid-capitalization stocks either paced or outpaced large-capitalization stocks.
A number of factors contributed to this change in market sentiment. The
disparity in valuations between smaller-company stocks and larger blue-chip
company stocks in the Standard & Poor's Composite Index of 500 Stocks ("S&P 500
Index") had become dramatic. (The S&P 500 Index is widely regarded by investors
as representative of the stock market in general.) A major investment bank
calculated that the spread in relative performance of the large-cap S&P 500
Index versus the small-cap Russell 2000 Index ("Russell 2000") was the widest
since the Russell 2000 was introduced in 1979. (The Russell
- ---------------
* The S&P 400 Index is an unmanaged index made up of the common stocks of
approximately 400 mid-capitalization companies.
** The unmanaged Lipper Mid-Cap Fund Index represents an average of the
performance of mid-capitalization growth funds tracked by Lipper Analytical
Services, Inc., a major fund-tracking organization.
1
<PAGE>
2000 Index is made up of 2,000 of smaller-capitalized U.S.-based companies whose
common stocks trade on either the New York, American or Nasdaq stock exchanges.)
Many investment professionals doubted that large-capitalization companies could
sustain the double-digit earnings growth they had reported for roughly three
years running. Others pointed out that price/earnings ratios for small- and
mid-cap companies were much more attractive than those of the big blue-chip
companies. (The price/earnings ratio is the price of a stock divided by its
latest annual earnings per share.) Moreover, a strong U.S. dollar tends to bode
well for less export-dependent smaller-sized companies.
Investment Strategy
While there were few dramatic changes in the Portfolio during the period under
review, we think Portfolio holdings in four sectors merit further discussion:
Technology
The Portfolio is significantly overweighted in technology, a relatively volatile
sector (i.e., more than a third of Portfolio holdings versus about 17% for the
S&P 400 Index). Within the technology sector, the Portfolio's two largest
industry groups are semiconductor and computer software and services companies.
In the semiconductor industry, the Portfolio leans toward makers of high-value,
non-commodity products who enjoy a competitive edge over makers of commodity
products. The Portfolio's managers believe that the computer software and
services industry should profit from the so-called "millennium" problem. The
special skills needed to reprogram older computers to recognize the year 2000
are already in demand, and estimates of the investment capital needed to solve
this problem run as high as $400 billion dollars. Another potential bright spot
in technology's future is Europe's migration to a common currency that will
require vast investments in information technology. Despite these promising
trends, the technology sector continues to be characterized by volatility and
ongoing price cutting and faces the potentially negative effects of the recent
turmoil in Asia's markets. While the Portfolio's large weighting in technology
may make it somewhat more vulnerable in the short term, the managers still
regard the long-term growth prospects of select technology companies to be
excellent.
Health Care
Health care continues to be the Portfolio's second-largest weighting, although
the Portfolio's managers are beginning to tread carefully in this area,
especially with patient care providers. While continued consolidation and
restructuring in this part of the industry have produced economies of scale,
they have also limited the ability of any one company to dictate prices or other
business terms
2
<PAGE>
to other companies. One positive note recently for the health care industry is
the Federal Drug Administration's move toward more rapid approval of drugs and
medical devices, an initiative that should reduce costs for the medical
instrument and pharmaceutical industries. Compared to the S&P 400 Index, the
Portfolio is relatively overweighted in health care.
Energy
The Portfolio's holdings in energy were increased during its fiscal year. The
Portfolio's managers believe this sector is attractive for a number of reasons.
Although oil and gas prices have been stable, energy demand is strong worldwide
and will likely remain so despite the recent economic shocks in Southeast Asia.
The managers think that equipment suppliers have become especially attractive as
an equipment shortage has raised prices. After more than a decade of
restructurings and shakeouts, the energy sector finally looks healthy. While the
Portfolio's weighting in this sector is up, the managers do not think they have
completely capitalized on the possibilities of this sector and the Portfolio's
weighting remains below that of the S&P 400 Index.
Retailers
Portfolio holdings in this sector are down somewhat during the reporting period.
Whereas a year ago the Portfolio tended to own high-visibility brand retailers,
the managers at the end of its fiscal year have begun to gravitate toward
discount stores selling brand-name merchandise at reduced prices which they
believed were more attractive. In addition, the mail order industry has begun to
firmly establish itself as a key player in the retail industry. Compared to its
index, the Portfolio remains relatively overweighted in the retail sector.
Market Outlook
The Portfolio's fiscal year ended on a jarring note. The last week of the period
under review was marked by wide swings in such popular market benchmarks as the
Dow Jones Industrial Average ("DJIA"), which delivered the first 10% correction
in the stock market since 1991. (The DJIA is a price-weighted average of 30
actively traded blue chip stocks, primarily industrials.) However, for the year
as a whole, the financial markets delivered attractive returns. For example, the
DJIA was up more than 25.78% for the Portfolio's fiscal year. The broader S&P
500 Index was up almost 32.10%. As noted earlier, the S&P 400 Index was up
32.67%.
The Portfolio's managers believe the outlook for the stock market is good
despite the gyrations of October 1997. Solid economic fundamentals are still in
place: low unemployment, subdued inflation and continued healthy economic growth
(e.g., during the third quarter of 1997, the annual rate of economic
3
<PAGE>
growth was roughly 3.5%). In addition, not many investment professionals expect
an interest rate increase since the consensus is that the Federal Reserve Board
won't do anything to create more turmoil in the already rocky international
markets. According to the Portfolio's managers, the future looks bright for
mid-cap stocks because they have been relatively undervalued compared to
large-cap stocks for so long.
In closing, thank you for investing in the Travelers Series Fund Inc. -- AIM
Capital Appreciation Portfolio. We look forward to continuing to help you to
pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
November 14, 1997
4
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns+
================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $10.76 $12.68 $0.01 $0.00 17.96%
- --------------------------------------------------------------------------------
10/31/96 10.00 10.76 0.01 0.00 7.71
- --------------------------------------------------------------------------------
10/10/95*-10/31/95 10.00 10.00 0.00 0.00 0.00++
================================================================================
Total $0.02 $0.00
================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS,
IF ANY, ANNUALLY.
- --------------------------------------------------------------------------------
Average Annual Total Return+
- --------------------------------------------------------------------------------
<TABLE>
================================================================================
<S> <C>
Year Ended 10/31/97 17.96%
- --------------------------------------------------------------------------------
10/10/95* through 10/31/97 12.33
================================================================================
</TABLE>
================================================================================
Cumulative Total Return+
================================================================================
<TABLE>
================================================================================
<S> <C>
10/10/95* through 10/31/97 27.06%
================================================================================
</TABLE>
+ Assumes the reinvestment of all dividends and capital gain distributions.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Commencement of operations.
5
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance (unaudited)
- --------------------------------------------------------------------------------
Growth of $10,000 Invested in Shares of the
AIM Capital Appreciation Portfolio vs. Lipper Midcap Index+
- --------------------------------------------------------------------------------
October 1995 -- October 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
AIM Capital
Date Appreciation Portfolio Lipper Midcap Index
- ---- ---------------------- -------------------
<S> <C> <C>
10/10/95 $10,000 $10,000
4/96 $10,711 $11,727
10/96 $10,771 $11,739
4/97 $10,582 $11,530
10/31/97 $12,706 $14,180
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares of the AIM Capital
Appreciation Portfolio on October 10, 1995 (commencement of operations),
assuming reinvestment of dividends and capital gains at net asset value
through October 31, 1997. The Lipper Midcap Index is an index of widely
held common stocks listed on the New York and American Stock Exchanges and
over-the-counter markets. Figures for the Lipper Midcap Index include
reinvestment of dividends. The index is unmanaged and is not subject to the
same management and trading expenses of a mutual fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
6
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
COMMON STOCK -- 92.6%
================================================================================
Advertising -- 0.2%
6,000 Omnicom Group, Inc. $ 423,750
- --------------------------------------------------------------------------------
Aerospace & Defense -- 0.1%
9,700 BE Aerospace, Inc.+ 272,812
- --------------------------------------------------------------------------------
Airlines -- 0.1%
6,000 Southwest Airlines Co. 195,750
- --------------------------------------------------------------------------------
Banking -- 1.3%
9,000 Amsouth Bancorporation 432,562
7,200 Bank of Boston Corp. 583,650
3,800 Dime Bancorp, Inc. 91,200
40,800 MBNA Corp. 1,073,550
3,500 North Fork Bancorpation, Inc. 103,031
6,300 TCF Financial Corp. 358,313
- --------------------------------------------------------------------------------
2,642,306
- --------------------------------------------------------------------------------
Biotechnology -- 0.1%
3,500 Arterial Vascular Engineering, Inc.+ 185,937
- --------------------------------------------------------------------------------
Broadcasting -- 0.4%
30,800 CanWest Global Communication Corp. 589,050
4,545 Chancellor Media Corp.+ 249,407
- --------------------------------------------------------------------------------
838,457
- --------------------------------------------------------------------------------
Commercial Services -- 1.5%
16,800 Comdisco, Inc. 530,250
3,900 Equity Corp. International+ 79,462
17,050 PMT Services Inc.+ 274,931
17,650 Paychex Inc. 672,906
47,500 Service Corp. International 1,445,781
- --------------------------------------------------------------------------------
3,003,330
- --------------------------------------------------------------------------------
Communications - Equipment and Software -- 2.6%
19,950 CHS Electronics, Inc.+ 487,528
15,300 Gartner Group, Inc., Class A Shares+ 432,225
15,400 Intel Corp. 1,185,800
7,077 Mark IV Industries Inc. 171,617
6,600 McKensson Corp. 708,262
13,000 Quantum Corp.+ 411,125
7,500 Storage Technology Corp.+ 440,156
34,000 Sun Microsystems, Inc.+ 1,164,500
12,300 Valassis Communications, Inc.+ 362,850
- --------------------------------------------------------------------------------
5,364,063
- --------------------------------------------------------------------------------
Computers -- 4.9%
28,300 Adaptec Inc.+ 1,370,781
40,700 Bay Networks, Inc. 1,287,137
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Computers -- 4.9% (continued)
5,800 Bisys Group Inc.+ $ 180,525
9,500 CSG Systems International Inc.+ 372,281
25,450 Compaq Computer Corp. 1,622,438
1,700 Comverse Technology, Inc.+ 70,125
3,500 Data General Corp.+ 67,375
27,900 Dell Computer Corp.+ 2,235,487
10,500 GTech Holdings Corp.+ 338,625
19,000 Iomega Corp.+ 509,437
3,500 MicroTouch Systems, Inc.+ 84,437
2,300 SMART Modular Technologies+ 114,425
25,400 Tech Data Corp.+ 1,130,300
12,800 3COM Corp. 530,400
- --------------------------------------------------------------------------------
9,913,773
- --------------------------------------------------------------------------------
Computer Software -- 9.6%
11,300 Affiliated Computer Services, Class A Shares+ 283,912
2,800 America Online, Inc.+ 215,600
3,500 Applied Voice Technology, Inc.+ 91,000
4,500 Aspect Development, Inc.+ 210,375
6,600 Autodesk, Inc. 244,200
10,700 Avant! Corp.+ 280,875
6,500 Avid Technology, Inc.+ 185,656
5,000 BDM International Inc.+ 110,625
26,600 BMC Software Inc. 1,605,975
25,775 Cadence Design Systems Inc.+ 1,372,519
6,300 Cambridge Technology Partners, Inc.+ 229,950
24,300 Cerner Corp.+ 589,275
9,900 Cisco Systems, Inc.+ 812,109
3,200 Citrix Systems, Inc.+ 235,000
13,350 Computer Associates International Inc. 995,409
27,500 Compuware Corp.+ 1,818,437
35,200 Concord EFS, Inc.+ 1,045,000
12,000 DST Systems Inc.+ 423,750
14,000 Electronics Arts Inc.+ 474,250
3,500 Electronics For Imaging, Inc.+ 163,625
5,800 First Data Corp. 168,563
10,600 IDX Systems Corp.+ 357,750
19,200 Input/Output, Inc.+ 514,800
3,725 McAfee Associates Inc.+ 185,319
11,500 Microsoft Corp.+ 1,495,000
11,400 National Data Corp. 421,087
27,125 Oracle Systems Corp.+ 970,566
21,200 Parametric Technologies Inc.+ 935,450
15,500 Physician Computer Network Inc.+ 84,281
27,185 Sterling Commerce Inc.+ 902,202
7,300 Sterling Software Inc.+ 249,113
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Computer Software -- 9.6% (continued)
12,800 Sungard Data Systems Inc.+ $ 302,400
13,300 Symantec Corp.+ 290,938
21,300 Synopsys Inc.+ 828,038
5,700 Technomatrix Technology Ltd.+ 175,987
6,750 Wind River Systems 259,031
- --------------------------------------------------------------------------------
19,528,067
- --------------------------------------------------------------------------------
Consumer/Commercial Services -- 1.0%
12,837 Accustaff Inc.+ 366,657
6,300 Central Garden & Pet Co.+ 165,375
16,250 Stewart Enterprises Inc., Class A Shares 674,375
12,200 Symbol Technologies Inc. 484,950
10,800 Tyco International Ltd. 407,700
- --------------------------------------------------------------------------------
2,099,057
- --------------------------------------------------------------------------------
Distribution -- 0.3%
18,500 Ingram Micro Inc., Class A Shares+ 551,531
- --------------------------------------------------------------------------------
Diversified -- 0.3%
4,300 AMS Lithography Holding AV 314,975
10,400 American Disposal Services, Inc.+ 366,600
- --------------------------------------------------------------------------------
681,575
- --------------------------------------------------------------------------------
Drugs -- 0.1%
3,700 Biovail Corp International+ 106,838
- --------------------------------------------------------------------------------
Electrical Equipment -- 0.3%
14,300 Methode Electronics Inc., Class A Shares 282,425
6,000 Tektronix, Inc. 354,750
- --------------------------------------------------------------------------------
637,175
- --------------------------------------------------------------------------------
Electronics -- 3.9%
5,000 Action Performance Cos, Inc. 128,125
22,700 Altera Corp.+ 1,007,313
18,600 Arrow Electronics, Inc.+ 527,775
10,600 Avnet Inc. 667,137
237,575 Kent Electronics Corp.+ 237,575
35,200 KLA-- Tencor Corp.+ 1,546,600
9,600 Motorola Inc. 592,800
13,400 Solectron Corp.+ 525,950
28,700 Teradyne Inc.+ 1,074,456
14,200 Texas Instruments Inc. 1,514,963
- --------------------------------------------------------------------------------
7,822,694
- --------------------------------------------------------------------------------
Electronics - Semiconductors and Components -- 7.3%
22,700 Analog Devices Inc.+ 693,769
45,000 Applied Materials, Inc.+ 1,501,875
1,200 ASE Test Ltd.+ 65,700
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Electronics - Semiconductors and Components -- 7.3% (continued)
26,200 Atmel Corp.+ $ 677,925
19,000 AVX Corp. 420,925
14,700 Berg Electronics Corp.+ 343,613
5,600 BMC Industries Inc. 180,250
10,800 Burr-Brown Corp.+ 326,700
3,500 Computer Products, Inc.+ 95,375
11,300 Dallas Semiconductor Corp. 552,288
6,800 Hadco Corp.+ 376,550
6,000 Lattice Semiconductor Corp.+ 300,375
20,700 Linear Technology Corp. 1,301,513
20,900 Maxim Integrated Products Inc.+ 1,384,625
15,500 Micron Electronics, Inc.+ 215,063
3,900 Molex Inc. 136,744
34,100 National Semiconductor Corp.+ 1,227,600
13,500 Novellus Systems Inc.+ 600,750
11,500 Perkin-Elmer Corp. 718,750
6,800 PMC-Sierra, Inc.+ 179,350
10,100 Sanmina Corp.+ 754,975
5,300 Sawtek, Inc.+ 180,200
30,600 SCI Systems Inc.+ 1,346,400
7,200 Taiwan Semiconductor ADR 142,650
4,200 Unitrode Corp.+ 112,613
5,800 Vitesse Semiconductors Corp.+ 251,575
19,200 Xilinx Inc.+ 655,200
- --------------------------------------------------------------------------------
14,743,353
- --------------------------------------------------------------------------------
Entertainment and Leisure Time -- 1.4%
14,000 Choice Hotels International, Inc.+ 245,868
9,900 Doubletree Corp.+ 412,087
6,200 HFS Inc.+ 437,100
20,500 Hollywood Entertainment Corp.+ 251,125
11,100 International Game Technology 283,744
8,300 MGM Grand Inc.+ 364,163
9,200 Promus Hotel Corp.+ 361,100
13,300 Regal Cinemas Inc.+ 305,900
4,600 Speedway Motorsports Inc.+ 110,113
2,700 Sun International Hotel Ltd.+ 97,200
- --------------------------------------------------------------------------------
2,868,400
- --------------------------------------------------------------------------------
Financial Services -- 4.6%
10,950 Aames Financial Corp.+ 160,144
10,400 Capital One Financial Corp. 474,500
9,500 Capmac Holdings Inc. 285,000
6,200 ContiFinancial Corp.+ 176,313
4,800 Equifax Inc. 149,100
7,100 FIRSTPLUS Financial Group, Inc.+ 390,500
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Financial Services -- 4.6% (continued)
35,500 Green Tree Financial Corp. $ 1,495,438
14,100 Household International Inc. 1,596,825
2,100 IMC Mortgage Co.+ 364,875
27,000 MGIC Investment Corp. 1,628,437
3,700 Newcourt Credit Group, Inc. 128,806
12,600 SunAmerica, Inc. 452,812
6,300 SLM Holding Corp. 884,363
10,700 T. Rowe Price Associates 708,875
12,900 The Money Store Inc. 366,037
- --------------------------------------------------------------------------------
9,262,025
- --------------------------------------------------------------------------------
Hospital Management -- 2.9%
7,850 American Homepatient Inc.+ 202,138
14,700 Cardinal Health Inc. 1,091,475
21,200 FPA Medical Management Inc.+ 511,450
15,900 Humana Inc.+ 333,900
3,600 Orthodontic Centers of America, Inc.+ 62,325
59,160 Tenet Healthcare Corp. 1,808,078
4,666 Sunburst Hospitality Corp.+ 47,243
7,600 United Healthcare Corp. 351,975
19,100 Universal Health Services Inc., Class B Shares+ 841,594
13,000 Wellpoint Health Networks, Inc.+ 594,750
- --------------------------------------------------------------------------------
5,844,928
- --------------------------------------------------------------------------------
Hospital Related -- 0.3%
34,500 Beverly Enterprises, Inc.+ 515,344
4,700 Curative Technologies+ 141,588
- --------------------------------------------------------------------------------
656,932
- --------------------------------------------------------------------------------
Insurance -- 0.4%
480 ChoicePoint Inc.+ 17,880
10,000 Everest Reinsurance Holdings 376,250
4,500 HCC Insurance Holdings, Inc. 105,188
5,700 Providian Corp. 210,900
- --------------------------------------------------------------------------------
710,218
- --------------------------------------------------------------------------------
Manufacturing -- 5.7%
3,800 Ametek Inc. 89,537
13,500 American Power Conversion Corp.+ 367,875
7,800 Black Box Corp.+ 319,800
6,000 Blyth Industries, Inc.+ 149,250
25,000 Clayton Homes, Inc. 410,938
14,000 Cognex Corp .+ 374,500
23,600 EMC Corp./Mass+ 1,321,600
18,400 Harley-Davidson Inc. 510,600
4,900 Herman Miller, Inc. 239,487
8,800 Hillenbrand Industries, Inc. 376,200
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Manufacturing -- 5.7% (continued)
3,000 HON Industries, Inc. $ 154,875
13,400 Kemet Corp.+ 291,450
18,500 Lam Research Corp.+ 668,312
12,300 Leggett & Platt Inc. 513,525
6,600 Lexmark International Group Inc., Class A Shares 201,713
34,950 Microchip Technology, Inc.+ 1,393,631
3,300 Oakwood Homes Corp. 86,831
20,600 Pairgain Technologies, Inc. 581,950
5,300 Pentair Inc. 204,712
7,100 Precision Castparts Corp. 417,569
13,800 Smith International Inc.+ 1,052,250
16,800 Thermo Electron Corp.+ 626,850
12,400 Thermo Instruments Systems Inc.+ 447,175
14,600 Unifi, Inc. 561,188
4,500 Wabash National Corp. 134,438
- --------------------------------------------------------------------------------
11,496,256
- --------------------------------------------------------------------------------
Medical Equipment and Information Systems -- 1.2%
12,400 Biomet, Inc. 309,225
34,092 HBO & Co. 1,483,002
10,800 Guidant Corp. 621,000
- --------------------------------------------------------------------------------
2,413,227
- --------------------------------------------------------------------------------
Medical Products and Supplies -- 1.5%
11,800 Dentsply International Inc. 334,825
45,000 Omnicare Inc. 1,251,562
5,500 Stryker Corp. 204,531
6,700 Sullivan Dental Products, Inc. 156,613
27,200 Sybron International Corp.+ 1,091,400
- --------------------------------------------------------------------------------
3,038,931
- --------------------------------------------------------------------------------
Medical Services -- 4.8%
3,700 American Oncology Resources, Inc.+ 54,112
5,600 Concentra Managed Care, Inc.+ 182,700
8,800 Express Scripts Inc., Class A Shares+ 496,100
25,150 Health Care & Retirement Inc.+ 950,984
67,425 Health Management Associates Inc., Class A Shares+ 435,375
8,100 Healthcare Compare Corp.+ 1,643,484
71,000 Healthsouth Corp.+ 1,814,938
13,150 Jones Medical Industries Inc. 396,144
13,700 Lincare Holdings Inc.+ 734,662
12,500 Medtronic, Inc. 543,750
13,800 Oxford Health Plans, Inc.+ 356,213
21,850 Phycor Inc.+ 503,916
11,000 Physician Sales & Service, Inc.+ 269,500
24,000 Quorum Health Group Inc.+ 582,000
11,166 Total Renal Care Holdings, Inc.+ 344,052
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Medical Services -- 4.8% (continued)
2,000 Transition Systems Inc.+ $ 40,500
17,500 Vencor Inc.+ 472,500
- --------------------------------------------------------------------------------
9,820,930
- --------------------------------------------------------------------------------
Miscellaneous -- 0.6%
12,100 Corrections Corp. of America+ 369,050
15,400 Fiserv Inc.+ 689,150
2,700 Helen Of Troy Ltd.+ 44,888
13,000 Sybase Inc.+ 212,063
- --------------------------------------------------------------------------------
1,315,151
- --------------------------------------------------------------------------------
Office Equipment, Products and Supplies -- 2.6%
28,500 Danka Business Systems Corp. 1,054,500
9,300 Diebold, Inc. 409,781
31,500 Office Depot, Inc.+ 649,688
12,000 Security Dynamics Tech Inc.+ 406,500
47,350 Staples Inc.+ 1,242,937
43,000 Viking Office Products Inc.+ 1,029,313
7,300 Xerox Corp. 578,984
- --------------------------------------------------------------------------------
5,371,703
- --------------------------------------------------------------------------------
Oil and Gas -- 5.4%
9,500 Apache Corp. 399,000
12,800 Baker Hughes Inc. 588,000
13,300 BJ Services Co.+ 1,127,175
9,800 Burlington Resources Inc. 479,588
13,100 Camco International Corp. 946,475
13,700 Cooper Cameron Corp.+ 989,825
24,000 Elan Corp. PLC ADR+ 1,197,000
14,600 Ensco International Inc.+ 614,112
15,200 EVI, Inc.+ 975,650
26,600 Global Industries Ltd.+ 535,325
11,500 Global Marine Inc.+ 357,938
9,900 Lone Star Technologies, Inc.+ 378,056
3,000 National-Oilwell, Inc.+ 229,688
2,700 Petroleum Geo-Services ADR+ 186,975
4,700 Pioneer Natural Resources Co. 188,294
19,100 Pride International, Inc.+ 630,300
11,000 Rowan Cos., Inc.+ 427,625
22,800 Santa Fe Energy Resources Inc.+ 297,825
7,700 Veritas DGC Inc.+ 315,219
- --------------------------------------------------------------------------------
10,864,070
- --------------------------------------------------------------------------------
Oil & Gas Drilling -- 2.5%
13,200 Diamond Offshore Drilling, Inc. 821,700
18,700 Falcon Drilling Co., Inc.+ 680,212
11,500 Halliburton Co. 685,687
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Oil & Gas Drilling -- 2.5% (continued)
20,000 Marine Drilling Co., Inc.+ $ 592,500
22,300 Nabors Industries Inc.+ 917,087
13,300 Noble Drilling Corp.+ 472,981
20,400 Precision Drilling Corp.+ 627,300
5,000 Santa Fe Energy Resources, Inc. 245,938
1,500 St. Mary Land & Exploration Co. 61,125
- --------------------------------------------------------------------------------
5,104,530
- --------------------------------------------------------------------------------
Pharmaceuticals -- 1.5%
4,700 Alpharma, Inc., Class A Shares 103,694
7,600 Columbia Laboratories, Inc.+ 121,600
12,800 Dura Pharmaeuticals, Inc.+ 619,200
7,500 Forest Labs Inc.+ 346,876
13,700 Mylan Laboratories Inc. 300,545
5,800 Parexel International Corp.+ 209,525
8,600 Quintiles Transnational Corp.+ 623,500
6,400 Teva Pharmaceutical Corp.+ 299,200
16,000 Watson Pharmaceuticals, Inc.+ 508,000
- --------------------------------------------------------------------------------
3,132,140
- --------------------------------------------------------------------------------
Restaurants -- 2.2%
28,700 Apple South Inc.+ 534,538
23,200 Applebees International Inc. 514,750
14,000 Brinker International, Inc.+ 196,000
16,000 Cracker Barrel Old Country Store, Inc. 472,000
11,800 CKE Restaurants, Inc. 471,262
3,200 Foodmaker, Inc.+ 52,600
7,600 Outback Steakhouse Inc.+ 205,675
29,900 Safeway Inc.+ 1,737,937
9,400 Starbucks Corp.+ 310,200
- --------------------------------------------------------------------------------
4,494,962
- --------------------------------------------------------------------------------
Retail -- 11.8%
40,700 American Stores Co. 1,045,481
7,200 AutoZone, Inc.+ 212,850
16,300 Bed Bath & Beyond Inc.+ 517,525
12,500 Best Buy Co., Inc.+ 349,220
6,000 Callaway Golf Co. 193,500
15,350 CDW Computers Centers Inc.+ 951,700
1,500 Cintas Corp. 108,375
41,200 Comp USA Inc.+ 1,349,300
35,018 Consolidated Stores Corp.+ 1,396,344
6,000 Costco Cos, Inc.+ 231,000
28,750 Covance Inc.+ 508,516
2,658 CVS Corp. 162,970
14,100 Dayton-Hudson Corp. 885,656
9,156 Dollar General Corp. 302,720
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Retail -- 11.8% (continued)
12,750 Dollar Tree Stores Inc.+ $ 516,375
10,300 Eagle Hardware & Garden, Inc.+ 175,100
5,200 Fastenal Co.+ 254,800
19,900 Fred Meyer, Inc.+ 568,394
10,100 Gap Inc. 537,194
18,000 General Nutrition Cos.+ 567,000
3,600 Home Depot, Inc. 200,250
20,600 Jones Apparel Group Inc.+ 1,048,025
7,600 Kohl's Corp.+ 510,150
35,000 Kroger Co.+ 1,141,875
17,000 Liz Clairborne Inc. 861,688
17,000 Michaels Stores, Inc.+ 511,062
25,200 Micro Warehouse Inc.+ 378,000
17,600 Nautica Enterprises Inc.+ 468,600
10,300 Nordstrom, Inc. 630,875
4,300 North Face, Inc.+ 101,587
10,000 Petco Animal Supplies Inc.+ 307,500
10,000 Polo Ralph Lauren Corp.+ 260,000
13,500 Quality Food Centers Inc. 642,938
26,100 Rexall Sundown Inc.+ 570,937
17,075 Rite Aid Corp. 1,013,828
9,200 Ross Stores Inc. 343,850
6,000 St. John Knits, Inc. 241,125
3,500 The Finish Line, Class A Shares+ 59,062
19,650 The Mens Warehouse Inc.+ 761,438
14,300 Tiffany & Co. 564,850
20,600 TJX Cos., Inc. 610,275
19,500 Tommy Hilfiger Corp.+ 771,469
10,500 Toys "R" Us Inc.+ 357,656
10,500 Williams-Sonoma Inc.+ 421,315
13,075 Wolverine Worldwide Inc. 287,650
- --------------------------------------------------------------------------------
23,900,025
- --------------------------------------------------------------------------------
Telecommunications -- 5.6%
40,500 ADC Telecommunications Inc.+ 1,341,562
3,300 ANADIGICS, Inc.+ 122,100
9,700 Billing Information Concepts+ 380,725
10,600 Brightpoint, Inc.+ 349,800
16,200 Cincinnati Bell Inc. 437,400
12,200 Clear Channel Communications, Inc.+ 805,200
2,200 Ericsson LM Telephone ADR 973,500
13,000 Glenayre Technologies, Inc.+ 169,000
10,200 Jacor Communications Inc.+ 427,126
27,300 LCI International, Inc.+ 706,388
6,500 Lucent Technologies Inc. 535,844
6,500 MasTec Inc.+ 210,844
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Telecommunications -- 5.6% (continued)
26,900 Newbridge Networks Corp.+ $ 1,425,700
6,700 Northern Telecom Ltd. 600,906
3,500 REMEC Inc.+ 88,812
23,900 Tellabs Inc.+ 1,290,600
11,800 USLD Communications Corp.+ 233,788
20,400 Varco International Inc.+ 1,243,125
- --------------------------------------------------------------------------------
11,342,420
- --------------------------------------------------------------------------------
Telecommunications Equipment -- 1.7%
14,500 CIENA Corp.+ 797,500
36,500 DSC Communications Corp.+ 889,687
9,500 ECI Telecommunications Ltd. 262,437
12,600 Nokia Corp. ADR 1,111,950
23,600 Scientific-Atlanta, Inc. 438,076
- --------------------------------------------------------------------------------
3,499,650
- --------------------------------------------------------------------------------
Transportation - Miscellaneous -- 0.5%
7,500 Airnet Systems Inc.+ 153,750
7,800 Caliber System, Inc 406,575
12,000 CNF Transportation Inc. 535,500
- --------------------------------------------------------------------------------
1,095,825
- --------------------------------------------------------------------------------
Utilities -- 0.3%
15,100 AES Corp. 598,338
- --------------------------------------------------------------------------------
Waste Management -- 1.1%
17,700 US Filter Corp.+ 710,213
38,577 U.S.A. Waste Service Inc.+ 1,427,350
- --------------------------------------------------------------------------------
2,137,563
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $155,091,441) 187,978,692
================================================================================
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C> <C>
CONVERTIBLE BOND -- 0.1%
$ 150,000 EMC Corp., 3.25% due 3/15/02 (Cost-- $203,143) $ 206,625
================================================================================
SHORT-TERM INVESTMENTS -- 7.3%
6,740,000 U.S. Treasury Bill due 1/2/98++ 6,683,587
196,000 U.S. Treasury Bill due 1/2/98++ 194,359
7,960,000 Farmer Mac Discount Note, 5.65% due 11/3/97 7,957,501
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost -- $14,834,966) 14,835,447
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $170,129,550*) $ 203,020,764
================================================================================
</TABLE>
+ Non-income producing security.
++ Security partially segregated by Custodian for open futures contracts
commitments.
* Aggregate cost for Federal income tax purpose is substantially the same.
See Notes to Financial Statements.
17
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost-- $170,129,550) $ 203,020,764
Cash 1,865
Receivable for securities sold 809,055
Receivable for Fund shares sold 339,744
Receivable from broker-- variation margin 156,750
Dividends receivable 22,277
- -------------------------------------------------------------------------------
Total Assets 204,350,455
- -------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 1,286,793
Management fees payable 142,709
Accrued expenses 75,359
- -------------------------------------------------------------------------------
Total Liabilities 1,504,861
- -------------------------------------------------------------------------------
Total Net Assets $ 202,845,594
===============================================================================
NET ASSETS:
Par value of capital shares $ 160
Capital paid in excess of par value 171,026,736
Undistributed net investment income 322,959
Accumulated net realized loss from
security transactions and futures contracts (1,390,078)
Net unrealized appreciation of investments and
futures contracts 32,885,817
- -------------------------------------------------------------------------------
Total Net Assets $ 202,845,594
===============================================================================
Shares Outstanding 15,991,259
- -------------------------------------------------------------------------------
Net Asset Value $12.68
- -------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended October 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends $ 1,251,257
Interest (net of foreign withholding tax of $25,441) 455,548
- --------------------------------------------------------------------------------
Total Investment Income 1,706,805
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 1,294,096
Shareholder communications 23,052
Custody 18,998
Audit and legal 17,884
Registration Fees 10,000
Directors' fees 9,032
Shareholder and system servicing fees 7,023
Other 2,997
- --------------------------------------------------------------------------------
Total Expenses 1,383,082
- --------------------------------------------------------------------------------
Net Investment Income 323,723
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FUTURES CONTRACTS (NOTES 3 AND 6):
Realized Gain From:
Security transactions (excluding short-term securities) 294,571
Futures contracts 2,506,815
- --------------------------------------------------------------------------------
Net Realized Gain 2,801,386
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investment and Futures Contracts:
Beginning of year 10,245,486
End of year 32,885,817
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 22,640,331
- --------------------------------------------------------------------------------
Net Gain on Investments and Futures Contracts 25,441,717
- --------------------------------------------------------------------------------
Increase Net Assets From Operations $25,765,440
================================================================================
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets For the Years Ended October 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
===================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 323,723 $ 141,502
Net realized gain (loss) 2,801,386 (4,183,860)
Increase in net unrealized appreciation 22,640,331 10,255,923
- -----------------------------------------------------------------------------------
Increase in Net Assets From Operations 25,765,440 6,213,565
- -----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (128,125) (27,358)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (128,125) (27,358)
- -----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 66,474,952 100,074,364
Net asset value of shares issued for
reinvestment of shares 128,125 27,358
Cost of shares reacquired (2,299,468) (1,465,966)
- -----------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 64,303,609 98,635,756
- -----------------------------------------------------------------------------------
Increase in Net Assets 89,940,924 104,821,963
NET ASSETS:
Beginning of year 112,904,670 8,082,707
- -----------------------------------------------------------------------------------
End of year* $ 202,845,594 $ 112,904,670
===================================================================================
* Includes undistributed net investment income of: $322,959 $127,361
===================================================================================
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The AIM Capital Appreciation Portfolio ("Portfolio") is a separate
investment portfolio of the Travelers Series Fund Inc. ("Fund"). The Fund, a
Maryland corporation, is registered under the Investment Company Act of 1940, as
amended, as an open-end management investment company and consists of this
portfolio and eleven other separate investment portfolios: Smith Barney Income
and Growth, Alliance Growth, Van Kampen American Capital Enterprise, Smith
Barney International Equity, Smith Barney Pacific Basin, TBC Managed Income,
Putnam Diversified Income, GT Global Strategic Income, Smith Barney High Income,
MFS Total Return and Smith Barney Money Market Portfolios. Shares of the Fund
are offered only to insurance company separate accounts that fund certain
variable annuity and variable life insurance contracts. The financial statements
and financial highlights for the other portfolios are presented in separate
annual reports.
The significant accounting policies followed by the Portfolio are: (a)
security transactions are accounted for on trade date; (b) securities traded on
national securities markets are valued at the closing prices on such markets;
securities for which no sales price was reported and U.S. government agencies
and obligations are valued at the mean between the bid and asked prices; (c)
securities maturing within 60 days are valued at cost plus accreted discount or
minus amortized premium, which approximates value; (d) interest income is
recorded on an accrual basis; (e) dividend income is recorded on the ex-dividend
date; foreign dividends are recorded on the ex-dividend date or as soon as
practical after the Portfolio determines the existence of a dividend declaration
after exercising reasonable due diligence; (f) gains or losses on the sale of
securities are calculated by using the specific identification method; (g) the
accounting records of the Portfolio are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars based on the rate of exchange of such currencies against U.S. dollars on
the date of valuation. Purchases and sales of securities, and income and
expenses are translated at the rate of exchange quoted on the respective date
that such transactions are recorded. Differences between income or expense
amounts recorded and collected or paid are adjusted when reported by the
custodian; (h) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles; (i) the Portfolio intends to comply
with the applicable provisions of the Internal Revenue Code of 1986, as amended,
pertaining to regulated investment companies and to make distributions of
taxable income sufficient to relieve it from substantially all
21
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
Federal income and excise taxes; and (j) estimates and assumptions are required
to be made regarding assets, liabilities and changes in net assets resulting
from operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
2. MANAGEMENT AGREEMENT AND TRANSACTIONS WITH
AFFILIATED PERSONS
Travelers Investment Adviser, Inc. ("TIA"), acts as investment manager of
the Fund. The Portfolio pays TIA a management fee calculated at an annual rate
of 0.80% on the average daily net assets. This fee is calculated daily and paid
monthly.
TIA has entered into a sub-advisory agreement with AIM Capital Management,
Inc. ("AIM"). Pursuant to the sub-advisory agreement, AIM is responsible for the
day-to-day portfolio operations and investment decisions and is compensated for
such service at the annual rate of 0.375% of the Portfolio's average daily net
assets. TIA pays this fee to AIM on a monthly basis.
TIA has entered into a sub-administrative services agreement with Smith
Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith Barney
Holdings Inc. ("SBH"). TIA pays SBMFM, as sub-administrator, a fee calculated at
an annual rate of 0.10% of the Portfolio's average daily net assets.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares and primary broker for its portfolio agency transactions. For the
year ended October 31, 1997, SB received brokerage commissions of $857.
All officers and one Director of the Fund are employees of SB.
3. INVESTMENTS
During the year ended October 31, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
================================================================================
<S> <C>
Purchases $145,479,009
- --------------------------------------------------------------------------------
Sales 77,742,351
================================================================================
</TABLE>
22
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At October 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $39,162,653
Gross unrealized depreciation (6,271,439)
- --------------------------------------------------------------------------------
Net unrealized appreciation $32,891,214
================================================================================
</TABLE>
4. CAPITAL LOSS CARRYFORWARD
At October 31, 1997, the Portfolio had, for Federal income tax purposes,
approximately $939,000 of capital loss carryforwards available to offset any
future capital gains. To the extent that these carryforward losses are used to
offset capital gains, it is probable that the gains so offset will not be
distributed. The amount and expiration of the carryforwards are indicated below.
Expiration occurs on October 31 of the year indicated:
<TABLE>
<CAPTION>
2004
================================================================================
<S> <C>
Carryforward Amounts $939,000
================================================================================
</TABLE>
5. LENDING OF PORTFOLIO SECURITIES
The Portfolio has an agreement with its custodian whereby the custodian may
lend securities owned by the Portfolio to brokers, dealers and other financial
organizations. Fees earned by the Portfolio on securities lending are recorded
as interest income. Loans of securities by the Portfolio are collateralized by
cash, U.S. government securities or high quality money market instruments that
are maintained at all times in an amount at least equal to the current market
value of the loaned securities, plus a margin which may vary between 2% and 5%
depending on the type of securities loaned. The custodian establishes and
maintains the collateral in a segregated account.
At October 31, 1997, there were no securities on loan.
6. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contract. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are received or made and recognized as
23
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
assets due from or liabilities due to broker, depending upon whether unrealized
gains or losses are incurred. When the contract is closed, the Portfolio records
a realized gain or loss equal to the difference between the proceeds from (or
cost of) the closing transactions and the Portfolio's basis in the contract.
The Portfolio enters into such contracts to hedge a portion of its
portfolio. The Portfolio bears the market risk that arises from changes in the
value of the financial instruments and securities indices (futures contracts).
At October 31, 1997, the Portfolio had the following open futures
contracts:
<TABLE>
<CAPTION>
Expiration # of Basis Market Unrealized
Month/Year Contracts Value Value Loss
============================================================================================
<S> <C> <C> <C> <C> <C>
Futures contracts to buy:
S&P 500 Index 12/97 15 $6,935,397 $6,930,000 $(5,397)
============================================================================================
</TABLE>
7. OPTIONS CONTRACTS
When a Portfolio writes a covered call option, an amount equal to the
premium received by the Portfolio is recorded as a liability, the value of which
is marked-to-market daily. When a written option expires, the Portfolio realizes
a gain equal to the amount of the premium received. When the Portfolio enters
into a closing purchase transaction, the Portfolio realizes a gain or loss
depending upon whether the cost of the closing transaction is greater or less
than the premium originally received, without regard to any unrealized gain or
loss on the underlying security, and the liability related to such option is
eliminated. When a written call option is exercised, the cost of the security
sold will be decreased by the premium originally received. When written index
options are exercised, settlement is made in cash.
The risk in writing a covered call option is that the Portfolio gives up
the opportunity to participate in any increase in the price of the underlying
security beyond the exercise price.
During the year ended October 31, 1997, the Portfolio did not write any
covered call options.
24
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
8. CAPITAL SHARES
At October 31, 1997, the Fund had six billion shares of capital stock
authorized with a par value of $0.00001 per share. Each share represents an
equal proportionate interest and has an equal entitlement to any dividends and
distributions made by the Portfolio.
Transactions in shares of the Portfolio were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1997 October 31, 1996
================================================================================
<S> <C> <C>
Shares sold 5,684,968 9,823,048
Shares issued on reinvestment 11,595 2,850
Shares redeemed (196,083) (143,288)
- --------------------------------------------------------------------------------
Net Increase 5,500,480 9,682,610
================================================================================
</TABLE>
25
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
1997 1996(1) 1995(1)(2)
=======================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $10.76 $10.00 $10.00
- ---------------------------------------------------------------------------------------
Income From Operations:
Net investment income(3) 0.02 0.02 0.02
Net realized and unrealized gain (loss) 1.91 0.75 (0.02)
- ---------------------------------------------------------------------------------------
Total Income From Operations 1.93 0.77 --
- ---------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.01) (0.01) --
- ---------------------------------------------------------------------------------------
Total Distributions (0.01) (0.01) --
- ---------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.68 $10.76 $10.00
- ---------------------------------------------------------------------------------------
Total Return 17.96% 7.71% 0.00%++
- ---------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $202,846 $112,905 $8,083
- ---------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 0.85% 0.96% 1.00%+
Net investment income 0.20 0.22 4.07+
- ---------------------------------------------------------------------------------------
Portfolio Turnover Rate 56% 44% 6%
- ---------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions $0.06 $0.06 $0.06
=======================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from October 10, 1995 (commencement of operations) to
October 31, 1995.
(3) The Manager waived all of its fees and reimbursed expenses of $13,456 for
the period ended October 31, 1995. If such fees were not waived, the per
share effect on net investment income would have been a decrease of $0.03
and the expense ratio would have been 5.95% (annualized).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
26
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
Travelers Series Fund Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the AIM Capital Appreciation Portfolio
of Travelers Series Fund Inc. as of October 31, 1997, and the related statement
of operations for the year then ended, the statements of changes in net assets
for each of the years in the two-year period then ended and the financial
highlights for each of the years in the two-year period then ended and for the
period from October 10, 1995 (commencement of operations) to October 31, 1995.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997, by correspondence with the custodian. As to securities
purchased or sold but not received or delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
AIM Capital Appreciation Portfolio of Travelers Series Fund Inc. as of October
31, 1997, the results of its operations for the year then ended, the changes in
its net assets for each of the years in the two-year period then ended and the
financial highlights for each of the years in the two-year period then ended and
for the period from October 10, 1995 to October 31, 1995, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
December 18, 1997
27
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year
ended October 31, 1997:
-- 100% of the ordinary dividends paid as qualifying for the corporate
dividends received deduction.
28
<PAGE>
TRAVELERS SERIES
FUND INC.
DIRECTORS
Victor K. Atkins
A.E. Cohen
Robert A. Frankel
Rainer Greeven
Susan M. Heilbron
Heath B. McLendon, Chairman
James M. Shuart
OFFICERS
Heath B. McLendon
President and
Chief Executive Officer
Lewis E. Daidone
Senior Vice President and Treasurer
Jeffrey J. Russell
Vice President
Bruce D. Sargent
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
SMITH BARNEY
- ---------------------------------
A Member of TravelersGroup [LOGO]
INVESTMENT MANAGER
Travelers Investment Adviser, Inc.
DISTRIBUTOR
Smith Barney Inc.
CUSTODIAN
PNC Bank, N.A.
ANNUITY ADMINISTRATION
Travelers Annuity Investor Services
5 State House Square
1 Tower Square
Hartford, CT 06183
This report is submitted for the general information of the shareholders of the
Travelers Series Fund Inc. -- AIM Capital Appreciation Portfolio. It is not
authorized for distribution to prospective investors unless accompanied or
preceded by a current Prospectus for the Portfolio, which contains information
concerning the Portfolio's investment policies and expenses as well as other
pertinent information.
TRAVELERS SERIES FUND INC.
388 Greenwich Street
New York, New York 10013
IN0794 12/97
================================================================================
ANNUAL REPORT
================================================================================
1997
1997
1997
1997
1997
Travelers Series
Fund Inc.
Smith Barney International
Equity Portfolio
Smith Barney Pacific Basin
Portfolio
GT Global Strategic Income
Portfolio
---------------------------------------------
October 31, 1997
[LOGO] Smith Barney Funds
Investing for your future.
Every day.
<PAGE>
================================================================================
Smith Barney International Equity, Smith Barney Pacific
Basin and GT Global Strategic Income Portfolios
================================================================================
Dear Shareholder:
We are pleased to provide the annual report for the Travelers Series Fund Inc.
- -- Smith Barney International Equity, Smith Barney Pacific Basin and GT Global
Strategic Income Portfolios ("Portfolios") for the year ended October 31, 1997.
For your convenience, we have summarized the period's prevailing economic and
market conditions and outlined each Portfolio's investment strategy. A detailed
summary of performance and current holdings can be found in the appropriate
sections that follow.
Portfolio Highlights
Smith Barney International Equity Portfolio
For the year ended October 31, 1997, the Smith Barney International Equity
Portfolio returned 8.73%. The Portfolio underperformed its Lipper Analytical
Services Inc. ("Lipper") fund peer group average of 10.39% over the same period.
(Lipper is a major fund-tracking organization.)
The Portfolio's managers pursue a "bottom-up" approach to stock investing --
namely, they look for promising companies and industries rather than trying to
discover investment opportunities based on the present or future condition of
the global economy, the financial markets or the performance of particular
markets. They seek companies growing at a premium rate to that of their local
country. At the same time, they strive to maintain a risk level no higher than
that of the overall international equity market through broad diversification in
a variety of markets.
In the months leading to the close of the Portfolio's reporting period and
through the date of this letter, the big news has been the sharp decline of
Asian markets and higher market volatility in many international markets. Global
equity investors have taken note of Asian economic instability and this has led
to a long-awaited correction in many major equity markets. Clearly, many global
multinational giants with significant Asian revenue streams, many of which have
been investor favorites over the past several years, will be under a cloud until
their earnings stability is confirmed.
As occurred after the Mexican peso debacle in late 1994, the Asian "Tiger"
sell-off has impacted virtually all emerging and smaller equity markets. The
Asian currency contagion, initially confined to Thailand, Malaysia, Indonesia
and the Philippines, spread throughout the region and has shaken the foundation
of the U.S. dollar-linked currency regimes in Asia. The latest victims of the
plague include the Hong Kong currency (linked since 1983 to the U.S. dollar) and
a
1
<PAGE>
spillover effect to virtually all equity markets, with emerging markets
especially hard hit. In the opinion of the managers, there is still more
downside risk in Asia's markets, with many investors capitulating and selling
their (reduced) holdings to minimize asset value attrition. Ironically, very
high interest rates necessary to stem currency pressures will achieve a key
government objective of slowing the rise in Hong Kong's real estate prices and
improving regional competitiveness as a service center.
Does the currency turbulence in Asia have implications beyond the local market
afflicted? To be sure, there is more downside risk with respect to local equity
markets, local corporate earnings and investors when currencies devalue 10%-40%
and interest rates reach sky high levels in order to defend macro economic
policies.
Outside Southeast Asia, the inevitable economic slowdown spells more bad news
for Japan, a major exporter of goods into the region. The Japanese economy is
already sluggish from a series of misguided policy initiatives (including
April's sales tax increase which led to reported Gross Domestic Product ("GDP")
contraction at the rate of 11% plus during second quarter 1997) and the troubles
in Asian neighboring economies.
European equity markets and the Americas have been effected by Asia's problems,
largely we suspect due to semi-panicked selling rather than any problems with
short-term fundamentals. The Portfolio's managers continue to believe that
Europe represents the best global investment opportunity because of continued
corporate restructuring, benign interest rates and improved demand for stocks
from both individuals and institutions.
Smith Barney Pacific Basin Portfolio
For the year ended October 31, 1997, the Smith Barney Pacific Basin Portfolio
generated a total return of -17.02%. However, the Portfolio's disappointing
one-year total return was better than its Lipper fund peer group average of
- -18.52% over the same period.
The last six months and up through the date of this letter have been a terrible
time for Asian stock markets in general, with every market in the region
recording losses for the period, in dollar terms. In particular, Southeast Asian
stock markets, including Malaysia, Indonesia, Thailand and the Philippines, fell
by 48%-56%. Disappointingly, even countries with relatively good fundamentals
and well-managed blue-chip companies were affected negatively by the turmoil.
For example, the Hong Kong stock market was down by 29% in October, wiping out
gains for the year and leading to a 17% decline for the twelve month period. For
the fiscal year, no stock markets in the Asian universe recorded gains, in
dollar terms.
2
<PAGE>
What went wrong in Asia during the last year? The Portfolio's managers have
identified three significant trends. To start with, the crisis that began in
Thailand could not be contained and spread to other countries in the Southeast
region. Thailand had borrowed a lot of money and invested it into non-productive
assets, particularly property. When the bubble burst, property and other asset
prices plunged, the Thai Baht came under pressure and interest rates rose,
leading to slower growth, rising non-performing loans and political turmoil. The
Thai crisis exposed similar problems in Indonesia, the Philippines and Malaysia.
While not as severe as in Thailand, current account deficits, overheated
property markets and over-accumulated debt in these countries caused a sharp
devaluation in their currencies and plunging stock markets. Thailand, Indonesia
and the Philippines have been driven into the arms of the IMF (International
Monetary Fund) and other international agencies for cash infusions to avoid
wholesale defaults and bankruptcies.
The next problem: even the so-called "safe havens" such as Australia, New
Zealand, Hong Kong and Singapore, were dragged down by regional turmoil. These
countries have low current account deficits or even surpluses, reasonable
corporate debt levels and sound economic management, yet this did not prevent
their stock markets from recording big losses in October. Even China, relatively
isolated from the problems of the rest of the region as it continues to
implement economic restructuring, was hurt during October, with China-related
shares falling sharply.
Finally, Northeast Asia developed its own contagion. Highly leveraged
corporations in Korea have over-expanded capacity and are filing for bankruptcy
at an accelerating rate. This development has put pressure on the Korean Won and
has had negative implications for neighboring countries such as Japan and
Taiwan. The combination of the three trends noted above led to a general
sell-off of Asian stocks by international and global funds. It also removed any
"safe harbor" for dedicated Pacific Basin portfolios as all stock markets in the
region suffered losses.
Four "defensive" adjustments were made in the Pacific Basin Portfolio to cope
with the developments noted above. First, the Portfolio's managers reduced their
weighting in Hong Kong, deleting holdings in property and financial companies as
they expect these sectors to be hardest hit by rising interest rates and
declining asset prices.
Second, the managers increased their weighting in Japan, adding to select
blue-chips they felt might offer some shelter from the storms in Asia. This
increase in weighting is in line with their investment strategy to gradually
raise exposure to Japan as they find fundamentally attractive companies.
3
<PAGE>
Third, the managers increased their weighting in Singapore, with particular
focus on the electronics and technology sectors, as many of these companies are
benefiting from the boom in related U.S. sectors while trading at attractive
levels.
Finally, the managers reduced their weighting in Malaysia because they were
disappointed by the government's response to the current crisis and they are
expecting that Malaysian property and financial stocks will continue to suffer.
The Portfolio's managers believe that Asian markets are close to reaching a
period of stability and positive returns after a year of currency devaluations
and share price declines. They are encouraged by two positive developments.
First, cheaper local currencies have made Asian goods very competitive in world
markets. As a result countries in the region are returning to an outward-looking
economic strategy -- using trade as an engine for growth -- to jump start
recovery. The managers believe this shift will hasten economic reform and guide
local corporations to become more efficient. To take advantage of this
development, they have increased their weighting in export-oriented companies
that are benefiting from dollar revenue streams and low local currency costs.
Second, according to the Portfolio's managers, value is beginning to emerge in
Asian stock markets. Blue-chip companies with excellent management teams and
strong track records are trading at very attractive levels as of this writing.
GT Global Strategic Income Portfolio
For the year ended October 31, 1997, the GT Global Strategic Income Portfolio
returned 9.32%, and outperformed its Lipper peer group average of 4.69% over the
same period. In addition, the Morgan Stanley Capital International ("MSCI")
EAFE-GDP Weighted Index returned 4.92% over the same period. (The MSCI EAFE-GDP
Weighted Index is a composite portfolio made up of the stock returns for the
countries of Europe, Australia, and the Far East, and weighted based on each
country's gross domestic product.)
In the third quarter of 1997, the Portfolio's managers continued to emphasize
bonds from dollar-block countries such as Canada, New Zealand and Australia.
These markets continue to outperform many other global bond markets because of
their low inflation and slower economic growth than the U.S. In fact,
Australia's bond market was the world's top performer during the third quarter
of 1997 and the yield on the 10-year bond fell to a record low 5.83%. In
addition, Canada was a strong performer during the reporting period.
With yields at record lows, the Japanese bond market provided investors with a
return of 3.3% in local currency terms. Given the weak state of Japan's economy,
the Portfolio's managers believe the probability of an interest rate increase in
Japan in the coming months is remote.
4
<PAGE>
The Portfolio continued to be overweighted in the European peripheral markets,
where yield spreads continue to narrow. Europe's best-performing bond market in
the third quarter of 1997 was the U.K., which returned 5.16%. Since the
beginning of the year, the U.K. has registered the largest gains in local
currency terms, rising about 11.69%. In the opinion of the managers,
non-accelerating inflation has helped fuel the gains in the Gilt market. Serious
efforts on the part of Italy and Spain to meet deficit and inflation targets for
membership in the European Monetary Union ("EMU") helped the Italian and Spanish
bond markets to be the second and third largest top European performers,
respectively, during the third quarter of 1997.
Core European bond markets, such as Germany and France, remained relatively poor
performers and the Portfolio was underweighted in these markets. In their view,
ongoing investor concerns about rising interest rates in order to contain
inflationary pressures resulted in the poor relative performance of Europe's
core bond markets.
During the reporting period, the Portfolio's managers have made some important
changes to the emerging markets bond holdings. They modestly raised their
exposure in Latin America, mainly increasing their allocation in Mexico while
reducing their holdings in Argentina bonds. In the non-Latin American bond
portion of the Portfolio, the exposure to Bulgarian and Russian bonds remained
unchanged while a large position was initiated in South African bonds.
The changes made to the Portfolio during the reporting period reflected the
managers' belief that the impressive 1997 rally in emerging markets debt could
not be expected to continue forever. In Latin America, this belief led them to
increase their exposure in Mexico, a country with very modest financing needs in
the coming years and which could be expected to perform better than many other
emerging markets during periods of market turmoil. Due to its improving
fundamentals as well as its low correlation with other emerging markets debt,
they invested in South African local currency denominated debt.
Given their long-term outlook based on economic growth, monetary policy and the
expected advent of monetary union in Europe, the Portfolio's managers believe
that the current yields from dollar-bloc bonds are fairly valued. Their
short-term investment strategy is to maintain their current emphasis in
Australia and Canada because the economies of these countries are growing
without much inflation. In addition, they expect to keep a fairly neutral
position with respect to U.S. bonds. However, in a majority of European
countries, the managers believe that many bond markets continue to be
overvalued.
5
<PAGE>
In the opinion of the Portfolio's managers, the volatility of the international
bond markets over the coming months will continue to be driven by the unfolding
Southeast Asian currency crises and the value of the U.S. dollar. They also
expect that the fundamentals in many of the major emerging market economies will
improve in the coming year. Moreover, they expect credit upgrades over the next
one-to-two years in a number of countries including Russia, Bulgaria, Mexico,
Argentina and Peru.
However, as noted, the managers caution that the impressive liquidity conditions
in the global bond markets over the past few years that have helped drive
spreads on emerging debt instruments to historically tight levels cannot be
expected to continue indefinitely. In their opinion, this could lead to some
market instability due to higher global interest rates or a sell-off in some of
the major stock markets. They have therefore chosen to minimize their
investments in countries with large balance of payment imbalances or onerous
debt amortization schedules.
In closing, thank you for investing in the Smith Barney International Equity,
Smith Barney Pacific Basin and G.T. Global Strategic Income Portfolios. We look
forward to continue to help you pursue your financial goals.
Sincerely,
/s/Heath B. McLendon
Heath B. McLendon
Chairman
November 28, 1997
6
<PAGE>
<TABLE>
<CAPTION>
=================================================================================
Smith Barney International Equity Portfolio
- ---------------------------------------------------------------------------------
Historical Performance
=================================================================================
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns+
=================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $12.18 $13.23 $0.01 $0.00 8.73%
- ---------------------------------------------------------------------------------
10/31/96 10.48 12.18 0.01 0.00 16.36
- ---------------------------------------------------------------------------------
10/31/95 10.55 10.48 0.00 0.00 (0.66)
- ---------------------------------------------------------------------------------
6/16/94*-10/31/94 10.00 10.55 0.00 0.00 5.50++
=================================================================================
Total $0.02 $0.00
=================================================================================
<CAPTION>
=================================================================================
Smith Barney Pacific Basin Portfolio
- ---------------------------------------------------------------------------------
Historical Performance
=================================================================================
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns+
=================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $ 9.75 $8.04 $0.06 $0.00 (17.02)%
- ---------------------------------------------------------------------------------
10/31/96 8.95 9.75 0.03 0.00 9.26
- ---------------------------------------------------------------------------------
10/31/95 10.10 8.95 0.00 0.00 (11.39)
- ---------------------------------------------------------------------------------
6/16/94*-10/31/94 10.00 10.10 0.00 0.00 1.00++
=================================================================================
Total $0.09 $0.00
=================================================================================
<CAPTION>
=================================================================================
GT Global Strategic Income Portfolio
- ---------------------------------------------------------------------------------
Historical Performance
=================================================================================
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns+
=================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $12.45 $12.52 $0.46 $0.58 9.32%
- ---------------------------------------------------------------------------------
10/31/96 10.77 12.45 0.42 0.00 20.07
- ---------------------------------------------------------------------------------
10/31/95 9.95 10.77 0.10 0.00 9.37
- ---------------------------------------------------------------------------------
6/16/94*-10/31/94 10.00 9.95 0.00 0.00 (0.50)++
=================================================================================
Total $0.98 $0.58
=================================================================================
</TABLE>
It is the Fund's policy to distribute dividends and capital gains, if any,
annually.
7
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Average Annual Total Return+
================================================================================
Smith Barney Smith Barney GT Global
International Pacific Strategic
Equity Basin Income
Portfolio Portfolio Portfolio
================================================================================
<S> <C> <C> <C>
Year Ended 10/31/97 8.73% (17.02)% 9.32%
- --------------------------------------------------------------------------------
6/16/94* through 10/31/97 8.71 (6.00) 11.13
================================================================================
<CAPTION>
================================================================================
Cumulative Total Return+
================================================================================
Smith Barney Smith Barney GT Global
International Pacific Strategic
Equity Basin Income
Portfolio Portfolio Portfolio
================================================================================
<S> <C> <C> <C>
6/16/94* through 10/31/97 32.59% (18.86)% 42.84%
================================================================================
</TABLE>
+ Assumes the reinvestment of all dividends and capital gains distributions.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Commencement of operations.
8
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Shares of the
Smith Barney International Equity Portfolio vs.
MSCI EAFE-GDP Weighted Index+
- --------------------------------------------------------------------------------
June 1994 -- October 1997
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Smith Barney Margan Stanley
International Equity EAFE-GDP
Portfolio Weighted Index
-------------------- ---------------
<S> <C> <C>
6/16/94 $10,000 $10,000
10/94 $10,550 $10,345
4/95 $9,610 $10,585
10/95 $10,480 $10,398
4/96 $11,884 $11,749
10/96 $12,194 $11,533
4/97 $12,628 $12,015
10/31/97 $13,259 $12,546
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares of the Smith Barney
International Equity Portfolio on June 16, 1994 (commencement of
operations), assuming reinvestment of dividends and capital gains, if any,
at net asset value through October 31, 1997. The Morgan Stanley Capital
International ("MSCI") EAFE-GDP Weighted Index is a composite portfolio
consisting of equity total returns for the countries of Europe, Australia,
New Zealand and the Far East, weighted based on each country's gross
domestic product. The index is unmanaged and is not subject to the same
management and trading expenses of a mutual fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
9
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Shares of the
Smith Barney Pacific Basin Portfolio vs.
MSCI Pacific Index+
- --------------------------------------------------------------------------------
June 1994 -- October 1997
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
Smith Barney MSCI Pacific
Pacific Basin Portfolio Index
----------------------- --------------
<S> <C> <C>
6/16/94 $10,000 $10,000
10/94 $10,100 $9,952
4/95 $8,760 $9,702
10/95 $8,950 $8,836
4/96 $10,260 $10,430
10/96 $9,779 $9,136
4/97 $10,264 $8,188
10/31/97 $8,114 $7,353
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares of the Smith Barney
Pacific Basin Portfolio on June 16, 1994 (commencement of operations),
assuming reinvestment of dividends and capital gains, if any, at net asset
value through October 31, 1997. The Morgan Stanley Capital International
("MSCI") Pacific Index is comprised of a sampling of large, medium and small
capitalization companies who are listed on the various Pacific exchanges, such
as Australia, Hong Kong, Japan, Malaysia, New Zealand and the Singapore stock
exchange. The index is unmanaged and is not subject to the same management and
trading expenses of a mutual fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
value may be more or less than the original cost.
10
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Shares of the
GT Global Strategic Income Portfolio vs.
J.P. Morgan Global Bond Index+
- --------------------------------------------------------------------------------
June 1994 -- October 1997
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
GT Global Strategic J.P. Morgan Global
Income Portfolio Bond Index - Unhedged
------------------- ---------------------
<S> <C> <C>
6/16/94 $10,000 $10,000
10/94 $9,950 $10,391
4/95 $10,074 $11,490
10/95 $10,882 $11,985
4/96 $11,660 $12,009
10/96 $13,055 $12,716
4/97 $13,519 $12,238
10/31/97 $14,284 $13,161
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares of the GT Global
Strategic Income Portfolio on June 16, 1994 (commencement of operations),
assuming reinvestment of dividends and capital gains, if any, at net asset
value through October 31, 1997. The J.P. Morgan Global Bond Index-Unhedged is
a daily, market capitalization weighted international fixed income index
consisting of 13 countries. The index is unmanaged and is not subject to the
same management and trading expenses of a mutual fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
value may be more or less than the original cost.
11
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments October 31, 1997
================================================================================
SMITH BARNEY INTERNATIONAL EQUITY PORTFOLIO
SHARES SECURITY VALUE
================================================================================
STOCK -- 92.8%
================================================================================
<S> <C> <C>
Australia -- 2.3%
456,697 Coca-Cola Amatil Ltd. $ 3,444,607
1,000,000 Portman Mining Ltd. 1,586,026
- --------------------------------------------------------------------------------
5,030,633
- --------------------------------------------------------------------------------
Austria -- 2.6%
15,000 VA Technologie AG 2,665,924
40,000 Wolford AG 2,905,729
- --------------------------------------------------------------------------------
5,571,653
- --------------------------------------------------------------------------------
Belgium -- 2.2%
25,000 Barco N.V. 4,822,925
- --------------------------------------------------------------------------------
Brazil -- 2.7%
30,000 Telecomunicacoes Brasileiras S.A. - Telebras ADR 3,045,000
100,000 Uniao de Bancos Brasileiros S.A. - GDR+ 2,725,000
- --------------------------------------------------------------------------------
5,770,000
- --------------------------------------------------------------------------------
Cayman Islands -- 3.4%
150,000 Santa Fe International Co. 7,378,125
- --------------------------------------------------------------------------------
Finland -- 2.0%
50,000 Nokia OYJ Class A Shares 4,412,500
- --------------------------------------------------------------------------------
France -- 7.7%
85,000 Companie Generale de Geopysique S/A - ADR+ 2,380,000
40,000 Edap TMS S.A. - ADR+ 280,000
20,000 Le Carbone-Lorraine 5,316,192
70,000 Schlumberger Ltd. 6,125,000
10,000 SGS - Thomson Microelectronics N.V.+ 713,169
25,000 SGS - Thomson Microelectronics NV - NY Shares+ 1,781,250
- --------------------------------------------------------------------------------
16,595,611
- --------------------------------------------------------------------------------
Germany -- 8.9%
50,000 Leica Camera AG 1,154,785
7,500 ProSieben Media AG - Preferred+ 372,581
35,000 SGL Carbon AG 4,992,447
15,000 System, Anwendungen, Produkte in der
Datenverarbeitung Preferred 4,484,051
35,000 System, Anwendungen, Produkte in der
Datenverarbeitung Preferred ADR 3,482,500
10,000 Volkswagen AG Preferred 4,607,518
- --------------------------------------------------------------------------------
19,093,882
- --------------------------------------------------------------------------------
Hong Kong -- 2.8%
897,000 China Resources Enterprise Ltd. 2,460,237
157,869 HSBC Holdings PLC 3,574,238
- --------------------------------------------------------------------------------
6,034,475
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
SMITH BARNEY INTERNATIONAL EQUITY PORTFOLIO
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
India -- 0.5%
100,000 Larsen & Toubro Ltd. GDR $ 1,050,000
- --------------------------------------------------------------------------------
Ireland -- 5.2%
286,647 Bank of Ireland 3,630,954
251,940 Greencore Group PLC 1,182,532
549,998 Independent Newspapers PLC 3,226,911
252,127 Irish Continental Group PLC 3,072,314
- --------------------------------------------------------------------------------
11,112,711
- --------------------------------------------------------------------------------
Israel -- 3.7%
135,000 Gilat Satellite Networks Ltd. ADR+ 4,387,500
75,000 Teva Pharmaceutical Industries Ltd. ADR 3,506,250
- --------------------------------------------------------------------------------
7,893,750
- --------------------------------------------------------------------------------
Italy -- 1.7%
1,000,000 Telecom Italia Mobile S.p.A. 3,697,897
- --------------------------------------------------------------------------------
Japan -- 8.1%
142,000 Canon Inc. 3,447,576
59,000 Meitec 1,741,498
49,000 Noritsu Koki Co. Ltd. 1,629,667
85 NTT Data Corp. 4,063,773
44,000 Rohm Company Ltd. 4,353,538
287,000 Sumitomo Reality & Development 2,097,556
- --------------------------------------------------------------------------------
17,333,608
- --------------------------------------------------------------------------------
Malaysia -- 0.4%
466,666 Mancon Berhad 523,780
550,000 Sungei Way Holdings Berhad 361,194
- --------------------------------------------------------------------------------
884,974
- --------------------------------------------------------------------------------
Mexico -- 1.0%
561,870 Gruma S.A. - Class B Shares+ 2,188,757
- --------------------------------------------------------------------------------
Netherlands -- 7.1%
146,512 Getronics N.V. 4,839,192
82,096 Hunter Douglas N.V. 3,384,181
65,793 IHC Caland N.V. 4,047,861
300,000 ING Groep N.V. Warrants, Expire 3/15/01+ 3,090,122
- --------------------------------------------------------------------------------
15,361,356
- --------------------------------------------------------------------------------
Norway -- 5.0%
162,900 Tomra Systems ASA 4,188,498
120,000 Transocean Offshore Inc. 6,480,000
- --------------------------------------------------------------------------------
10,668,498
- --------------------------------------------------------------------------------
Singapore -- 0.7%
200,000 Cerebos Pacific Ltd. 511,125
750,000 Singapore Technologies Industrial Co. 1,029,879
- --------------------------------------------------------------------------------
1,541,004
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
SMITH BARNEY INTERNATIONAL EQUITY PORTFOLIO
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
South Africa -- 1.5%
427,000 Dimension Data Holdings Ltd.+ $ 1,774,545
20,340 South African Breweries Ltd. 539,301
31,345 South African Breweries Ltd. ADR+ 834,561
- --------------------------------------------------------------------------------
3,148,407
- --------------------------------------------------------------------------------
South Korea -- 0.1%
14,800 Korea Electric Power Corp. 210,158
5,200 Korea Electric Power Corp. ADR 42,575
- --------------------------------------------------------------------------------
252,733
- --------------------------------------------------------------------------------
Spain -- 1.3%
48,000 Banco Popular Espanol S.A. 2,836,544
- --------------------------------------------------------------------------------
Sweden -- 8.2%
50,000 Astra AB - Class A Shares 808,369
66,667 Astra AB - Class B Shares 1,033,293
75,000 Autoliv Inc. 2,957,813
50,000 Munters AB+ 507,736
100,000 Nobel Biocare AB 1,296,064
75,000 Ortivus AB - Class B Shares+ 2,605,488
60,000 Pricer AB - Class B Shares+ 1,394,939
75,000 Prosolvia AB - Class B Shares+ 2,585,447
100,000 Telefonaktiebolaget LM Ericsson - Class B Shares 4,409,289
- --------------------------------------------------------------------------------
17,598,438
- --------------------------------------------------------------------------------
Switzerland -- 3.9%
3,100 Novartis AG - Registered 4,868,447
400 Roche Holding AG - Genuss 3,524,778
100 Roche Holding AG Warrants, Expire 5/5/98+ 6,445
- --------------------------------------------------------------------------------
8,399,670
- --------------------------------------------------------------------------------
Thailand -- 0.2%
300,000 Siam Marko Public Co. Ltd.+ 387,569
- --------------------------------------------------------------------------------
United Kingdom -- 9.6%
150,000 Bodycote International PLC 2,584,516
600,000 Boxmore International PLC 2,761,847
235,000 Compass Group PLC 2,472,792
98,500 Hays PLC 1,151,264
28,920 Misys Jersey Ltd.+ 718,951
126,714 Misys PLC 3,192,605
303,370 PowerScreen International PLC 3,548,321
300,000 Serco Group PLC 4,162,893
- --------------------------------------------------------------------------------
20,593,189
- --------------------------------------------------------------------------------
TOTAL STOCK
(Cost -- $167,985,427) 199,658,909
================================================================================
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
SMITH BARNEY INTERNATIONAL EQUITY PORTFOLIO
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C> <C>
REPURCHASE AGREEMENT -- 7.2%
$ 15,400,000 CIBC Wood Gundy Securities, 5.590% due 11/3/97;
Proceeds at maturity -- $15,407,174; (Fully
collateralized by U.S. Treasury Note, 6.125%
due 5/15/98; Market value --$15,708,664)
(Cost -- $15,400,000) $ 15,400,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $183,385,427*) $215,058,909
================================================================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
SMITH BARNEY PACIFIC BASIN PORTFOLIO
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
STOCK -- 86.1%
================================================================================
Australia -- 5.9%
12,500 Australia & New Zealand Banking Group Ltd. ADR $ 435,938
53,584 Coca-Cola Amatil Ltd. 404,154
40,000 Leighton Holdings Ltd. 148,029
- --------------------------------------------------------------------------------
988,121
- --------------------------------------------------------------------------------
Hong Kong -- 15.8%
980,000 Beijing Datang Power Generation Co. Ltd.+ 494,469
230,000 Guangdong Kelon Electric Holdings Co. 291,610
140,000 Guangnan Holdings 128,598
370,000 Hong Kong & China Gas Co., Ltd. 698,881
251 HSBC Holdings PLC 5,683
85,000 Hutchison Whampoa Ltd. 588,330
35,000 Shanghai Industrial Holdings Ltd. 155,767
150,000 VTech Holdings Ltd. 293,033
- --------------------------------------------------------------------------------
2,656,371
- --------------------------------------------------------------------------------
India -- 2.7%
30,000 Mahindra & Mahindra Ltd. GDR(a) 315,000
10,000 Videsh Sanchar Nigam Ltd. GDR(a) 138,000
- --------------------------------------------------------------------------------
453,000
- --------------------------------------------------------------------------------
Indonesia -- 7.3%
13,500 Gulf Indonesia Resources Ltd.+ 283,500
380,000 PT Bimantara Citra 347,850
200,000 PT Daya Guna Samudera 257,975
69,000 PT Fiskaragung Perkasa 28,710
800,000 PT Indah Kiat Pulp & Paper Corp. 305,132
- --------------------------------------------------------------------------------
1,223,167
- --------------------------------------------------------------------------------
Japan -- 30.5%
2,700 Advantest Corp. 223,372
13,000 Fuji Photo Film Co. 471,273
220 H.I.S. Co. Ltd. 7,152
9,000 Kinden Corp. 112,247
10,000 Meitec 295,169
42,000 Minebea Co., Ltd. 419,057
11,000 Murata Manufacturing Co., Ltd. 446,329
13,000 Noritsu Koki Co. Ltd. 432,361
5,000 Rohm Co. Ltd. 494,720
6,000 Seven-Eleven Japan Co., Ltd. 448,990
2,800 Shohkoh Fund & Co., Ltd. 907,957
4,800 Sony Corp. 398,703
64,000 Sumitomo Realty & Development Co. 467,748
- --------------------------------------------------------------------------------
5,125,078
- --------------------------------------------------------------------------------
Malaysia -- 3.9%
141,500 Hap Seng Consolidated Berhad 221,754
116,000 Kuala Lumpur Kepong Berhad 277,015
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
SMITH BARNEY PACIFIC BASIN PORTFOLIO
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Malaysia -- 3.9% (continued)
90,000 Muhibbah Engineering Berhad $ 155,821
- --------------------------------------------------------------------------------
654,590
- --------------------------------------------------------------------------------
Singapore -- 12.2%
7,000 Creative Technology Ltd.+ 178,004
135,000 Datacraft Asia Ltd. 307,800
56,000 Elec & Eltek International Holdings Ltd.+ 403,200
425,000 GPE Industries Ltd. 299,625
287,000 Lindeteves-Jacoberg Ltd. 310,172
60,000 Parkway Holdings Ltd. 151,812
115,000 Venture Manufacturing Ltd. 394,787
- --------------------------------------------------------------------------------
2,045,400
- --------------------------------------------------------------------------------
South Korea -- 2.7%
5,148 LG Information & Communication Ltd. 294,537
4,035 Samsung Electronics Co. 160,618
- --------------------------------------------------------------------------------
455,155
- --------------------------------------------------------------------------------
Thailand -- 5.1%
119,700 Circuit Electronic Industries PLC 105,038
40,000 Delta Electronics PLC 331,505
100,100 GSS Array Technology PLC+ 197,638
32,000 K.R. Precision PLC 234,004
- --------------------------------------------------------------------------------
868,185
- --------------------------------------------------------------------------------
TOTAL STOCK
(Cost -- $15,312,472) 14,469,067
<CAPTION>
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C> <C>
CONVERTIBLE BONDS -- 2.8%
Taiwan -- 2.8%
$ 100,000 Primax Electronics Ltd., 0.500% due 9/30/04(a) 91,500
400,000 Siliconware Precision Industries, 0.500%
due 7/21/04(a) 380,000
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost -- $500,000) 471,500
================================================================================
SUB-TOTAL INVESTMENTS
(Cost -- $15,812,472) 14,940,567
================================================================================
REPURCHASE AGREEMENT -- 11.1%
1,877,000 CIBC Wood Gundy, 5.590% due 11/3/97;
Proceeds at maturity -- $1,877,874; (Fully
collateralized by U.S. Treasury Note, 6.125%
due 5/15/98; Market value -- $1,914,835)
(Cost -- $1,877,000) 1,877,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $17,689,472*) $16,817,567
================================================================================
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
GT GLOBAL STRATEGIC INCOME PORTFOLIO
FACE
AMOUNT++ SECURITY VALUE
================================================================================
<S> <C> <C>
BONDS -- 80.2%
Argentina -- 2.1%
39,000 Acindar Industry, 11.250% due 2/15/04 $ 38,610
100,000 Industrias Metalurgicas Pescarmona SA, 9.500%
due 5/31/02(a) 94,500
344,000 Republic of Argentina, 11.000% due 10/9/06 338,014
171,000 Republic of Argentina, 11.375% due 1/30/17 163,066
- --------------------------------------------------------------------------------
634,190
- --------------------------------------------------------------------------------
Australia -- 2.1%
800,000 Australian Government, 7.500% due 9/15/09 634,898
- --------------------------------------------------------------------------------
Brazil -- 0.8%
340,000 Republic of Brazil Par Z-L, 5.250% due 4/15/24(b) 229,862
- --------------------------------------------------------------------------------
Bulgaria -- 1.9%
322,000 Bulgaria FLIRB Series A, 2.250% due 7/28/12(b) 175,490
614,000 Bulgaria IAB Series PDI, 6.688% due 7/28/11(b) 401,789
- --------------------------------------------------------------------------------
577,279
- --------------------------------------------------------------------------------
Canada -- 2.5%
770,000 Government of Canada, 8.750% due 12/1/05 664,856
86,000 Pacalta Resources Ltd. Series B, 10.750% due 6/15/04 85,785
- --------------------------------------------------------------------------------
750,641
- --------------------------------------------------------------------------------
China -- 1.0%
100,000 Greater Beijing First, 9.500% due 6/15/07(a) 91,125
224,000 Panda Global Energy Co., 12.500% due 4/15/04 210,560
- --------------------------------------------------------------------------------
301,685
- --------------------------------------------------------------------------------
Costa Rica -- 0.3%
100,000 Banco Central Costa Rica Series A, 6.250% due 5/21/10 87,000
- --------------------------------------------------------------------------------
Denmark -- 0.9%
1,800,000 Realkredit Danmark, 6.000% due 10/1/26 254,026
- --------------------------------------------------------------------------------
Dominican Republic -- 0.3%
78,000 Tricom S.A., 11.375% due 9/1/04(a) 77,220
- --------------------------------------------------------------------------------
Ecuador -- 0.9%
364,000 Ecuador Discount Bond, 6.688% due 2/28/25(b) 255,710
- --------------------------------------------------------------------------------
France -- 0.9%
1,400,000 Government of France, 7.250% due 4/25/06 272,265
- --------------------------------------------------------------------------------
Germany -- 9.6%
1,474,000 Bundesrepublik Deutscheland, 8.250% due 9/20/01 955,860
2,025,000 Bundesrepublik Deutscheland, 6.000% due 1/5/06 1,212,812
520,000 Federal National Mortgage Association Global Bond,
5.000% due 2/16/01 303,793
530,000 Treuhandanstalt, 7.125% due 1/29/03(c) 335,411
- --------------------------------------------------------------------------------
2,807,876
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
GT GLOBAL STRATEGIC INCOME PORTFOLIO
FACE
AMOUNT++ SECURITY VALUE
=============================================================================================
<S> <C> <C>
Hong Kong -- 0.6%
100,000 GS Superhighway Holdings, 9.875% due 8/15/04(a) $ 93,750
100,000 Road King Infrastructure, 9.500% due 7/15/07 93,250
- ---------------------------------------------------------------------------------------------
187,000
- ---------------------------------------------------------------------------------------------
Indonesia -- 1.3%
146,000 DGS International Finance Co. BV, 10.000% due 6/1/07(a) 134,685
64,000 Pratama Datakom Asia BV, 12.750% due 7/15/05(a) 56,320
131,000 Tata Electric Co., 8.500% due 8/19/17(a) 114,363
87,000 Tjiwi Kimia Finance Mauritius Ltd., 10.000% due 8/1/04(a) 77,648
- ---------------------------------------------------------------------------------------------
383,016
- ---------------------------------------------------------------------------------------------
Italy -- 5.1%
1,480,000,000 Buoni Poliennali Del Tes, 9.500% due 2/01/99 913,753
950,000,000 Buoni Poliennali Del Tes, 7.250% due 11/1/26 602,831
- ---------------------------------------------------------------------------------------------
1,516,584
- ---------------------------------------------------------------------------------------------
Jamaica -- 0.1%
37,000 Mechala Group, 12.750% due 12/30/99 35,890
- ---------------------------------------------------------------------------------------------
Mexico -- 9.5%
59,000 Copamex, 11.375% due 4/30/04(a) 63,278
100,000 Dine S.A. DE CV, 8.750% due 10/15/07(a) 94,500
100,000 Fideicomiso Petacalco Trust, 10.160% due 12/23/09 100,000
165,000 Hylsa S.A. DE CV, 9.250% due 9/15/07 158,400
132,000 Petroleos Mexicanos, 8.850% due 9/15/07(a) 126,885
264,000 Petroleos Mexicanos, 9.500% due 9/15/27(a) 242,220
50,000 TV Azteca S.A. DE CV, 10.500% due 2/15/07(a) 50,933
916,000 United Mexican States Series A, 6.693% due 12/31/19(b) 818,721
1,066,000 United Mexican States, 11.500% due 5/15/26 1,170,536
510,000 United Mexican States Value Recovery Rights, Expire 6/30/03+ 0
- ---------------------------------------------------------------------------------------------
2,825,473
- ---------------------------------------------------------------------------------------------
Netherlands -- 1.1%
650,000 Netherlands Government, 5.750% due 2/15/07 339,117
- ---------------------------------------------------------------------------------------------
New Zealand -- 2.4%
500,000 Federal National Mortgage Association Global Bond,
7.250% due 6/20/02 310,730
600,000 New Zealand Goverment, 8.000% due 4/15/04 401,000
- ---------------------------------------------------------------------------------------------
711,730
- ---------------------------------------------------------------------------------------------
Nigeria -- 1.1%
500,000 Central Bank of Nigeria Par, 6.250% due 11/15/20 327,500
500 Central Bank of Nigeria Warrants, Expire 11/15/20+ 0
- ---------------------------------------------------------------------------------------------
327,500
- ---------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
GT GLOBAL STRATEGIC INCOME PORTFOLIO
FACE
AMOUNT++ SECURITY VALUE
================================================================================
<S> <C> <C>
Panama -- 2.6%
883,000 Panama Interest Reduction, 3.750% due 7/17/14(b) $ 619,760
160,000 Republic of Panama, 7.875% due 2/13/02(a) 152,400
- --------------------------------------------------------------------------------
772,160
- --------------------------------------------------------------------------------
Peru -- 0.6%
292,000 Peru Past Due Interest, 4.000% due 3/7/17(b) 166,440
- --------------------------------------------------------------------------------
Russia -- 5.2%
95,000 Ministry Finance Russia, 3.000% due 5/14/06(a) 53,200
160,000 Ministry Finance Russia, 3.000% due 5/14/11(a) 76,200
65,000 Mosenergo Finance BV, 8.375% due 10/9/02(a) 57,200
1,170,000 Vnesheconombank Loan Agreement(d)+ 1,040,575
466,000 Vnesheconombank Loan Agreement Assignment(d)+ 299,863
- --------------------------------------------------------------------------------
1,527,038
- --------------------------------------------------------------------------------
South Africa -- 2.7%
124,000 Electricity Supply Comm., 11.000% due 6/1/08 20,613
4,200,000 Republic of South Africa, 13.000% due 8/31/10 794,338
- --------------------------------------------------------------------------------
814,951
- --------------------------------------------------------------------------------
Spain -- 1.6%
55,000,000 Government of Spain, 10.500% due 10/30/03 470,637
- --------------------------------------------------------------------------------
Sweden -- 1.5%
3,000,000 Swedish Government, 8.000% due 8/15/07 447,475
- --------------------------------------------------------------------------------
United Kingdom -- 4.9%
290,000 United Kingdom Conversion, 9.500% due 4/18/05 566,539
200,000 United Kingdom Treasury, 7.000% due 6/07/02 339,781
305,000 United Kingdom Treasury, 7.500% due 12/07/06 542,780
- --------------------------------------------------------------------------------
1,449,100
- --------------------------------------------------------------------------------
United States -- 15.7%
95,000 Chase Manhattan, 6.250% due 1/15/06 93,309
680,782 Federal National Mortgage Association Pass Through,
7.000% due 3/1/04 689,714
330,000 General Motors Acceptance Corp., 6.625% due 10/15/05 331,815
1,300,000 Government National Mortgage Association Pass Through,
6.500% due 11/15/27(e) 1,284,153
389,000 U.S. Treasury Note, 5.875% due 9/30/02 390,700
850,000 U.S. Treasury Note, 6.500% due 10/15/06(c) 883,227
380,000 U.S. Treasury Bond, 6.875% due 8/15/25(c) 412,665
566,000 U.S. Treasury Bond, 6.375% due 8/15/27 583,223
- --------------------------------------------------------------------------------
4,668,806
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
GT GLOBAL STRATEGIC INCOME PORTFOLIO
FACE
AMOUNT++ SECURITY VALUE
================================================================================
<S> <C> <C>
Venezuela -- 0.9%
322,000 Republic of Venezuela, 6.750% due 3/31/20 $ 269,571
1,250 Republic of Venezuela - Oil Warrants, Expire 4/15/20+ 0
- --------------------------------------------------------------------------------
269,571
- --------------------------------------------------------------------------------
TOTAL BONDS
(Cost -- $23,820,300) 23,795,140
================================================================================
CONVERTIBLE BONDS -- 0.4%
================================================================================
Russia -- 0.3%
72,000 Lukinter Finance, 3.500% due 5/6/02(a) 96,841
- --------------------------------------------------------------------------------
China -- 0.1%
21,000 Huaneng Power International PLC, 1.750% due 5/21/04 19,762
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost -- $94,142) 116,603
================================================================================
COMMERCIAL PAPER -- 4.4%
800,000 Ford Motor Credit Corp. due 11/19/97 797,808
500,000 General Electric Co. due 11/19/97 498,630
- --------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost -- $1,296,438) 1,296,438
================================================================================
<CAPTION>
CONTRACTS SECURITY VALUE
================================================================================
<S> <C> <C>
OPTIONS -- 0.1%
1,694,000 Brazil DCB Call @ 82.250, Expire 1/12/98
(Cost -- $30,492) 12,359
================================================================================
SUB-TOTAL INVESTMENTS
(Cost -- $25,241,372) 25,220,540
================================================================================
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
GT GLOBAL STRATEGIC INCOME PORTFOLIO
FACE
AMOUNT SECURITY VALUE
=============================================================================================
<S> <C> <C>
REPURCHASE AGREEMENT -- 14.9%
$4,425,000 CIBC Wood Gundy Securities, 5.590% due 11/3/97; Proceeds at
maturity -- $4,427,061; (Fully collateralized by U.S. Treasury
Bill due 5/15/98; Market value -- $4,513,688) (Cost --
$4,425,000) $ 4,425,000
=============================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $29,666,372*) $29,645,540
=============================================================================================
</TABLE>
(a) Security is exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be sold in transactions that are exempt from
registration, normally to qualified institutional buyers.
(b) Represents current rate on floating rate security.
(c) Security is segregated by the Custodian for open forward foreign currency
contracts and/or for securities traded on a "to-be-announced" basis.
(d) Security is in default.
(e) Security is traded on a "to-be-announced" basis (See Note 11). + Non-income
producing security.
++ Represents local currency.
* Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
22
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================
Statements of Assets and Liabilities October 31, 1997
===================================================================================================
Smith Barney Smith Barney GT Global
International Pacific Strategic
Equity Basin Income
Portfolio Portfolio Portfolio
===================================================================================================
<S> <C> <C> <C>
ASSETS:
Investments, at value
(Cost -- $167,985,427, $15,812,472
and $25,241,372, respectively) $ 199,658,909 $ 14,940,567 $ 25,220,540
Repurchase Agreement, at value
(Cost -- $15,400,000, $1,877,000
and $4,425,000, respectively) 15,400,000 1,877,000 4,425,000
Foreign currency (Cost -- $4,689, $59,992
and $393, respectively) 4,744 58,150 395
Cash 73,499 105,898 202,162
Receivable for securites sold 1,714,749 183,121 185,515
Receivable for Fund shares sold 5,021,113 1,600,026 2,692
Receivable for open forward foreign
currency contracts 4,757 384 257,035
Dividends and interest receivable 184,472 25,290 503,948
Other receivables -- -- 223,680
- -------------------------------------------------------------------------------------------------
Total Assets 222,062,243 18,790,436 31,020,967
- -------------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 2,653,356 478,307 1,418,716
Management fees payable 174,007 14,086 20,217
Payable for open forward foreign
currency contracts 6,403 -- 303,273
Payable for Fund shares purchased 2 -- --
Accrued expenses 191,082 73,472 47,070
- -------------------------------------------------------------------------------------------------
Total Liabilities 3,024,850 565,865 1,789,276
- -------------------------------------------------------------------------------------------------
Total Net Assets $ 219,037,393 $ 18,224,571 $ 29,231,691
=================================================================================================
NET ASSETS:
Par value of capital shares $ 166 $ 23 $ 23
Capital paid in excess of par value 190,944,836 21,448,642 26,174,333
Undistributed (overdistributed) net
investment income -- (56,369) 1,616,547
Accumulated net realized (gain) loss from
security transactions, options, futures
contracts and foreign currencies (3,575,165) (2,305,826) 1,505,304
Net unrealized appreciation (depreciation)
of investments and foreign currencies 31,667,556 (861,899) (64,516)
- -------------------------------------------------------------------------------------------------
Total Net Assets $ 219,037,393 $ 18,224,571 $ 29,231,691
=================================================================================================
Shares Outstanding 16,556,698 2,267,264 2,334,911
- -------------------------------------------------------------------------------------------------
Net Asset Value $ 13.23 $ 8.04 $ 12.52
- -------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
23
<PAGE>
<TABLE>
<CAPTION>
========================================================================================================
Statements of Operations For the Year Ended October 31, 1997
========================================================================================================
Smith Barney Smith Barney GT Global
International Pacific Strategic
Equity Basin Income
Portfolio Portfolio Portfolio
========================================================================================================
<S> <C> <C> <C>
INVESTMENT INCOME:
Dividends $ 1,911,076 $ 217,298 $ 1,554
Interest 346,877 50,111 1,802,040
Less: Foreign withholding tax (179,771) (15,769) (8,308)
- --------------------------------------------------------------------------------------------------------
Total Investment Income 2,078,182 251,640 1,795,286
- --------------------------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 1,692,179 175,112 201,225
Custody 127,568 48,993 31,529
Shareholder communications 26,978 4,570 1,220
Audit and legal 21,756 19,333 18,684
Directors' fees 11,406 3,938 4,683
Shareholder and system servicing fees 8,307 7,683 7,392
Registration fees 2,505 908 1,107
Other 11,840 6,633 4,769
- --------------------------------------------------------------------------------------------------------
Total Expenses 1,902,539 267,170 270,609
- --------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) 175,643 (15,530) 1,524,677
- --------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS, OPTIONS, FUTURES
CONTRACTS AND FOREIGN CURRENCIES
(NOTES 3, 5, 6 AND 7):
Realized Gain (Loss) From:
Security transactions
(excluding short-term securities) (2,625,608) (1,549,531) 1,543,386
Options -- -- 88,995
Futures contracts -- -- (10,088)
Foreign currency transactions (226,181) (40,221) 9,967
- --------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) (2,851,789) (1,589,752) 1,632,260
- --------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
(Depreciation) of Investments and
Foreign Currencies:
Beginning of year 15,538,528 813,420 1,048,593
End of year 31,667,556 (861,899) (64,516)
- --------------------------------------------------------------------------------------------------------
Increase in Net Unrealized
Appreciation (Depreciation) 16,129,028 (1,675,319) (1,113,109)
- --------------------------------------------------------------------------------------------------------
Net Gain (Loss) on Investments, Options,
Futures Contracts and Foreign Currencies 13,277,239 519,151
- --------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Operations $ 13,452,882 $ (3,280,601) $ 2,043,828
========================================================================================================
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================
Statements of Changes in Net Assets
=====================================================================================
Years Ended October 31,
-------------------------------
Smith Barney International Equity Portfolio 1997 1996
=====================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 175,643 $ 224,890
Net realized gain (loss) (2,851,789) 303,917
Increase in net unrealized appreciation 16,129,028 12,631,849
- -------------------------------------------------------------------------------------
Increase in Net Assets
From Operations 13,452,882 13,160,656
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (160,617) (75,105)
- -------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (160,617) (75,105)
- -------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 12):
Net proceeds from sale of shares 155,537,213 78,935,547
Net asset value of shares issued
for reinvestment of dividends 160,617 75,105
Cost of shares reacquired (93,275,280) (2,312,077)
- -------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 62,422,550 76,698,575
- -------------------------------------------------------------------------------------
Increase in Net Assets 75,714,815 89,784,126
NET ASSETS:
Beginning of year 143,322,578 53,538,452
- -------------------------------------------------------------------------------------
End of year* $ 219,037,393 $ 143,322,578
=====================================================================================
* Includes undistributed net investment income of: -- $ 159,473
=====================================================================================
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================
Statements of Changes in Net Assets (continued)
=====================================================================================
Years Ended October 31,
-----------------------------
Smith Barney Pacific Basin Portfolio 1997 1996
=====================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income (loss) $ (15,530) $ 61,542
Net realized loss (1,589,752) (335,117)
(Increase) decrease in net unrealized depreciation (1,675,319) 1,008,150
- -------------------------------------------------------------------------------------
Increase (Decrease) in Net
Assets From Operations (3,280,601) 734,575
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income (111,296) (25,705)
- -------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (111,296) (25,705)
- -------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 12):
Net proceeds from sale of shares 38,889,543 12,262,188
Net asset value of shares issued
for reinvestment of dividends 111,296 25,705
Cost of shares reacquired (34,041,446) (3,461,355)
- -------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 4,959,393 8,826,538
- -------------------------------------------------------------------------------------
Increase in Net Assets 1,567,496 9,535,408
NET ASSETS:
Beginning of year 16,657,075 7,121,667
- -------------------------------------------------------------------------------------
End of year* $ 18,224,571 $ 16,657,075
=====================================================================================
* Includes undistributed (overdistributed)
net investment income of: $ (56,369) $ 110,678
=====================================================================================
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================
Statements of Changes in Net Assets (continued)
=====================================================================================
Years Ended October 31,
-----------------------------
GT Global Strategic Income Portfolio 1997 1996
=====================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 1,524,677 $ 943,615
Net realized gain 1,632,260 857,613
(Increase) decrease in net unrealized depreciation (1,113,109) 812,287
- -------------------------------------------------------------------------------------
Increase in Net Assets From Operations 2,043,828 2,613,515
- -------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (782,233) (385,932)
Net realized gains (963,673) --
- -------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (1,745,906) (385,932)
- -------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 12):
Net proceeds from sale of shares 10,442,393 9,268,494
Net asset value of shares issued
for reinvestment of dividends 1,746,011 385,932
Cost of shares reacquired (2,406,873) (1,126,715)
- -------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 9,781,531 8,527,711
- -------------------------------------------------------------------------------------
Increase in Net Assets 10,079,453 10,755,294
NET ASSETS:
Beginning of year 19,152,238 8,396,944
- -------------------------------------------------------------------------------------
End of year* $ 29,231,691 $ 19,152,238
=====================================================================================
* Includes undistributed net investment income of: $ 1,616,547 $ 756,823
=====================================================================================
</TABLE>
See Notes to Financial Statements.
27
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney International Equity, Smith Barney Pacific Basin and GT
Global Strategic Income Portfolios ("Portfolio(s)") are separate investment
portfolios of the Travelers Series Fund Inc. ("Fund"). The Fund, a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as a diversified, open-end management investment company and consists of these
Portfolios and nine other separate investment portfolios: AIM Capital
Appreciation, Alliance Growth, MFS Total Return, Putnam Diversified Income,
Smith Barney High Income, Smith Barney Income and Growth, Smith Barney Money
Market, TBC Managed Income and Van Kampen American Capital Enterprise
Portfolios. Shares of the Fund are offered only to insurance company separate
accounts which fund certain variable annuity and variable life insurance
contracts. The financial statements and financial highlights for the other
portfolios are presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing prices in the
primary exchange on which they are traded; securities listed or traded on
certain foreign exchanges or other markets whose operations are similar to the
U.S. over-the-counter market (including securities listed on exchanges where the
primary market is believed to be over-the-counter) and listed securities for
which no sales price was reported on that date are valued at the mean between
the bid and asked prices. Securities which are listed or traded on more than one
exchange or market are valued at the quotations on the exchange or market
determined to be the primary market for such securities; (c) securities maturing
within 60 days are valued at cost plus accreted discount or minus amortized
premium, which approximates value; (d) gains or losses on the sale of securities
are calculated by using the specific identification method; (e) interest income,
adjusted for amortization of premium and accretion of discount, is recorded on
an accrual basis; (f) dividend income is recorded on the ex-dividend date;
foreign dividends are recorded on the ex-dividend date or as soon as practical
after the Portfolios determine the existence of a dividend declaration after
exercising reasonable due diligence; (g) dividends and distributions to
shareholders are recorded on the ex-dividend date; (h) the accounting records of
the Portfolios are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income or expense amounts
recorded and collected or paid are adjusted when reported by the custodian; (i)
the
28
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. At October 31, 1997, reclassifications were made to the capital
accounts of Smith Barney International Equity Portfolio to reflect permanent
book/tax differences and income and gains available for distribution under
income tax regulations. Accordingly, a portion of net investment loss amounting
to $51,682 was reclassified to paid-in capital. Net investment income, net
realized gains and net assets were not affected by this change; (j) each
Portfolio intends to comply with the requirements of the Internal Revenue Code
of 1986, as amended pertaining to regulated investment companies and make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; and (k) estimates and assumptions are required
to be made regarding assets, liabilities and changes in net assets resulting
from operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
In addition, the Portfolios may enter into forward exchange contracts in
order to hedge against foreign currency risk. These contracts are marked to
market daily, by recognizing the difference between the contract exchange rate
and the current market rate as an unrealized gain or loss. Realized gains or
losses are recognized when contracts are settled.
2. MANAGEMENT AGREEMENT AND TRANSACTIONS WITH AFFILIATED PERSONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment manager of the Smith Barney
International Equity ("SBIE") and the Smith Barney Pacific Basin ("SBPB")
Portfolios. Travelers Investment Adviser, Inc., ("TIA"), an affiliate of SBMFM,
acts as the investment manager of the GT Global Strategic Income Portfolio
("GTGSI"). SBIE and SBPB pay SBMFM a management fee calculated at the annual
rate of 0.90% of the average daily net assets of each Portfolio, respectively.
GTGSI pays TIA a management fee calculated at an annual rate of 0.80% of its
average daily net assets. These fees are calculated daily and paid monthly.
TIA has entered into a subadvisory agreement with Chancellor LGT Asset
Management, Inc. ("LGT"). Pursuant to the subadvisory agreement, LGT is
responsible for the day-to-day portfolio operations and investment decisions for
GTGSI and is compensated for such services. TIA pays LGT a monthly fee
calculated at the annual rate of 0.375% of the average daily net assets of
GTGSI.
29
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
TIA has entered into a sub-administrative services agreement with SBMFM.
TIA pays SBMFM, as sub-administrator, a fee calculated at an annual rate of
0.10% of the Portfolios' average daily net assets.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. SB also acts as broker for certain portfolio transactions. For the
year ended October 31, 1997, SB received brokerage commissions of $6,500 for
SBIE and SBPB.
All officers and one Director of the Fund are employees of SB.
3. INVESTMENTS
For the year ended October 31, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
SBIE SBPB GTGSI
=============================================================================
<S> <C> <C> <C>
Purchases $115,293,776 $31,104,418 $41,087,254
- -----------------------------------------------------------------------------
Sales 68,308,369 28,261,989 34,368,812
=============================================================================
</TABLE>
At October 31, 1997, the gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
<TABLE>
<CAPTION>
SBIE SBPB GTGSI
==============================================================================
<S> <C> <C> <C>
Gross unrealized appreciation $ 45,867,785 $ 898,679 $ 973,455
Gross unrealized depreciation (14,194,303) (1,770,584) (994,287)
- ------------------------------------------------------------------------------
Net unrealized appreciation
(depreciation) $ 31,673,482 $ (871,905) $ (20,832)
==============================================================================
</TABLE>
4. CAPITAL LOSS CARRYFORWARD
At October 31, 1997, the Fund had capital loss carryforwards available to
offset future realized capital gains, if any, for Federal income tax purposes of
approximately $3,572,000 and $2,306,000 for SBIE and SBPB, respectively. To the
extent that these carryforward losses are used to offset capital gains, it is
probable that the gains so offset will not be distributed. The amounts and
expiration of the carryforward losses are indicated below. Expiration occurs on
October 31 of the year indicated.
<TABLE>
<CAPTION>
Portfolio 2003 2004 2005
==============================================================================
<S> <C> <C>
SBIE $947,000 -- $2,625,000
- ------------------------------------------------------------------------------
SBPB 305,000 $452,000 1,549,000
==============================================================================
</TABLE>
30
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
5. FORWARD FOREIGN CURRENCY CONTRACTS
At October 31, 1997, the Portfolios had open forward foreign currency
contracts as described below. The Portfolios bear the market risk that arises
from changes in foreign currency exchange rates. The unrealized gain (loss) on
the contracts is reflected as follows:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
===============================================================================
Smith Barney International Equity
To Sell:
<S> <C> <C> <C> <C> <C>
NLG Dutch Guilder 282,404 $ 145,543 11/3/97 $ (921)
NLG Dutch Guilder 1,307,626 673,913 11/3/97 (5,040)
NLG Dutch Guilder 1,121,948 578,254 11/4/97 405
- -------------------------------------------------------------------------------
(5,556)
- -------------------------------------------------------------------------------
To Buy:
GBP British Pound 108,684 182,229 11/3/97 1,302
GBP British Pound 65,305 109,486 11/5/97 395
GBP British Pound 256,822 430,571 11/5/97 830
GBP British Pound 31,570 52,928 11/5/97 181
GBP British Pound 157,858 264,642 11/6/97 925
GBP British Pound 279,625 468,780 11/6/97 (290)
GBP British Pound 160,120 267,920 11/7/97 (152)
SEK Swedish Krona 1,223,359 163,476 11/3/97 433
SEK Swedish Krona 1,548,030 206,861 11/3/97 286
- -------------------------------------------------------------------------------
3,910
- -------------------------------------------------------------------------------
Total Unrealized Loss on Forward
Foreign Currency Contracts $(1,646)
===============================================================================
Smith Barney Pacific Basin
To Buy:
Singapore Dollar 289,044 $ 183,671 11/3/97 $ 384
===============================================================================
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Notes to Financial Statements (continued)
================================================================================
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
================================================================================
<S> <C> <C> <C> <C>
GT Global Strategic Income
To Sell:
Australian Dollar 525,000 $ 370,117 11/6/97 $ 15,821
Australian Dollar 530,000 373,642 11/6/97 (7,142)
Canadian Dollar 400,000 283,973 11/6/97 5,358
Canadian Dollar 61,602 43,733 11/6/97 917
Danish Krone 2,600,000 397,011 11/6/97 (22,911)
Dutch Guilder 660,000 340,206 11/6/97 (18,475)
German Deutschemark 823,655 478,731 11/6/97 (11,512)
German Deutschemark 267,342 155,386 11/6/97 (3,297)
German Deutschemark 586,146 340,684 11/6/97 (8,192)
German Deutschemark 1,060,000 616,101 11/6/97 (28,192)
German Deutschemark 1,227,621 713,527 11/6/97 (28,585)
German Deutschemark 525,780 305,598 11/6/97 (12,739)
German Deutschemark 600,000 348,736 11/6/97 (19,247)
German Deutschemark 393,959 229,540 2/5/98 (4,959)
British Pound 180,000 301,763 11/6/97 (17,003)
British Pound 230,000 383,775 2/5/98 (14,441)
Italian Lira 1,200,000,000 709,858 11/6/97 (40,954)
New Zealand Dollar 1,120,000 698,397 11/6/97 11,010
South African Rand 2,620,800 531,161 1/30/98 (11,676)
Spanish Peseta 69,500,000 478,158 11/6/97 (28,902)
Swedish Krone 2,300,000 307,378 11/6/97 (17,705)
- --------------------------------------------------------------------------------
(262,826)
- --------------------------------------------------------------------------------
To Buy:
Australian Dollar 180,000 126,897 11/6/97 (4,341)
Danish Krone 1,500,000 229,045 11/6/97 5,788
Danish Krone 1,100,000 168,312 2/5/98 (1,206)
Dutch Guilder 660,000 341,297 2/5/98 7,040
German Deutschemark 3,547,600 2,067,005 2/5/98 107,005
German Deutschemark 275,346 160,430 2/5/98 5,117
German Deutschemark 1,947,957 1,134,975 2/5/98 34,975
German Deutschemark 1,224,650 713,540 2/5/98 13,540
British Pound 180,000 300,345 2/5/98 10,599
Italian Lira 1,200,000,000 707,380 2/5/98 28,071
Spanish Peseta 69,500,000 478,650 2/5/98 11,794
Swedish Krone 2,300,000 307,824 2/5/98 (1,794)
- --------------------------------------------------------------------------------
216,588
- --------------------------------------------------------------------------------
Total Unrealized Loss on Forward
Foreign Currency Contracts $ (46,238)
================================================================================
</TABLE>
32
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
6. FUTURES CONTRACTS
Initial margin deposits are made upon entering into futures contracts and
are recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contracts. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are received or made and recognized as assets
due from or liabilities due to broker, depending upon whether unrealized gains
or losses are incurred. When the contract is closed, the Portfolios record a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transactions and the Portfolios' basis in the contract.
The Portfolios enter into such contracts to hedge a portion of their
portfolios. The Portfolios bear the market risk that arises from changes in the
value of the financial instruments and securities indices (futures contracts).
At October 31, 1997, the Portfolios had no open futures contracts.
7. OPTION CONTRACTS
Premiums paid when put or call options are purchased by the Portfolios
represent investments, which are marked-to-market daily and are included in the
schedules of investments. When a purchased option expires, the Portfolios will
realize a loss in the amount of the premium paid. When the Portfolios enter into
closing sales transaction, the Portfolios will realize a gain or loss depending
on whether the proceeds from the closing sales transactions are greater or less
than the premium paid for the option. When the Portfolios exercise a put option,
they will realize a gain or loss from the sale of the underlying security and
the proceeds from such sale will be decreased by the premium originally paid.
When the Portfolios exercise a call option, the cost of the security which the
Portfolios purchase upon exercise will be increased by the premium originally
paid.
At October 31 1997, GTGSI held one purchased call option with a cost of
$30,492.
When the Portfolios write a covered call or put option, an amount equal to
the premium received by the Portfolios is recorded as a liability, the value of
which is marked-to-market daily. When a written option expires, the Portfolios
realize a gain equal to the amount of the premium received. When the Portfolios
enter into a closing purchase transaction, the Portfolios realize a gain
33
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
or loss depending upon whether the cost of the closing transaction is greater or
less than the premium originally received, without regard to any unrealized gain
or loss on the underlying security, and the liability related to such option is
eliminated. When a written call option is exercised, the cost of the security
sold will be decreased by the premium originally received. When a written put
option is exercised, the amount of the premium originally received will reduce
the cost of the security which the Portfolios purchased upon exercise. When
written index options are exercised, settlement is made in cash.
The risk associated with purchasing options is limited to the premium
originally paid. The Portfolios enter into options for hedging purposes. The
risk in writing a covered call option is that the Portfolios give up the
opportunity to participate in any increase in the price of the underlying
security beyond the exercise price. The risk in writing a put option is that the
Portfolios are exposed to the risk of loss if the market price of the underlying
security declines.
During the year ended October 31, 1997, the Portfolios did not write any
options.
8. REVERSE REPURCHASE AGREEMENT
GTGSI may enter into reverse repurchase agreement transactions for
leveraging purposes. A reverse repurchase agreement involves a sale by GTGSI of
securities that it holds with an agreement by GTGSI to repurchase the same
securities at an agreed upon price and date. A reverse repurchase agreement
involves the risk that the market value of the securities sold by GTGSI may
decline below the repurchase price of the securities. GTGSI will establish a
segregated account with its custodian, in which GTGSI will maintain cash, U.S.
government securities or other liquid high grade debt obligations equal in value
to its obligations with respect to reverse repurchase agreements.
At October 31, 1997, GTGSI had no open reverse repurchase agreements.
9. LENDING OF PORTFOLIO SECURITIES
The Portfolios have an agreement with their custodian whereby the custodian
may lend securities owned by the Portfolios to brokers, dealers and other
financial organizations. Fees earned by the Portfolios on securities lending are
recorded as interest income. Loans of securities by the Portfolios are
collateralized by cash, U.S. government securities or high quality money market
instruments that are maintained at all times in an amount at least equal to the
current market value of the loaned securities, plus a margin which may
34
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
vary between 2% and 5% depending on the type of securities loaned. The custodian
establishes and maintains the collateral in segregated accounts.
At October 31, 1997, the Portfolios had no securities on loan.
10. PORTFOLIO CONCENTRATION
The Portfolios' investments in foreign securities may involve risks not
present in domestic investments. Since securities may be denominated in a
foreign currency and may require settlement in foreign currencies and pay
interest or dividends in foreign currencies, changes in the relationship of
these foreign currencies to the U.S. dollar can significantly affect the value
of the investments and earnings of the Portfolios. Foreign investments may also
subject the Portfolios to foreign government exchange restrictions,
expropriation, taxation or other political, social or economic developments, all
of which could affect the market and/or credit risk of the investments.
In addition to the risks described above, risks may arise from forward
foreign currency contracts with respect to the potential inability of counter-
parties to meet the terms of their contracts.
11. SECURITIES TRADED ON A TO-BE-ANNOUNCED BASIS
SBIE and GTGSI may trade securities on a "to-be-announced" ("TBA") basis.
In a TBA transaction, the Portfolios commit to purchasing or selling securities
for which specific information is not yet known at the time of the trade,
particularly the face amount and maturity date in GNMA transactions. Securities
purchased on a TBA basis are not settled until they are delivered to the
Portfolios, normally 15 to 45 days later. These transactions are subject to
market fluctuations and their current value is determined in the same manner as
for other securities.
As of October 31, 1997, GTGSI held one TBA security with a cost of
$1,283,141.
12. CAPITAL SHARES
At October 31, 1997, the Fund had six billion shares of capital stock
authorized with a par value of $0.00001 per share. Each share of a Portfolio
represents an equal proportionate interest in that Portfolio with each share of
the same Portfolio and has an equal entitlement to any dividends and
distributions made by the Portfolio.
35
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Notes to Financial Statements (continued)
================================================================================
Transactions in shares of each Portfolio were as follows:
Year Ended Year Ended
October 31, 1997 October 31, 1996
=================================================================================
<S> <C> <C>
Smith Barney International Equity
Shares sold 11,728,929 6,840,983
Shares issued on reinvestment 12,902 7,032
Shares redeemed (6,948,446) (191,267)
- ---------------------------------------------------------------------------------
Net Increase 4,793,385 6,656,748
=================================================================================
Smith Barney Pacific Basin
Shares sold 3,912,494 1,262,559
Shares issued on reinvestment 11,185 2,782
Shares redeemed (3,364,536) (352,741)
- ---------------------------------------------------------------------------------
Net Increase 559,143 912,600
=================================================================================
GT Global Strategic Income
Shares sold 847,390 821,257
Shares issued on reinvestment 147,094 35,504
Shares redeemed (198,015) (98,292)
- ---------------------------------------------------------------------------------
Net Increase 796,469 758,469
=================================================================================
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
============================================================================================================
Financial Highlights
============================================================================================================
For a share of capital stock outstanding throughout each year:
Smith Barney International Equity Portfolio 1997 1996 1995 1994(1)
============================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.18 $10.48 $10.55 $10.00
- ------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss)(2) 0.01 0.02 0.03** (0.03)
Net realized and unrealized gain (loss) 1.05 1.69 (0.10) 0.58
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.06 1.71 (0.07) 0.55
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.01) (0.01) -- --
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.01) (0.01) -- --
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.23 $12.18 $10.48 $10.55
- ------------------------------------------------------------------------------------------------------------
Total Return 8.73% 16.36% (0.66)% 5.50%++
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $219,037 $143,323 $53,538 $13,811
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 1.01% 1.10% 1.44% 1.20%+
Net investment income (loss) 0.09 0.23 0.25 (0.73)+
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 38% 41% 29% --
- ------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3)(4) $0.02 $0.02 $0.01 --
============================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) The Manager waived part of its fees for the year ended October 31, 1994. If
such fees were not waived, the effect on the net investment loss and the
expense ratio would have been as follows:
<TABLE>
<CAPTION>
Per Share
Decrease to Net Expense Ratios
Investment Income Without Fee Waiver
----------------- ------------------
<S> <C> <C>
1994 $0.03 2.00%+
</TABLE>
In addition, during the years ended October 31, 1996 and 1995, the
Portfolio had earned credits from the custodian which reduced service fees
incurred. When the credits are taken into consideration the expense ratios
are 1.05% and 1.21%, 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.
(4) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.00%.
* Amount less than $0.01 per share.
** Includes realized gains and losses from foreign currency transactions.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
37
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================
Financial Highlights (continued)
=====================================================================================================
For a share of capital stock outstanding throughout each year:
Smith Barney Pacific Basin Portfolio 1997 1996 1995 1994(1)
=====================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $9.75 $8.95 $10.10 $10.00
- -----------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income (loss)(2) (0.01) 0.08 (0.04)* (0.04)
Net realized and unrealized gain (loss) (1.64) 0.75 (1.11) 0.14
- -----------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations (1.65) 0.83 (1.15) 0.10
- -----------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.06) (0.03) --
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.06) (0.03) -- --
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $8.04 $9.75 $8.95 $10.10
- -----------------------------------------------------------------------------------------------------
Total Return (17.02)% 9.26% (11.39)% 1.00%++
- -----------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $18,225 $16,657 $7,122 $4,238
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 1.38% 1.34% 1.83% 1.26%+
Net investment income (loss) (0.08) 0.47 (0.51) (0.93)+
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 156% 59% 28% --
- -----------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3)(4) $0.01 $0.02 $0.01 --
=====================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) The Manager 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 reimbursed the Portfolio for $9,778 in expenses for the period
ended October 31, 1994. If such fees were not waived and expenses not
reimbursed, the effect on the net investment loss and the expense ratios
would have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Per Share Without Fee Waiver,
Decreases to Net Reimbursement and
Investment Income Custody Credits
----------------- ---------------
<S> <C> <C>
1996 $0.02 1.58%
1995 0.03 2.23
1994 0.06 2.82+
</TABLE>
In addition, during the years ended October 31, 1996 and 1995, the
Portfolio had earned credits from the custodian which reduced 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.
(4) Trades executed in the United States and Canada have an average commission
rate of $0.06 per share. Commission on trades executed outside these
countries are generally executed as a percentage of cost or proceeds
ranging from 0.5% to 1.00%.
* Includes realized gains and losses from foreign currency transactions.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
38
<PAGE>
<TABLE>
<CAPTION>
=======================================================================================================
Financial Highlights (continued)
=======================================================================================================
For a share of capital stock outstanding throughout each year:
GT Global Strategic Income Portfolio 1997(1) 1996 1995 1994(2)
=======================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.45 $10.77 $9.95 $10.00
- -------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(3) 0.75 0.74 0.64* 0.17
Net realized and unrealized gain (loss) 0.36 1.36 0.28 (0.22)
- -------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.11 2.10 0.92 (0.05)
- -------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.46) (0.42) (0.10) --
Net realized gains (0.58) -- -- --
- -------------------------------------------------------------------------------------------------------
Total Distributions (1.04) (0.42) (0.10) --
- -------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.52 $12.45 $10.77 $9.95
- -------------------------------------------------------------------------------------------------------
Total Return 9.32% 20.07% 9.37% (0.50)%++
- -------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $29,232 $19,152 $8,397 $2,624
- -------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 1.07% 1.23% 1.47% 1.07%+
Net investment income 6.05 6.87 6.44 4.58+
- -------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 161% 192% 295% 56%
=======================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(3) The Manager 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 reimbursed the 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 effect on net investment income and expense
ratios would have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Without Fee Waiver,
Per Share Decreases Reimbursement and
to Net Investment Income Custody Credits
------------------------ ---------------
<S> <C> <C>
1996 $0.02 1.38%
1995 0.04 1.93
1994 0.13 4.53+
</TABLE>
In addition, during the years ended October 31, 1996 and 1995, the
Portfolio had earned credits from the custodian which reduced 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.
* Includes realized gains and losses from foreign currency transactions.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
================================================================================
Tax Information (unaudited)
================================================================================
For Federal tax purposes, GTGSI hereby designates for the fiscal year ended
October 31, 1997:
-- long term capital gain distributions paid of $250,254.
39
<PAGE>
================================================================================
Independent Auditors' Report
================================================================================
The Shareholders and Board of Directors of
Travelers Series Fund Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the Smith Barney International
Equity, Smith Barney Pacific Basin and GT Global Strategic Income Portfolios of
Travelers Series Fund Inc. as of October 31, 1997, the related statements of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended and the financial highlights
for each of the years in the three-year period then ended and for the period
from June 16, 1994 (commencement of operations)to October 31, 1994. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997, by correspondence with the custodian. As to securities
purchased or sold but not received or delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Smith Barney International Equity, Smith Barney Pacific Basin and GT Global
Strategic Income Portfolios of Travelers Series Fund Inc. as of October 31,
1997, the results of their operations for the year then ended, the changes in
their net assets for each of the years in the two-year period then ended and the
financial highlights for each of the years in the three-year period then ended
and for the period from June 16, 1994to October 31, 1994, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
December 18, 1997
40
<PAGE>
Travelers Series SMITH BARNEY
Fund Inc. ------------
A Member of TravelersGroup[LOGO]
Directors Investment Managers
Victor K. Atkins Smith Barney Mutual Funds
A. E. Cohen Management Inc.
Robert A. Frankel Travelers Investment
Rainer Greeven Advisers, Inc.
Susan M. Heilbron
Heath B. McLendon, Chairman Distributor
James M. Shuart Smith Barney Inc.
Officers Custodian
The Chase Manhattan Bank
Heath B. McLendon
President and Annuity Administration
Chief Executive Officer Travelers Annuity Investor Services
5 State House Square
Lewis E. Daidone 1 Tower Square
Senior Vice President and Treasurer Hartford, CT 06183
Jeffrey J. Russell This report is submitted for the general
Vice President information of the shareholders of
Travelers Series Fund Inc. -- Smith
Bruce D. Sargent Barney International Equity, Smith
Vice President Barney Pacific Basin and GT Global
Strategic Income Portfolios. It is not
Irving P. David authorized for distribution to
Controller prospective investors unless accompanied
or preceded by a current Prospectus for
Christina T. Sydor the Portfolios, which contains
Secretary information concerning the Portfolios'
investment policies and expenses as well
as other pertinent information.
Travelers Series Fund Inc.
388 Greenwich Street
New York, New York 10013
IN0252 12/97
<PAGE>
================================================================================
ANNUAL REPORT
================================================================================
1997
1997
1997
1997
1997
Travelers Series
Fund Inc.
MFS Total Return Portfolio
TBC Managed Income
Portfolio
Smith Barney Money
Market Portfolio
---------------------------------------------
October 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
========================================
MFS Total Return, TBC Managed Income and
Smith Barney Money Market Portfolios
========================================
Dear Shareholder:
We are pleased to provide the annual report for the Travelers Series Fund Inc.
- -- MFS Total Return, TBC Managed Income and Smith Barney Money Market Portfolios
for the year ended October 31, 1997. For your convenience, we have summarized
the period's prevailing economic and market conditions and outlined each
Portfolio's investment strategy. A detailed summary of performance and current
holdings can be found in the appropriate sections that follow.
Portfolio Highlights
MFS Total Return Portfolio
The financial markets turned in another strong performance during the year ended
October 31, 1997. The Standard & Poor's 500 Composite Stock Index ("S&P 500
Index") gained 32.10%, the Nasdaq Composite Index generated a total return of
30.46% and the Lehman Brothers Government Corporate Bond Index posted a total
return of 8.81% (The S&P 500 Index is a capitalization-weighted measure of 500
widely held common stocks. The Nasdaq Composite Index is an unmanaged index of
over-the-counter stock prices that does not assume the reinvestment of
dividends. The Lehman Brothers Government Corporate Bond Index is comprised of
over 5,000 issues of U.S. Government Treasury and Agency securities and
corporate and Yankee securities.) In comparison, the MFS Total Return Portfolio
("Portfolio") returned 20.64% over the same time period. In addition, the
Portfolio did better than its Lipper Analytical Services, Inc. ("Lipper") peer
group total return of 19.51% for the same period. (Lipper is a major
fund-tracking organization.)
As a balanced fund, the Portfolio continues to maintain its mix of stocks, bonds
and cash. Through most of the year, the Portfolio's managers allocation to
stocks was between 55% and 60%. The allocation to bonds was approximately 35%
and their cash position was between 5% and 10%. Over the long term, the managers
look to maintain the Portfolio with 60% stocks, 35% bonds and 5% cash. As of
October 31, 1997 the Portfolio's allocation stood at 53.9% in stocks (including
preferred stock, convertible preferred stocks and convertible bonds), 32.9%
bonds, and 13.2% in cash.
The past twelve months have been very positive for stock investors due to
extremely favorable macro-economic conditions including solid growth in Gross
Domestic Product ("GDP") and rising corporate profits.
1
<PAGE>
Moreover, inflation has been in check and interest rates have remained
reasonably steady. In addition, the Portfolio's managers continue to see strong
demand for U.S. stocks as more and more American households continue to invest
more of their assets in stocks. As a result of these and other factors, most
stock prices rose throughout the reporting period.
The MFS Total Return Portfolio benefited from the increase in stock prices. In
particular, the Portfolio has been heavily weighted in financial and energy
stocks --both of which did well over the past twelve months. The stock selection
process followed by the managers is focused on large, dividend-paying companies
with reasonable valuations and attractive growth prospects. The Portfolio's
managers continue to find these characteristics in the financial and energy
sectors. Moreover, their stock selection process also attempts to reduce
volatility. As a result, the managers are underweighted in over-the-counter
stocks in general and technology stocks in particular. They view the technology
sector as a high reward/high risk area that is often difficult to value.
The bond investment strategy followed by the Portfolio's managers has remained
fairly constant through out the reporting period: an overweight in corporate
issues versus U.S. Treasuries. In fact, approximately 65% of the Portfolio's
bond portion was invested in corporate issues during the period under review.
Throughout much of the Portfolio's fiscal year, duration has been approximately
5.5 years. (Duration is a measure of a fund's volatility relative to a given
change in interest rates.) The Portfolio's bond holdings were positioned to
benefit from an expected strengthening of corporate profits while its duration
has been set in anticipation of flat to slightly lower interest rates.
October 1997 produced increased market volatility and falling stock prices. The
currency crises in Asia and concerns over the strength of many international
economies has caused some investors to rethink their outlook for corporate
profit growth in the U.S. In fact, the Portfolio's managers have been concerned
about the rate of corporate earnings growth for some time and they believe it
will slow over the next twelve months. As a result, they have lowered the
Portfolio's weighting in stocks to just over 53% at the end of October and they
increased its cash position to 13%.
The Portfolio's managers also anticipate better stock values over the next
several months and they plan on spending their cash when these more attractive
stock values arise. It's their intent to increase the Portfolio's stock
weighting in the event of any market correction because their long-term outlook
for stocks continues to be quite positive.
2
<PAGE>
TBC Managed Income Portfolio
For the year ended October 31, 1997, the TBC Managed Income Portfolio
("Portfolio") had a total return of 9.19% versus the 8.89% total return of the
Lehman Brothers Aggregate Bond Index, an unmanaged bond index made up of more
than 5,900 issues of U.S. Treasuries and agencies, corporate bonds, and
mortgage-backed securities. Furthermore, the Portfolio outperformed its Lipper
peer group average of 7.98%. The Portfolio's performance was aided by its
allocation to high yield bonds and mortgage-backed securities. Improving credit
trends and the strength of the U.S. economy were factors which led to a strong
year for high yield bonds. Mortgage-backed securities contributed positively to
the Portfolio's performance as interest rates remained within a narrow trading
range throughout much of 1997.
Over the past year, the bond markets have enjoyed strong performance while
experiencing considerable volatility. From November 1996 through April 1997,
interest rates rose as investors expected continued economic growth to produce
inflationary pressures. The yield on the benchmark 30-year U.S. Treasury bond
reach its peak of 7.17% on April 14, 1997, shortly after the Federal Reserve
Board ("Fed") chose to raise the federal funds interest rates by 0.25% at the
end of March. Market sentiment improved and interest rates fell during the
second half of the reporting period as the Fed has since declined to raise the
federal-funds rate at its last five Federal Open-Market Committee ("FOMC")
meetings. (The federal-funds rate is the interest rate banks charge each other
for overnight loans and a closely watched indicator of the direction of interest
rates.) In addition, the expected inflationary pressures resulting from
continued economic growth have yet to materialize. The weakness in the Asian
stock and currency markets during October resulted in a flight to quality to
U.S. Treasuries, these yields reached 12-month lows at that line. The benchmark
U.S. Treasury's yield has declined more than 100 basis points (1.0%) from its
peak in April to 6.15% on October 31, 1997.
During the previous 12 months, the Portfolio's managers have maintained a
40%-50% allocation in corporate bonds. The Portfolio's allocation in industrial
corporate bonds is approximately 27%. The managers continue to avoid specific
types of industrial bonds such as steel, paper and chemical issues. However, the
Portfolio has benefited from its exposure to the media, telecommunications and
radio broadcasting sectors, which have performed well due to industry
consolidations and improved earnings. The Portfolio's managers recently added
Cliffs Drilling and Noble Drilling bonds to the Portfolio. These issues have
performed well due to positive fundamentals and higher earnings in the oil
drilling sector. The price of Protection One Alarm, one of the Portfolio's high
yield issues, rose significantly after it was acquired by Western Resources.
Financial issues comprise approximately 13% of the Portfolio and have performed
very well during the reporting period.
3
<PAGE>
Mortgage-backed securities now comprise approximately 25% of the Portfolio,
about 7% below last year's allocation. The mortgage-backed securities exhibited
strength through much of the year, but weakened during September and October as
the yield on the 10-year U.S. Treasury bond fell below the important 6% level
and remained in a 5.80%-5.90% range. Mortgage prepayments typically increase
when the yield on the 10-year Treasury falls below 6%. The remainder of the
Portfolio has been allocated to U.S. Treasuries and asset-backed securities,
which comprise approximately 20% and 3% of the Portfolio, respectively.
Although recent economic data shows that inflationary pressures have not yet
materialized, the Portfolio's managers remain cautious with respect to interest
rates. Reflecting this view, the Portfolio's duration is neutral with a short
bias. The Portfolio's managers believe their value-oriented, research-driven and
risk-averse investment philosophy should provide strong, stable performance in
the upcoming year.
Smith Barney Money Market Portfolio
The Smith Barney Money Market Portfolio ("Portfolio") had a total return of
5.05% during the reporting period. Despite the recent troubles in the global
stock markets, it has been relatively quiet in the money markets so far this
year. The Fed has stayed patient and has kept its monetary policy unchanged. The
Fed's approach has helped the U.S. economy to grow moderately while inflation
remains subdued. The FOMC last raised interest rates in late March 1997. Since
then, both long- and short-term interest rates have traded in a narrow range and
investors who were long and fully invested have been rewarded.
Fed Chairman Alan Greenspan recently testified before the Joint Economic
Committee of Congress where he discussed the financial turmoil in Asia and its
possible effects on the U.S. markets. As a result of events in Asia, Greenspan
expects some slowing in U.S. economic growth. In addition, the Fed Chairman
reiterated many points that we have raised throughout the year: namely, that
inflation remains low, labor markets are tight and labor productivity continues
to improve. Greenspan also noted that the U.S. stock market drop of late October
1997 was "salutary" for the U.S. economy because it could possibly dampen
consumer demand and bring stock valuations back down from their lofty levels.
The U.S. economy is still growing above its potential. Real GDP rose at a 3.5%
annual rate in the third quarter of 1997 after rising 3.3% in the second quarter
of 1997. In our view, the key to prolonging the current economic expansion is
low inflation. However, we have seen a slight pick-up in labor costs recently.
The employment cost index increased 0.8% in the third quarter
4
<PAGE>
of 1997, and is running at a 3.0% rate for the twelve months ended September
1997 versus 2.8% for the comparable period in 1996.
We think that the current emerging market crisis should help to keep inflation
low. However, the degree to which it slows the capital spending of U.S.
corporations remains an open question. Weak demand in Asia and a stronger U.S.
dollar will have some modest effect (although negative) on U.S. economic growth
in 1998. The Fed will most likely wait to see the impact of all of these events
before adjusting its monetary policy.
Going forward, we will continue to focus on identifying good relative values.
With interest rates remaining fairly stable, there is little or no incremental
yield to be gained if maturities are extended out from three to six months. As
the global crisis unwinds, we plan on purchasing strong solid credits and will
target the Portfolio's average weighted maturity in the 40-50 day range.
In closing, thank you for investing in the MFS Total Return, TBC Managed Income
and Smith Barney Money Market Portfolios. We look forward to helping you pursue
your investment goals.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
November 28, 1997
5
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
MFS Total Return Portfolio
- --------------------------------------------------------------------------------------------------------------
Historical Performance
==============================================================================================================
Net Asset Value
------------------------
Beginning End of Income Capital Gains Total
Year Ended of Year Year Dividends Distribution Returns+
==============================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $13.13 $15.31 $0.29 $0.18 20.64%
- --------------------------------------------------------------------------------------------------------------
10/31/96 11.53 13.13 0.27 0.08 17.16
- --------------------------------------------------------------------------------------------------------------
10/31/95 9.98 11.53 0.05 0.00 16.12
- --------------------------------------------------------------------------------------------------------------
6/16/94* - 10/31/94 10.00 9.98 0.00 0.00 (0.20)++
==============================================================================================================
Total $0.61 $0.26
==============================================================================================================
<CAPTION>
==============================================================================================================
TBC Managed Income Portfolio
- --------------------------------------------------------------------------------------------------------------
Historical Performance
==============================================================================================================
Net Asset Value
------------------------
Beginning End of Income Capital Gains Total
Year Ended of Year Year Dividends Distribution Returns+
==============================================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $11.06 $11.55 $0.49 $0.00 9.19%
- --------------------------------------------------------------------------------------------------------------
10/31/96 11.16 11.06 0.46 0.15 4.61
- --------------------------------------------------------------------------------------------------------------
10/31/95 10.04 11.16 0.13 0.00 12.68
- --------------------------------------------------------------------------------------------------------------
6/16/94* - 10/31/94 10.00 10.04 0.00 0.00 0.40++
==============================================================================================================
Total $1.08 $0.15
==============================================================================================================
</TABLE>
IT IS THE FUNDS' POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
<TABLE>
<CAPTION>
================================================================================
Average Annual Total Return+
================================================================================
MFS Total TBC Managed
Return Income
Portfolio Portfolio
================================================================================
<S> <C> <C>
Year Ended 10/31/97 20.64% 9.19%
- --------------------------------------------------------------------------------
6/16/94* - 10/31/97 15.73 7.89
================================================================================
================================================================================
Cumulative Total Return+
================================================================================
<CAPTION>
MFS Total TBC Managed
Return Income
Portfolio Portfolio
================================================================================
<S> <C> <C>
6/16/94* through 10/31/97 63.80% 29.23%
================================================================================
</TABLE>
+ Assumes the reinvestment of all dividends and capital gains distributions
at net asset value.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Commencement of operations.
6
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Shares of
MFS Total Return Portfolio vs. S&P 500 Index and
Lehman Brothers Government Corporate Bond Index+
- --------------------------------------------------------------------------------
June 1994 -- October 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
MFS Total Lehman Brothers
Return S&P 500 Government Corporate
Portfolio Index Bond Index
--------- ----- ----------
<S> <C> <C> <C>
6/16/94 $10,000 $10,000 $10,000
10/94 $ 9,980 $10,324 $10,075
4/95 $10,614 $11,404 $10,777
10/95 $11,589 $13,053 $11,704
4/96 $12,740 $14,684 $11,709
10/96 $13,577 $16,018 $12,335
4/97 $14,711 $18,374 $12,496
10/31/97 $16,380 $21,159 $13,423
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares of the MFS Total
Return Portfolio on June 16, 1994 (commencement of operations), assumes
reinvestment of dividends and capital gains, if any, at net asset value
through October 31, 1997. The Standard & Poor's 500 Composite Stock Index
("S&P 500 Index") is an index of widely held common stocks listed on the
New York and American Stock Exchanges and the over-the-counter markets.
Figures for the S&P 500 Index include reinvestment of dividends. The Lehman
Brothers Government Corporate Bond Index is comprised of over 5,000 issues
of U.S. Government Treasury and Agency securities and Corporate and Yankee
securities. The indexes are unmanaged and are not subject to the same
management and trading expenses of a mutual fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
7
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Shares of the
TBC Managed Income Portfolio vs.
Lehman Brothers Aggregate Bond Index+
- --------------------------------------------------------------------------------
June 1994 -- October 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<CAPTION>
TBC Managed Income Lehman Brothers
Portfolio Aggregate Bond Index
--------- --------------------
<S> <C> <C>
6/16/94 $10,000 $10,000
10/94 $10,040 $10,052
4/95 $10,533 $10,757
10/95 $11,313 $11,626
4/96 $11,289 $11,687
10/96 $11,835 $12,305
4/97 $12,084 $12,515
10/31/97 $12,923 $13,399
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares of the TBC Managed
Income Portfolio on June 16, 1994 (commencement of operations), assumes
reinvestment of dividends and capital gains, if any, at net asset value
through October 31, 1997. The Lehman Brothers Aggregate Bond Index is
comprised of over 6,500 issues of U.S. Treasuries, Agencies, Corporate
Bonds and Mortgage-Backed securities. The index is unmanaged and is not
subject to the same management and trading expenses of a mutual fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost.
8
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments October 31, 1997
===========================================================================================================
MFS TOTAL RETURN PORTFOLIO
SHARES SECURITY VALUE
===========================================================================================================
<S> <C> <C>
COMMON STOCKS -- 49.4%
===========================================================================================================
Aerospace -- 2.8%
63,000 Allied Signal Inc. $ 2,268,000
17,900 General Dynamics Corp. 1,453,256
10,300 Lockheed Martin Corp. 979,144
27,400 Raytheon Co. 1,486,450
20,100 United Technologies Corp. 1,407,000
- -----------------------------------------------------------------------------------------------------------
7,593,850
- -----------------------------------------------------------------------------------------------------------
Apparel -- 0.1%
2,000 V.F. Corp. 178,750
- -----------------------------------------------------------------------------------------------------------
Automotive -- 1.7%
45,300 B.F. Goodrich Co. 2,018,681
6,700 Dana Corp. 313,643
38,400 Ford Motor Co. 1,677,600
3,800 General Motors Corp. 243,913
12,000 Volvo Aktiebolaget ADR 312,000
- -----------------------------------------------------------------------------------------------------------
4,565,837
- -----------------------------------------------------------------------------------------------------------
Banking -- 5.6%
3,600 Bank of Boston Corp. 291,825
40,500 Bank of New York Co., Inc. 1,906,031
22,400 BB&T Corp. 1,219,400
12,984 Chase Manhattan Corp. 1,498,029
14,300 Fleet Financial Corp. 919,669
39,100 National City Corp. 2,336,225
24,900 NationsBank Corp. 1,490,888
27,700 Northern Trust Corp. 1,620,450
45,700 Norwest Corp. 1,465,256
40,300 PNC Bank Corp. 1,914,250
16,400 WBK Strypes Trust 508,400
- -----------------------------------------------------------------------------------------------------------
15,170,423
- -----------------------------------------------------------------------------------------------------------
Business Machines -- 1.3%
24,200 Digital Equipment Corp.+ 1,211,513
22,700 International Business Machines Corp. 2,226,019
- -----------------------------------------------------------------------------------------------------------
3,437,532
- -----------------------------------------------------------------------------------------------------------
Cellular Phones -- 0.2%
12,100 Telephone Data Systems Inc. 514,250
- -----------------------------------------------------------------------------------------------------------
Chemicals -- 1.6%
15,800 Air Products & Chemical Inc. 1,200,800
11,500 Dow Chemical Co. 1,043,625
27,800 E.I. du Pont De Nemours & Co. 1,581,125
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
MFS TOTAL RETURN PORTFOLIO
SHARES SECURITY VALUE
===========================================================================================================
<S> <C> <C>
Chemicals -- 1.6% (continued)
9,000 Nalco Chemical Co. $ 360,000
- -----------------------------------------------------------------------------------------------------------
4,185,550
- -----------------------------------------------------------------------------------------------------------
Computer Software - Systems -- 0.6%
33,300 Alcatel Alsthom ADR 809,606
18,100 Lear Corp. 869,931
- -----------------------------------------------------------------------------------------------------------
1,679,537
- -----------------------------------------------------------------------------------------------------------
Conglomerates -- 0.1%
8,900 Eastern Enterprises 348,769
- -----------------------------------------------------------------------------------------------------------
Construction Services -- 0.3%
13,000 Champion International Corp. 717,438
- -----------------------------------------------------------------------------------------------------------
Consumer Products -- 1.9%
5,100 Colgate Palmolive Co. 330,225
61,500 Philip Morris Cos. Inc. 2,436,938
24,300 Rubbermaid Inc. 584,719
13,607 Service Corp. 414,163
12,700 Sherwin Williams Co. 352,425
3,200 Stanley Works, Inc. 135,200
21,900 Tyco International Ltd. 826,725
- -----------------------------------------------------------------------------------------------------------
5,080,395
- -----------------------------------------------------------------------------------------------------------
Electrical Equipment - Utilities -- 1.5%
31,400 Cooper Industries Inc. 1,636,725
38,500 General Electric Co. 2,485,656
- -----------------------------------------------------------------------------------------------------------
4,122,381
- -----------------------------------------------------------------------------------------------------------
Financial Institutions -- 2.8%
32,000 A.G. Edwards Inc. 1,050,000
29,300 American Express Co. 2,285,400
37,600 Fannie Mae 1,821,250
21,900 Federal Home Loan Mortgage Corp. 829,463
2,000 Franklin Resources Inc. 179,750
7,000 Merrill Lynch & Co. Inc. 473,375
18,500 Morgan Stanley Dean Witter Corp. 906,500
- -----------------------------------------------------------------------------------------------------------
7,545,738
- -----------------------------------------------------------------------------------------------------------
Food & Beverages -- 0.7%
8,500 Dimon Inc. 220,469
6,800 General Mills Inc. 448,800
11,600 McCormick & Co., Inc. 290,000
28,400 PepsiCo Inc. 1,045,475
- -----------------------------------------------------------------------------------------------------------
2,004,744
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
MFS TOTAL RETURN PORTFOLIO
SHARES SECURITY VALUE
===========================================================================================================
<S> <C> <C>
Forest & Paper Products -- 0.6%
33,700 Weyerhaeuser Co. $ 1,609,175
- -----------------------------------------------------------------------------------------------------------
Hospital Related -- 3.2%
24,100 American Home Products Corp. 1,786,413
1 Astra AB ADR 15
6,900 Baxter International Inc. 319,125
41,400 Bristol-Myers Squibb Co. 3,632,850
48,900 Smithkline Beecham ADR 2,328,863
13,900 United Healthcare Corp. 643,744
- -----------------------------------------------------------------------------------------------------------
8,711,010
- -----------------------------------------------------------------------------------------------------------
Insurance -- 3.7%
7,000 Allstate Corp. 580,563
24,800 Chubb Corp. 1,643,000
15,200 Cigna Corp. 2,359,800
16,400 Lincoln National Corp. 1,127,500
30,000 Provident Co. 1,001,250
18,700 St. Paul Cos. Inc. 1,494,831
47,100 Torchmark Corp. 1,878,113
- -----------------------------------------------------------------------------------------------------------
10,085,057
- -----------------------------------------------------------------------------------------------------------
Machinery - Diversified -- 0.7%
29,700 Deere & Co. 1,562,963
9,300 York International Corp. 424,313
- -----------------------------------------------------------------------------------------------------------
1,987,276
- -----------------------------------------------------------------------------------------------------------
Metals & Minerals -- 0.5%
16,100 Aluminum Co. of America 1,175,300
2,800 Phelps Dodge Corp. 208,250
- -----------------------------------------------------------------------------------------------------------
1,383,550
- -----------------------------------------------------------------------------------------------------------
Oil Production -- 7.4%
12,200 Amoco Corp. 1,118,588
18,200 Atlantic Richfield Co. 1,498,088
12,000 Baker Hughes Inc. 551,256
40,902 British Petroleum Co. PLC ADR 3,589,151
17,700 Chevron Corp. 1,468,003
31,300 Exxon Corp. 1,922,994
19,700 Mobil Corp. 1,434,416
33,200 Occidental Petroleum Corp. 925,450
13,800 Repsol SA ADR 586,500
40,700 Royal Dutch Petroleum Co. ADR 2,141,838
4,000 Tenneco Inc. 179,750
45,900 Texaco Inc. 2,613,431
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
MFS TOTAL RETURN PORTFOLIO
SHARES SECURITY VALUE
===========================================================================================================
<S> <C> <C>
Oil Production -- 7.4% (continued)
13,700 Union Pacific Resource Group Inc. $ 337,363
43,700 USX-Marathon Group Inc. 1,562,275
- -----------------------------------------------------------------------------------------------------------
19,929,103
- -----------------------------------------------------------------------------------------------------------
Photographic Products -- 0.4%
19,600 Eastman Kodak Co. 1,173,550
- -----------------------------------------------------------------------------------------------------------
Pollution Control -- 1.1%
52,300 Browning-Ferris Industries Inc. 1,699,750
53,100 Waste Management Inc. 1,241,213
- -----------------------------------------------------------------------------------------------------------
2,940,963
- -----------------------------------------------------------------------------------------------------------
Railroads -- 1.0%
8,500 Burlington Northern Santa Fe Corp. 807,500
37,800 Illinois Central Corp. 1,346,625
19,200 Norfolk Southern Corp. 616,800
- -----------------------------------------------------------------------------------------------------------
2,770,925
- -----------------------------------------------------------------------------------------------------------
Real Estate Investment Trust -- 0.8%
18,800 Arden Realty Group Inc. 573,400
16,000 Hospitality Properties Trust Corp. 569,000
13,000 Meditrust Corp. 555,750
16,000 Trinet Corporate Realty Trust, Inc. 579,000
- -----------------------------------------------------------------------------------------------------------
2,277,150
- -----------------------------------------------------------------------------------------------------------
Restaurant & Lodging -- 0.0%
2,540 Tricon Global Restaurants 76,994
- -----------------------------------------------------------------------------------------------------------
Retail -- 2.0%
5,200 CVS Corp. 318,825
23,300 J.C. Penney & Co. Inc. 1,367,419
6,800 May Department Stores Co. 366,350
43,000 Rite Aide Corp. 2,553,125
14,000 Sears, Roebuck & Co. 586,250
- -----------------------------------------------------------------------------------------------------------
5,191,969
- -----------------------------------------------------------------------------------------------------------
Utilities - Electric -- 2.9%
19,200 Carolina Power & Light Co. 686,400
20,000 Cinergy Corp. 657,646
18,000 CMS Energy Corp. 657,000
10,400 DPL Inc. 258,050
23,798 Duke Energy Corp. 1,148,254
25,300 FPL Group, Inc. 1,307,694
19,800 GPU Inc. 716,513
32,900 Pacificorp 713,519
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
MFS TOTAL RETURN PORTFOLIO
SHARES SECURITY VALUE
===========================================================================================================
<S> <C> <C>
Utilities - Electric -- 2.9% (continued)
35,600 Pinnacle West Capital Co. $ 1,239,325
10,500 Texas Utilities Co. 376,688
- -----------------------------------------------------------------------------------------------------------
7,761,089
- -----------------------------------------------------------------------------------------------------------
Utilities - Gas -- 1.5%
31,900 Coastal Corp. 1,917,988
8,500 Pacific Enterprises 277,844
23,000 UGI Corp. 618,125
21,600 Williams Cos., Inc. 1,100,250
- -----------------------------------------------------------------------------------------------------------
3,914,207
- -----------------------------------------------------------------------------------------------------------
Utilities - Telephone -- 2.4%
30,600 American Telephone & Telegraph Corp. 1,497,475
23,900 Bellsouth Corp. 1,130,769
47,100 GTE Corp. 1,998,806
8,062 SBC Communications Inc. 512,945
24,900 Sprint Corp. 1,294,800
- -----------------------------------------------------------------------------------------------------------
6,434,795
- -----------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $110,801,635) 133,392,007
===========================================================================================================
CONVERTIBLE PREFERRED STOCKS -- 1.2%
===========================================================================================================
Aerospace -- 0.2%
8,700 Loral Space Communications, 6.000%++ 535,050
- -----------------------------------------------------------------------------------------------------------
Agricultural Products -- 0.2%
3,200 Case Corp., Class A Shares, $4.50 464,000
- -----------------------------------------------------------------------------------------------------------
Banks -- 0.2%
7,400 McKesson Corp., 5.000%++ 555,925
- -----------------------------------------------------------------------------------------------------------
Financial Institutions -- 0.1%
2,400 Finova Finance Trust, 5.500% 151,200
- -----------------------------------------------------------------------------------------------------------
Metals & Minerals -- 0.1%
3,900 Timet Capital Trust, 6.625%++ 205,725
2,800 USX Capital LLC, Series A, 8.750% 70,000
- -----------------------------------------------------------------------------------------------------------
275,725
- -----------------------------------------------------------------------------------------------------------
Printing & Publishing -- 0.1%
400 NB Capital Corp., 8.350%++ 425,000
- -----------------------------------------------------------------------------------------------------------
Restaurants & Lodging -- 0.3%
11,000 Host Marriott Finance Trust, 6.750%++ 712,250
- -----------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost-- $2,661,941) 3,119,150
===========================================================================================================
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
MFS TOTAL RETURN PORTFOLIO
SHARES SECURITY VALUE
===========================================================================================================
<S> <C> <C>
FOREIGN COMMON STOCKS -- 3.0%
===========================================================================================================
Canada -- 0.4%
19,300 Canadian National Railway Co. $ 1,040,994
- -----------------------------------------------------------------------------------------------------------
Germany -- 0.8%
31,200 Henkel KGAA 1,658,707
16,500 Hoechst AG 635,132
- -----------------------------------------------------------------------------------------------------------
2,293,839
- -----------------------------------------------------------------------------------------------------------
Netherlands -- 0.7%
11,100 Akzo Nobel 1,956,675
- -----------------------------------------------------------------------------------------------------------
Switzerland -- 0.6%
976 Novartis Registered 1,532,776
- -----------------------------------------------------------------------------------------------------------
United Kingdom -- 0.5%
148,800 Grand Metropolitan 1,338,686
- -----------------------------------------------------------------------------------------------------------
TOTAL FOREIGN COMMON STOCKS
(Cost-- $7,020,856) 8,162,970
===========================================================================================================
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
CORPORATE BONDS -- 15.2%
===========================================================================================================
Airlines -- 1.0%
Continental Airlines Inc.:
$ 500,000 Ba3* 9.500% due 12/15/01 522,500
392,156 BBB 9.500% due 10/15/13 453,699
97,210 NR 10.220% due 7/2/14 118,179
400,000 Baa3* Delta Airlines Inc., 8.500% due 3/15/02 432,500
Jet Equipment Trust:
250,000 A2* 9.410% due 6/15/10++ 299,426
192,403 A+ 8.640% due 11/1/12++ 216,424
300,000 Baa2* 11.440% due 11/1/14++ 376,308
100,000 Baa1* 10.690% due 5/1/15++ 124,932
- -----------------------------------------------------------------------------------------------------------
2,543,968
- -----------------------------------------------------------------------------------------------------------
Banking -- 1.4%
400,000 BB+ Capital One Financial Corp., 7.250% due 12/1/03 403,000
400,000 BB Colonial Capital I, 8.920% due 1/15/27++ 430,500
400,000 Baa1* Dao Heng Bank Ltd., 7.750% due 1/24/07++ 373,500
300,000 NR Greenpoint Capital Trust I, 9.100% due 6/1/27 324,375
600,000 BBB MBNA Capital Trust Trust Corp., 8.278% due 12/1/26 607,500
400,000 Ba1* Riggs National Bank, 8.500% due 2/1/06 417,000
200,000 B+ Societe Generale Real Estate, 7.640% due 12/29/49++ 211,000
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
MFS TOTAL RETURN PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Banking -- 1.4% (continued)
$ 400,000 A1* State Street Bank, 7.940% due 12/30/26 $ 415,000
600,000 Baa3* Washington Mutual Capital Trust, 8.375% due 6/1/27 642,750
- -----------------------------------------------------------------------------------------------------------
3,824,625
- -----------------------------------------------------------------------------------------------------------
Building & Construction -- 0.1%
200,000 Baa2* Georgia-Pacific Corp., 9.875% due 11/1/21 227,250
100,000 BBB- Owens-Corning Fiberglass Corp., 8.875% due 6/1/02 109,750
- -----------------------------------------------------------------------------------------------------------
337,000
- -----------------------------------------------------------------------------------------------------------
Business Machines -- 0.1%
300,000 A1* International Business Machines Corp., 7.125% due 12/1/06 305,625
- -----------------------------------------------------------------------------------------------------------
Chemicals -- 0.0%
100,000 BBB Solutia Inc., 7.375% due 10/15/27 100,875
- -----------------------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations -- 1.0%
393,204 NR BCF LLC, 7.750% due 9/25/26++ 384,852
2,115,436 AAA Beneficial Mortgage Corp., 5.584% due 9/28/37 2,194,765
- -----------------------------------------------------------------------------------------------------------
2,579,617
- -----------------------------------------------------------------------------------------------------------
Consumer Products -- 0.1%
400,000 Baa3* Fingerhut Cos., 7.375% due 9/15/99 405,000
- -----------------------------------------------------------------------------------------------------------
Entertainment -- 0.5%
Time Warner Inc.:
1,000,000 BBB- 6.100% due 12/30/01++ 985,000
140,000 BBB- 8.180% due 8/15/07 152,950
100,000 BBB- 9.125% due 1/15/13++ 116,125
- -----------------------------------------------------------------------------------------------------------
1,254,075
- -----------------------------------------------------------------------------------------------------------
Financial -- 2.6%
2,000,000 A Bear Stearns Co. Inc., 6.500% due 8/1/02 2,020,000
1,370,000 BB+ Contifinancial Corp., 8.375% due 8/15/03 1,397,400
400,000 BB* Dynex Capital Inc., 7.875% due 7/15/02 407,000
400,000 A3* First Empire Capital Trust, 8.234% due 2/1/27 424,000
Lehman Brothers Inc.:
400,000 A 6.400% due 12/27/99 400,000
400,000 A 7.125% due 9/15/03 411,000
500,000 A 7.500% due 8/1/26 526,250
400,000 BBB MBNA Corp., 6.963% due 9/12/02++ 408,000
400,000 A+ Nationwide Mutual Insurance Co., 7.500% due 2/15/24++ 401,000
Salton Sea Funding:
100,000 BBB- 7.370% due 5/30/05 103,250
400,000 BBB- 7.840% due 5/30/10 427,500
- -----------------------------------------------------------------------------------------------------------
6,925,400
- -----------------------------------------------------------------------------------------------------------
Forest & Paper Products -- 0.2%
400,000 BBB- Boise Cascade Corp., 7.430% due 10/10/05 416,500
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
MFS TOTAL RETURN PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Industrial -- 1.6%
===========================================================================================================
$ 60,000 BBB- Burlington Industries, 7.250% due 8/1/27 $ 61,200
Circus Circus Enterprise:
230,000 BBB 7.000% due 11/15/36 226,263
400,000 BBB+ 6.700% due 11/15/2096 402,000
200,000 NR Edelnor, 7.750% due 3/15/06++ 204,030
600,000 BBB+ Federal Express Corp., 7.650% due 1/15/14 636,000
277,000 BBB- Freeport-McMoRan Corp., 7.500% due 11/15/06 288,080
400,000 NR Jasmine Submarine Telecom, 8.483% due 5/30/11++ 375,000
Korea Development Bank:
100,000 AA- 7.125% due 9/17/01 96,875
400,000 AA- 6.750% due 12/1/05 361,000
400,000 BBB+ Norfolk Southern Corp., 7.050% due 5/1/37 420,500
400,000 BBB- Northrop-Grumman Corp., 9.375% due 10/15/24 469,000
90,000 BBB Raytheon Co., 6.750% due 8/15/07 91,800
50,000 A2* Sears Roebuck Acceptance, 6.700% due 9/18/07 50,813
400,000 A- Southern Co. Capital Trust I, 8.190% due 2/1/37 435,000
200,000 A- Transocean Offshore Inc., 8.000% due 4/15/27 222,500
- -----------------------------------------------------------------------------------------------------------
4,340,061
- -----------------------------------------------------------------------------------------------------------
Insurance -- 0.8%
400,000 BBB- Conseco Finance Trust III, 8.796% due 4/1/27 437,000
267,000 A Equitable Life Assurance, 7.700% due 12/1/15++ 282,686
400,000 Baa1* Providian Capital I, 9.525% due 2/1/27++ 438,000
1,000,000 NR Safeco Capital Trust I, 8.072% due 7/15/37++ 1,037,500
- -----------------------------------------------------------------------------------------------------------
2,195,186
- -----------------------------------------------------------------------------------------------------------
Medical Services -- 0.2%
Tenet Healthcare Corp.:
60,000 Ba1* 8.625% due 1/15/07 64,275
400,000 Ba1* 8.000% due 1/15/05 417,500
140,000 Ba3* 10.125% due 3/1/05 154,000
- -----------------------------------------------------------------------------------------------------------
635,775
- -----------------------------------------------------------------------------------------------------------
Oil -- 0.9%
400,000 NR Enserch Exploration Inc., 7.540% due 1/2/09++ 418,440
400,000 BB+ Gulf Canada Resources Ltd., 9.250% due 1/15/04 422,000
400,000 BBB Louisiana Land & Exploration, 7.650% due 12/1/23 415,500
ORYX Energy Co.:
400,000 BB+ 10.000% due 4/1/01 442,000
500,000 BB+ 8.375% due 7/15/04 540,625
110,000 BBB Seacor Smit Inc., 7.200% due 9/15/09++ 112,338
115,000 BBB Ultramar Diamond Shamroc, 7.200% due 10/15/17 116,006
- -----------------------------------------------------------------------------------------------------------
2,466,909
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
MFS TOTAL RETURN PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Restaurants & Lodging -- 0.3%
$ 400,000 BBB+ Hilton Hotels, 7.950% due 4/15/07 $ 428,000
400,000 BBB Mirage Resorts Inc., 6.750% due 8/1/07 400,000
- -----------------------------------------------------------------------------------------------------------
828,000
- -----------------------------------------------------------------------------------------------------------
Telecommunications -- 1.6%
Continental Cablevision:
60,000 BB+ 8.300% due 5/15/06 65,775
1,000,000 BB- 11.000% due 6/1/07 1,120,000
40,000 AAA Fox/Liberty Networks LLC, 8.875% due 8/15/07++ 40,100
Tele-Communications Inc.:
1,400,000 BBB- 7.385% due 8/27/01 1,428,000
70,000 BBB- 8.250% due 1/15/03 74,025
800,000 BBB- 8.750% due 8/1/15 903,000
400,000 BB+ 9.650% due 3/31/27 442,000
Worldcom Inc.:
100,000 BBB- 8.875% due 1/15/06 108,000
99,000 BBB- 7.750% due 4/1/07 105,188
136,000 BBB- 7.750% due 4/1/27 147,390
- -----------------------------------------------------------------------------------------------------------
4,433,478
- -----------------------------------------------------------------------------------------------------------
Utilities - Electric -- 2.5%
Beaver Valley II Funding Corp.:
220,000 B+ 8.250% due 6/1/03 224,400
80,000 B+ 8.625% due 6/1/07 87,400
70,000 BB+ Calenergy Co. Inc., 7.630% due 10/15/07 70,875
100,000 BB Cleveland Electric, 9.000% due 7/1/23 108,250
Commonwealth Edison:
200,000 BBB- 6.400% due 10/15/05 194,250
400,000 BBB- 7.625% due 1/15/07 419,000
400,000 BB+ Connecticut Lighting & Power, 7.750% due 6/1/02 411,500
400,000 BBB+ Empresa National Electrical, 7.325% due 2/1/37++ 400,000
First PV Funding:
243,000 BB- 10.150% due 1/15/16 257,884
259,000 BB- 10.300% due 1/15/14 282,634
165,000 BB+ Loewen Group International Inc., 6.700% due 10/1/99 165,000
Long Island Lighting Co.:
165,000 BB+ 7.500% due 3/1/07 170,981
210,000 BB+ 8.900% due 7/15/19 223,388
910,000 BB+ 9.000% due 11/1/22 1,027,163
59,000 B Midland Funding II, 11.750% due 7/23/05 69,544
Niagara Mohawk Power:
400,000 BB- 6.875% due 3/1/01 401,000
1,000,000 BB- 8.770% due 1/1/18 1,083,750
400,000 BBB- 8.750% due 4/1/22 433,500
140,000 BBB- 8.500% due 7/1/23 148,225
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
MFS TOTAL RETURN PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Utilities - Electric -- 2.5% (continued)
$ 213,000 B+ North Atlantic Energy, 9.050% due 6/1/02 $ 215,392
120,000 Ba3* Texas Ultilities Electric Co., 7.170% due 8/1/07 124,050
100,000 BBB Utilicorp United Inc., 8.450% due 11/15/99 104,250
- -----------------------------------------------------------------------------------------------------------
6,622,436
- -----------------------------------------------------------------------------------------------------------
Utilities - Gas -- 0.3%
300,000 BB+ California Energy Co., step bond to yield
9.640% due 1/15/04 324,000
400,000 BBB Texas Gas Transmission, 7.250% due 7/15/27 414,000
- -----------------------------------------------------------------------------------------------------------
738,000
- -----------------------------------------------------------------------------------------------------------
Utilities - Telephone -- 0.0%
100,000 B+ U.S. Cellular Corp., 7.250% due 8/15/07 102,250
- -----------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost-- $39,685,383) 41,054,780
===========================================================================================================
CONVERTIBLE CORPORATE BONDS -- 0.3%
===========================================================================================================
Automobile -- 0.3%
825,000 AAA Deutsche Bank Finance BV, zero coupon bond to yield
4.557% due 2/12/17++ 340,313
360,000 BBB+ Diamond Offshore Drill, 3.750% due 2/15/07 585,450
- -----------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE CORPORATE BONDS
(Cost-- $709,776) 925,763
===========================================================================================================
FOREIGN BONDS -- 0.4%
===========================================================================================================
Indonesia -- 0.1%
222,000 B+ PT Polysindo Eka, 13.000% due 6/15/01 239,760
- -----------------------------------------------------------------------------------------------------------
Mexico -- 0.0%
40,000 BB Mexico-United Mexica, 11.500% due 5/15/21 43,300
- -----------------------------------------------------------------------------------------------------------
Panama -- 0.1%
400,000 A1* Panama Republic, 7.875% due 2/13/02++ 388,000
- -----------------------------------------------------------------------------------------------------------
United States -- 0.2%
425,000 NR Banco Comerical, 8.250% due 2/5/07 453,539
- -----------------------------------------------------------------------------------------------------------
TOTAL FOREIGN BONDS
(Cost-- $1,115,593) 1,124,599
===========================================================================================================
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 17.3%
7,400,000 U.S. Treasury Note, 5.750% due 10/31/02 7,412,341
8,000,000 U.S. Treasury Note, 6.000% due 6/30/99 8,047,920
1,439,000 U.S. Treasury Note, 6.125% due 8/15/07 1,471,219
1,200,000 U.S. Treasury Note, 6.250% due 8/31/02 1,222,836
5,293,000 U.S. Treasury Note, 6.500% due 10/15/06 5,499,905
5,000,000 U.S. Treasury Note, 6.625% due 5/15/07 5,257,500
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
MFS TOTAL RETURN PORTFOLIO
FACE
AMOUNT SECURITY VALUE
===========================================================================================================
<S> <C> <C>
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 17.3% (continued)
$ 3,013,000 U.S. Treasury Note, 6.625% due 2/15/27 $ 3,193,057
880,000 U.S. Treasury Note, 7.250% due 5/15/04 946,070
1,800,000 U.S. Treasury Note, 9.125% due 5/15/99 1,891,386
200,000 U.S. Treasury Note, 9.250% due 8/15/98 205,548
100,000 U.S. Treasury Note, 9.875% due 11/15/15 139,834
199,989 Federal National Mortgage Association, 7.000% due 5/1/12 202,675
2,216,293 Federal National Mortgage Association, 7.000% due 6/1/12 2,246,059
540,539 Federal National Mortgage Association, 7.000% due 7/1/12 547,799
3,036,724 Federal National Mortgage Association, 8.500% due 12/1/26 3,177,175
989,270 Government National Mortgage Association,
7.500% due 11/15/26 1,012,143
988,904 Government National Mortgage Association,
7.500% due 6/15/27 1,011,768
197,732 Government National Mortgage Association,
7.500% due 9/15/27 202,304
235,645 Government National Mortgage Association,
8.500% due 6/15/26 247,206
483,452 Government National Mortgage Association,
8.500% due 7/15/26 507,170
417,414 Government National Mortgage Association,
8.500% due 9/15/26 437,893
228,022 Government National Mortgage Association,
8.500% due 1/15/27 239,209
520,030 Government National Mortgage Association,
8.500% due 3/15/27 545,543
172,918 Government National Mortgage Association,
8.500% due 10/15/27 181,401
700,000 Government National Mortgage Association 30 Year,
8.000% due 6/20/25 736,582
- -----------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES &
OBLIGATIONS
(Cost-- $45,949,688) 46,582,543
===========================================================================================================
SUB-TOTAL INVESTMENTS
(Cost-- $207,944,872) 234,361,812
===========================================================================================================
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
MFS TOTAL RETURN PORTFOLIO
FACE
AMOUNT SECURITY VALUE
===========================================================================================================
<S> <C> <C>
SHORT-TERM SECURITIES -- 13.2%
$ 8,400,000 Federal Home Loan Mortgage Corp., Discount Note,
5.410% due 11/3/97 $ 8,397,475
8,000,000 Federal Home Loan Mortgage Corp., Discount Note,
5.420% due 11/7/97 7,992,773
4,100,000 Federal National Mortgage Association,
5.480% due 11/5/97 4,097,504
9,900,000 Federal National Mortgage Association,
5.430% due 11/6/97 9,892,534
5,300,000 Federal National Mortgage Association,
5.480% due 11/7/97 5,295,159
- -----------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM SECURITIES
(Cost-- $35,675,445) 35,675,445
===========================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $243,620,317**) $270,037,257
===========================================================================================================
</TABLE>
+ Non-income producing security.
++ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registation, normally to qualified institutional buyers.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 29 for definition of ratings.
See Notes to Financial Statements.
20
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
TBC MANAGED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
CORPORATE BONDS -- 43.0%
===========================================================================================================
Banking -- 4.4%
$ 70,000 A1* BankAmerica Corp., 6.625% due 10/15/07 $ 70,000
225,000 A3* Branch Banking & Trust Corp., 7.250% due 6/15/07 236,250
250,000 BBB- Capital One Bank, 6.830% due 8/16/99 252,188
250,000 BBB+ First National Bank of Boston, 7.375% due 9/15/06 264,375
50,000 Ba3* First Nationwide Bank, 10.625% due 10/1/03 54,875
95,000 A3* First Security Corp., 6.875% due 11/15/06 97,019
295,000 A3* Great Western Financial Trust II, Inc., 8.206% due 2/1/27 310,119
295,000 NR Zurich Capital, 8.376% due 6/1/37+ 324,500
- -----------------------------------------------------------------------------------------------------------
1,609,326
- -----------------------------------------------------------------------------------------------------------
Financial Services -- 8.9%
50,000 B+ Dollar Financial Group, 10.875% due 11/15/06 53,370
91,000 A1* First Union Capital I, Inc., 7.935% due 1/15/27 94,526
115,000 A1* First Union Capital II, Inc., 7.850% due 1/1/27+ 118,594
180,000 A3* Fleet Financial Group, 7.125% due 4/15/06 185,850
55,000 A+ Ford Motor Credit Co., 7.400% due 11/1/46 57,475
50,000 BBB+ H.F. Ahmanson & Co., 7.650% due 4/15/00 51,313
155,000 A Household Financial Co., 6.580% due 5/17/99 156,356
250,000 BB- Indah Kiat Fin Mauritius, 10.000% due 7/1/07+ 223,125
Jefferson Pilot:
120,000 AA- 8.140% due 1/15/46+ 123,600
100,000 AA- 8.285% due 3/1/46+ 104,750
Lehman Brothers Holdings, Inc.:
200,000 A 6.125% due 2/1/01 199,750
200,000 A 8.500% due 5/1/07 226,250
50,000 A Lincoln National Corp., 7.250% due 5/15/05 52,375
130,000 A1* National City Capital Trust I,
6.750% due 6/1/29+ 131,183
92,000 A1* NB Capital Trust, 8.250% due 4/15/27 99,245
PaineWebber Group:
35,000 BBB+ 7.625% due 10/15/08 37,406
220,000 BBB+ 7.390% due 10/16/17 223,850
190,000 BBB+ 8.060% due 1/17/17 205,438
115,000 BBB+ 7.810% due 2/13/17 120,463
175,000 A+ Sun Hung Kai Finance Corp., 5.625% due 11/24/98 173,250
380,000 AA Sun Life Canada, 8.526% due 5/29/49+ 410,875
150,000 A3* Washington Mutual CapitaI I, 8.375% due 6/1/27 160,688
- -----------------------------------------------------------------------------------------------------------
3,209,732
- -----------------------------------------------------------------------------------------------------------
Health Care -- 0.6%
Tenet Healthcare Corp.:
50,000 Ba1* 8.625% due 12/1/03 53,000
160,000 Ba1* 8.000% due 1/15/05 167,000
- -----------------------------------------------------------------------------------------------------------
220,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
TBC MANAGED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Industrial -- 26.6%
$ 150,000 B- ADV Accessory, 9.750% due 10/1/97+ $ 151,500
90,000 B+ Allied Waste Industries, step bond to yield
11.300% due 6/1/07+ 60,750
120,000 B2* AMC Entertainment, Inc., 9.500% due 3/15/09 122,400
50,000 B2* Amphenol Corp., 9.875% due 5/15/07 52,875
95,000 B BE Aerospace, Inc., 9.875% due 2/1/06 100,938
205,000 BBB+ Brunswick Corp., 7.125% due 8/1/27 204,744
45,000 Ba3* Building Materials, 8.625% due 12/15/06 46,350
210,000 BBB- Burlington Industries, 7.250% due 8/1/27 214,200
150,000 B Canadian Forest Oil Ltd., 8.750% due 9/15/07+ 150,750
50,000 A- Carpenter Technology Corp., 7.440% due 8/16/99 51,188
115,000 B2* Chancellor Radio Broadcasting, Inc., 9.375% due 10/1/04 119,313
120,000 BB- Chesapeake Energy Corp., 7.875% due 3/15/04 115,200
115,000 BBB- Coastal Corp., 8.125% due 9/15/02 123,769
75,000 BB+ Comcast Cellular Holdings, 9.500% due 5/1/07+ 77,625
100,000 BB Dominion Textiles, Inc., 8.875% due 11/1/03 103,500
150,000 B Dyncorp, Inc., 9.500% due 3/1/07 152,625
100,000 B- E&S Holdings Corp., 10.375% due 10/1/06 85,500
190,000 BB- El Paso Electric Co., 7.250% due 2/1/99 191,425
160,000 BBB+ Embotelladora Andina SA, 7.000% due 10/1/07 155,200
180,000 B Fedders North America, 9.375% due 8/15/07+ 184,500
190,000 BB Ferrellgas Inc., 10.000% due 8/1/01 200,925
190,000 B+ Fleming Cos. Inc., 10.500% due 12/1/04+ 199,025
90,000 BBB- Fort James Corp., 6.875% due 9/15/07 91,013
100,000 B+ GCI Inc., 9.750% due 8/1/07 102,250
100,000 Ba2* Gulf Canada Resources Ltd., 9.625% due 7/1/05 108,500
285,000 A- Hanson Overseas BV, 6.750% due 9/15/05 290,344
45,000 BBB+ Hilton Hotels Corp., 7.375% due 6/1/02 46,519
50,000 B HS Resources, Inc., 9.250% due 11/15/06 50,875
150,000 BB ICN Pharmaceuticals Inc., 9.250% due 8/15/05+ 157,875
190,000 B+ Insilco Corp., 10.250% due 8/15/07+ 198,550
50,000 B- Iridium LLC/Capital Corp., 11.250% due 7/15/05+ 46,000
100,000 BB Iron Mountain Inc., 10.125% due 10/1/06 108,500
105,000 B Jacor Communications Co., 8.750% due 6/15/07+ 106,050
100,000 B JCAC, Inc., 10.125% due 6/15/06 109,500
150,000 B1* Kaiser Aluminum & Chemical Inc., 10.875% due 10/15/06 163,500
120,000 B+ Keystone Consolidated Industries, 9.625% due 8/1/07+ 124,500
130,000 B- Kindercare Learning Centers, 9.500% due 2/15/09 128,050
70,000 B3* KSL Recreation Group, Inc., 10.250% due 5/1/07+ 76,300
125,000 BB+ Lear Seating, 8.250% due 2/1/02 126,875
205,000 A3* Lockheed Martin Corp., 7.750% due 5/1/26 224,731
75,000 B1* Lodgenet Entertainment, Inc., 10.250% due 12/15/06 77,531
200,000 BB+ Loewen Group International, Inc., 7.500% due 4/15/01 205,250
</TABLE>
See Notes to Financial Statements.
22
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
TBC MANAGED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Industrial -- 26.6% (continued) McLeod USA Inc.:
$ 150,000 B 9.250% due 7/15/07+ $ 153,750
140,000 B Sr. Discount Notes, step bond to yield 10.500% due 3/1/07 96,600
60,000 B+ Muzak Corp., 10.000% due 10/1/03 62,400
115,000 B- Neenah Corp., 11.125% due 5/1/07 124,200
75,000 BBB News America Holdings Inc., 7.500% due 3/1/00 76,969
30,000 BBB Noble Drilling, 9.125% due 7/1/06 32,588
35,000 BBB Norcen Energy Resources, Inc., 7.375% due 5/15/06 36,706
150,000 B Orion Network Systems, Inc., 11.250% due 1/15/07 173,250
40,000 BBB- ORYX Energy Co., 10.000% due 4/1/01 44,200
150,000 B1* Physician Sales & Service, 8.500% due 10/1/07+ 148,875
150,000 Baa3* Pindo Deli FinMauritus, 10.750% due 10/1/07+ 135,750
70,000 B+ Pioneer Americas, 9.250% due 6/15/07+ 70,350
40,000 B+ Plastic Containers Inc., 10.000% due 12/15/06 41,800
190,000 B- Protection One, Inc., Sr. Discount Notes, step bond to yield
13.625% due 6/30/05 204,725
50,000 BB Rayovac Corp., 10.250% due 11/1/06+ 54,375
375,000 Baa1* Raytheon Co., 6.450% due 8/15/02 378,750
300,000 B3* RCN Corp., 11.125% due 10/15/07+ 174,750
150,000 B+ Regal Cinemas Inc., 8.500% due 10/1/07+ 148,875
170,000 B- Reliant Building Product, 10.875% due 5/1/04 177,225
100,000 BBB- Republic of Colombia, 7.625% due 2/15/07 93,875
60,000 B Revlon Consumer Product, 9.500% due 6/1/99 61,950
285,000 B- Revlon Worldwide Corp., Series B, zero coupon due 3/15/01+ 198,075
Royal Caribbean Cruises:
85,000 BBB- 7.125% due 9/18/02 87,656
130,000 BBB- 7.500% due 10/15/27 129,675
100,000 B+ Speedy Muffler King Inc., 10.875% due 10/1/06 70,500
275,000 BB- Standard Commercial Tobacco, 8.875% due 8/1/05+ 277,406
50,000 B+ Tracor, Inc., 8.500% due 3/1/07 50,813
200,000 B- Unicco Service, 9.875% due 10/15/07+ 201,000
180,000 B- United Defense Industries Inc., 8.750% due 11/15/07+ 182,700
70,000 B1* U.S. Can Corp., 10.125% due 10/15/06+ 73,500
110,000 BBB USA Waste Services Inc., 7.125% due 10/1/07 113,575
200,000 Baa3* Westpoint Stevens Inc., 8.750% due 12/15/01 208,000
WMX Technologies, Inc.:
50,000 A2* 6.625% due 7/15/02 50,438
95,000 A2* 7.700% due 10/1/02 100,581
- -----------------------------------------------------------------------------------------------------------
9,642,897
- -----------------------------------------------------------------------------------------------------------
Retail -- 0.2%
80,000 Baa2* Federated Department Stores, 8.125% due 10/15/02 86,200
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
23
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
TBC MANAGED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Telecommunications -- 1.3%
$ 150,000 BB+ Cablevision Systems Corp., 8.125% due 8/15/09+ $ 150,375
125,000 Baa3* Century Communications, 9.500% due 8/15/00 130,313
350,000 B3* Nextel Communications Inc., Sr. Discount Notes,
step bond to yield 9.750% due 10/31/07 196,000
- -----------------------------------------------------------------------------------------------------------
476,688
- -----------------------------------------------------------------------------------------------------------
Transportation -- 0.3%
50,000 BBB Federal Express Corp., 6.250% due 4/15/98 50,073
66,000 BBB Union Pacific Corp., 6.700% due 12/1/06 66,825
- -----------------------------------------------------------------------------------------------------------
116,898
- -----------------------------------------------------------------------------------------------------------
Utilities - Electrical -- 0.5%
103,000 BB CMS Energy Corp., 8.125% due 5/15/02 106,219
80,000 BB+ Niagara Mohawk Power, 8.000% due 6/1/04 84,600
- -----------------------------------------------------------------------------------------------------------
190,819
- -----------------------------------------------------------------------------------------------------------
Yankee Bond With Coupon -- 0.2%
155,000 BB- Rogers Communications Inc., 2.000% due 11/26/05 82,538
- -----------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(Cost-- $15,233,280) 15,635,098
===========================================================================================================
FIXED RATE MORTGAGE PASS-THROUGH SECURITY -- 0.5%
2,087,632 First Union-Lehman Brothers Commercial Mortgage Trust,
Series 1997-C1, 1.307% due 4/18/27
(Cost-- $156,949) 163,749
===========================================================================================================
ASSET-BACKED SECURITIES -- 4.2%
Asset Securitization Corp.:
77,000 Series 1996-M7-B, 6.863% due 6/17/11 78,468
195,000 Series 1996-MD6-A1C, 7.040% due 11/13/26 202,434
158,000 Series 1997-D4-A1D, 7.490% due 4/14/27 169,109
102,086 Centrex Auto Trust, Series 1996-B-A, 6.150% due 9/15/04 102,118
92,939 Fleetwood Credit Corp., Grantor Trust, Series 1997-A-A,
6.640% due 9/15/12 94,014
115,000 Green Tree Home Improvement Loan Trust, Series 1997-C,
6.380% due 8/15/28 115,180
The Money Store Inc., Home Equity Loan:
64,000 6.890% due 3/15/16 67,680
72,000 7.600% due 7/15/21 75,290
49,000 7.800% due 10/15/21 50,777
153,000 7.690% due 5/15/24 160,814
152,000 Merrill Lynch, 7.120% due 6/18/29 159,315
110,000 Morgan Stanley Capital I, Series 1997-C1-A1C,
7.630% due 12/15/06 118,559
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
TBC MANAGED INCOME PORTFOLIO
FACE
AMOUNT SECURITY VALUE
===========================================================================================================
<S> <C> <C>
ASSET-BACKED SECURITIES -- 4.2% (continued)
$ 138,000 Oakwood Mortgage 97-C A-6, 7.350% due 11/15/27 $ 141,148
- -----------------------------------------------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost-- $1,485,010) 1,534,906
===========================================================================================================
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 37.9%
935,000 U.S. Treasury Note, 5.500% due 11/15/98 934,233
2,118,000 U.S. Treasury Note, 6.750% due 5/31/99 2,153,180
1,676,000 U.S. Treasury Note, 5.875% due 11/15/99 1,682,754
332,000 U.S. Treasury Note, 6.375% due 8/15/02 340,250
221,000 U.S. Treasury Note, 6.500% due 10/15/06 229,639
1,283,000 U.S. Treasury Bond, 7.250% due 8/15/22 1,445,197
440,866 Federal Home Loan Mortgage Corp., 8.500% due 5/1/25 461,666
192,329 Federal Home Loan Mortgage Corp., 9.500% due 7/25/22 205,852
195,314 Federal Home Loan Mortgage Corp. Gold, 7.000% due 1/1/00 198,121
195,867 Federal National Mortgage Association, 6.000% due 12/1/10 192,440
156,720 Federal National Mortgage Association, 6.500% due 11/1/03 158,924
482,000 Federal National Mortgage Association, 6.500% due 12/1/12++ 481,547
58,134 Federal National Mortgage Association, 7.000% due 7/1/22 58,315
166,871 Federal National Mortgage Association, 7.000% due 7/1/23 167,392
305,016 Federal National Mortgage Association, 7.000% due 8/1/03 309,018
674,000 Federal National Mortgage Association, 7.000% due 12/1/27++ 676,103
8,935 Federal National Mortgage Association, 7.500% due 4/1/05 9,128
52,823 Federal National Mortgage Association, 7.500% due 6/1/10 54,193
244,026 Federal National Mortgage Association, 7.500% due 7/1/09 250,354
219,371 Federal National Mortgage Association, 7.500% due 6/1/09 225,060
84,369 Federal National Mortgage Association, 7.500% due 11/1/11 86,557
238,713 Federal National Mortgage Association, 7.536% due 6/1/16 244,158
127,352 Federal National Mortgage Association, 9.000% due 8/1/26 135,511
468,485 Government National Mortgage Association,
7.000% due 9/15/23 471,264
244,997 Government National Mortgage Association,
7.000% due 11/15/23 246,450
438,891 Government National Mortgage Association,
7.500% due 12/15/23 450,684
256,225 Government National Mortgage Association,
8.000% due 7/15/17 266,954
186,965 Government National Mortgage Association,
8.000% due 6/15/27 194,092
307,085 Government National Mortgage Association,
8.000% due 7/15/27 318,792
212,685 Government National Mortgage Association,
8.500% due 12/15/21 223,918
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
TBC MANAGED INCOME PORTFOLIO
FACE
AMOUNT SECURITY VALUE
===========================================================================================================
<S> <C> <C>
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 37.9% (continued)
$ 844,592 Government National Mortgage Association,
9.000% due 12/15/21 $ 906,110
- -----------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES &
OBLIGATIONS
(Cost-- $13,654,949) 13,777,856
===========================================================================================================
<CAPTION>
SHARES SECURITY VALUE
===========================================================================================================
<S> <C> <C>
WARRANTS -- 0.0%
1,500 Orion Network Systems, Expires 1/15/07
(Cost-- $1,050) 1,500
===========================================================================================================
SUB-TOTAL INVESTMENTS
(Cost-- $30,531,238) 31,113,109
===========================================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
===========================================================================================================
<S> <C> <C>
SHORT-TERM INVESTMENT -- 14.4%
$ 5,224,000 Federal Home Loan Bank Discount Note,
5.625% due 11/3/97
(Cost-- $5,224,000) 5,224,000
===========================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $35,755,238**) $36,337,109
===========================================================================================================
</TABLE>
+ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be sold in transactions that are exempt from
registration, normally to qualified institutional buyers.
++ Security is traded on a "to-be-announced" basis (See Note 9).
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 29 for definition of ratings.
See Notes to Financial Statements.
26
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
SMITH BARNEY MONEY MARKET PORTFOLIO
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
===========================================================================================================
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCIES & OBLIGATIONS -- 5.3%
$ 2,000,000 Federal Home Loan Bank matures 4/24/98 5.59% $ 1,947,412
4,000,000 Federal Home Loan Mortgage Corp. matures 11/3/97 5.49 3,998,782
- -----------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT
AGENCIES & OBLIGATIONS
(Cost-- $5,946,195) 5,946,194
===========================================================================================================
COMMERCIAL PAPER -- 73.8%
2,000,000 ABN AMRO Bank Canada matures 1/5/98 5.60 1,980,067
4,000,000 AIG Funding matures 11/3/97 5.70 3,998,733
2,000,000 American Express Credit Corp. matures 12/29/97 5.55 1,982,343
4,000,000 Banca Commerciale Italiana
mature 11/14/97 to 12/23/97 5.59 to 5.61 3,980,038
3,000,000 Bank of New York matures 11/17/97 5.53 2,992,664
4,000,000 Bayerische Vereinsbank matures 11/3/97 5.53 3,998,778
1,000,000 Bear Stearns matures 11/13/97 5.59 998,150
4,000,000 Bell Atlantic Financial matures 11/10/97 5.56 3,994,480
4,000,000 Chase Manhattan Bank Corp.
mature 11/17/97 to 1/30/98 5.57 to 5.65 3,967,679
4,000,000 CIT Group Holdings Inc. matures 11/10/97 5.56 3,994,480
2,000,000 Credit Suisse First Boston matures 11/20/97 5.60 1,994,195
2,000,000 Cregem North America Inc. matures 11/7/97 5.58 1,998,167
1,000,000 E.I. du Pont De Nemours & Co. matures 12/4/97 5.75 994,876
3,000,000 First Union Corp. matures 11/4/97 5.57 2,998,628
3,000,000 Ford Motor Credit mature 12/2/97 to 1/23/98 5.68 to 5.80 2,969,321
2,000,000 Generale Bank matures 1/22/98 5.66 1,974,694
3,000,000 General Electric Capital Corp.
matures 11/10/97 5.71 2,995,815
3,000,000 Halifax Building Society matures 12/11/97 5.61 2,981,534
4,800,000 International Nederlanden US Funding Corp.
mature 11/4/97 to 11/6/97 5.52 to 5.53 4,797,189
2,000,000 J.P. Morgan & Co. matures 11/12/97 5.51 1,996,651
3,800,000 Lucent Technologies matures 12/4/97 5.53 3,780,911
3,500,000 Merrill Lynch & Co., Inc.
mature 12/1/97 to 2/27/98 5.61 to 5.67 3,470,255
2,000,000 National Bank of Canada matures 2/2/98 5.63 1,971,480
4,000,000 NationsBank mature 11/21/97 to 12/10/97 5.55 to 5.59 3,981,885
1,000,000 Oesterreichische Kontrollbank AG matures 1/14/98 5.65 988,695
3,800,000 Rabo Bank matures 11/3/97 5.52 3,798,839
3,000,000 Svenska Handelsbanken matures 1/30/98 5.64 2,958,300
3,800,000 Union Bank of Switzerland matures 11/3/97 5.69 3,798,799
- -----------------------------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER
(Cost-- $84,338,489) 82,337,646
===========================================================================================================
</TABLE>
See Notes to Financial Statements.
27
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Schedules of Investments (continued) October 31, 1997
===========================================================================================================
SMITH BARNEY MONEY MARKET PORTFOLIO
FACE ANNUALIZED
AMOUNT SECURITY YIELD VALUE
===========================================================================================================
<S> <C> <C> <C>
FOREIGN CERTIFICATES OF DEPOSIT -- 13.5%
$ 3,000,000 Abbey National PLC mature 12/19/97 to 4/3/98 5.64% to 5.71% $ 3,000,562
2,000,000 Bayerische Landesbank mature 1/14/98 to 3/10/98 5.67 to 5.68 2,000,122
2,000,000 Credit Agricole Indosuez matures 2/17/98 5.72 2,000,175
4,000,000 Deutsche Bank mature 1/9/98 to 4/6/98 5.64 4,000,000
2,000,000 National Westminster Bank PLC matures 1/7/98 5.72 2,000,217
2,000,000 Royal Bank of Canada matures 1/13/98 5.72 2,000,843
- -----------------------------------------------------------------------------------------------------------
TOTAL FOREIGN CERTIFICATES OF DEPOSIT
(Cost-- $13,001,076) 15,001,919
===========================================================================================================
TIME DEPOSITS -- 3.6%
4,000,000 Bank Austriaengesellschaft
(Bank Austria) matures 11/3/97
(Cost-- $4,000,000) 5.75 4,000,000
===========================================================================================================
REPURCHASE AGREEMENT -- 3.8%
4,225,000 Morgan Stanley Dean Witter Discover, 5.65% due 11/3/97;
Proceeds at maturity -- $4,226,989;
(Fully collateralized by U.S. Treasury Note,
9.125% due 5/15/99; Market value -- $4,332,193)
(Cost-- $4,225,000) 4,225,000
===========================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $111,510,759**) $111,510,759
===========================================================================================================
</TABLE>
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
28
<PAGE>
================================================================================
Bond Ratings
================================================================================
All ratings are by Standard & Poor's Ratings Services ("Standard & Poor's"),
except that those identified by an asterisk (*) are rated by Moody's Investors
Service Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Ratings from "AA" to "CCC" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standings within the major
rating categories.
AAA -- Bonds rated "AAA" have the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay principal
is extremely strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest
and repay principal and differs from the highest rated issue
only in a small degree.
A -- Bonds rated "A" have 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 bonds in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate
capacity to pay interest and repay principal. Whereas they
normally exhibit 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 bonds in this category than in higher rated
categories.
BB, B and CCC -- Bonds rated "BB" and "B" are 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" represents a lower degree of speculation
than "B," and "CCC" the highest degree of speculation. While
such bonds will likely have some quality and protective
characteristics, these are outweighted by large uncertainties
or major risk exposure to adverse conditions.
Moody's -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating
from "A" to "B," where 1 is the highest and 3 the lowest rating within its
generic category.
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 which
suggest a susceptibility to impairment some time 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 that 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 thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds that are rated "B" generally lack characteristics of
desirable investments. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
29
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================
Statements of Assets and Liabilities October 31, 1997
==========================================================================================
Smith Barney
MFS Total TBC Managed Money
Return Income Market
Portfolio Portfolio Portfolio
==========================================================================================
<S> <C> <C> <C>
ASSETS:
Investments, at value
(Cost -- $207,944,872 and $30,531,238,
respectively) $234,361,812 $ 31,113,109 $ --
Short-term investments, at value
(Cost -- $35,675,445, $5,224,000
and $111,510,759, respectively) 35,675,445 5,224,000 111,510,759
Cash 369,740 116 474
Receivable for securities sold 758,791 7,235,935 --
Receivable for Fund shares sold 167,780 124,725 --
Dividends and interest receivable 1,819,862 447,093 196,471
- ------------------------------------------------------------------------------------------
Total Assets 273,153,430 44,144,978 111,707,704
- ------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 9,338,379 12,276,668 --
Management fees payable 178,958 72,942 278,183
Dividends payable -- -- 222,615
Accrued expenses 50,963 16,380 38,878
- ------------------------------------------------------------------------------------------
Total Liabilities 9,568,300 12,365,990 539,676
- ------------------------------------------------------------------------------------------
Total Net Assets $263,585,130 $ 31,778,988 $111,168,028
==========================================================================================
NET ASSETS:
Par value of capital shares $ 172 $ 27 $ 1,112
Capital paid in excess of par value 218,636,900 29,357,001 111,166,916
Undistributed net investment income 6,905,623 1,768,287 --
Accumulated net realized gain
from security transactions 11,625,144 71,802 --
Net unrealized appreciation of investments
and foreign currencies 26,417,291 581,871 --
- ------------------------------------------------------------------------------------------
Total Net Assets $263,585,130 $ 31,778,988 $111,168,028
==========================================================================================
Shares Outstanding 17,220,795 2,751,446 111,168,028
- ------------------------------------------------------------------------------------------
Net Asset Value $15.31 $11.55 $1.00
- ------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
30
<PAGE>
<TABLE>
<CAPTION>
============================================================================================
Statements of Operations For the Year Ended October 31, 1997
============================================================================================
Smith Barney
MFS Total TBC Managed Money
Return Income Market
Portfolio Portfolio Portfolio
============================================================================================
<S> <C> <C> <C>
INVESTMENT INCOME:
Interest $ 5,695,940 $ 2,000,778 $ 6,058,095
Dividends 2,901,231 -- --
Less: Foreign withholding tax (20,493) -- --
- --------------------------------------------------------------------------------------------
Total Investment Income 8,576,678 2,000,778 6,058,095
- --------------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 3) 1,556,167 176,499 650,916
Custody 40,120 4,808 23,146
Audit and legal 22,435 16,005 18,760
Shareholder communications 20,415 3,507 16,274
Pricing service fees 10,233 19,999 --
System servicing fees 6,166 6,147 6,026
Directors' fees 5,001 4,000 6,500
Registration fees -- 2,792 3,650
Other 9,999 2,011 1,677
- --------------------------------------------------------------------------------------------
Total Expenses 1,670,536 235,768 726,949
Less:Management fee waiver (Note 3) -- -- (24,546)
- --------------------------------------------------------------------------------------------
Net Expenses 1,670,536 235,768 702,403
- --------------------------------------------------------------------------------------------
Net Investment Income 6,906,142 1,765,010 5,355,692
- --------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (NOTE 4):
Realized Gain From Security Transactions
(excluding short-term securities*):
Proceeds from sales 172,309,745 68,367,159 5,293,085
Cost of securities sold 160,677,597 67,946,672 5,293,038
- --------------------------------------------------------------------------------------------
Net Realized Gain 11,632,148 420,487 47
- --------------------------------------------------------------------------------------------
Changes in Net Unrealized Appreciation
of Investments:
Beginning of year 10,613,244 289,610 --
End of year 26,417,291 581,871 --
- --------------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 15,804,047 292,261 --
- --------------------------------------------------------------------------------------------
Net Gain on Investments 27,436,195 712,748 47
- --------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 34,342,337 $ 2,477,758 $ 5,355,739
============================================================================================
</TABLE>
* Amounts represent gains from the sale of short-term securities for the
Smith Barney Money Market Portfolio.
See Notes to Financial Statements.
31
<PAGE>
<TABLE>
<CAPTION>
===================================================================================
Statements of Changes in Net Assets
===================================================================================
Years Ended October 31,
------------------------------
MFS Total Return Portfolio 1997 1996
===================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 6,906,142 $ 3,561,906
Net realized gain 11,632,148 1,948,481
Increase in net unrealized appreciation 15,804,047 8,395,692
- -----------------------------------------------------------------------------------
Increase in Net Assets From Operations 34,342,337 13,906,079
- -----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (3,166,892) (1,430,635)
Net realized gains (1,937,784) (403,787)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (5,104,676) (1,834,422)
- -----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares 98,021,137 71,717,857
Net asset value of shares issued
for reinvestment of dividends 5,104,675 1,834,422
Cost of shares reacquired (3,307,736) (457,554)
- -----------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 99,818,076 73,094,725
- -----------------------------------------------------------------------------------
Increase in Net Assets 129,055,737 85,166,382
NET ASSETS:
Beginning of year 134,529,393 49,363,011
- -----------------------------------------------------------------------------------
End of year* $ 263,585,130 $ 134,529,393
===================================================================================
* Includes undistributed net investment income of: $ 6,905,623 $ 3,168,201
===================================================================================
</TABLE>
See Notes to Financial Statements.
32
<PAGE>
<TABLE>
<CAPTION>
=================================================================================
Statements of Changes in Net Assets (continued)
=================================================================================
Years Ended October 31,
----------------------------
TBC Managed Income Portfolio 1997 1996
=================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 1,765,010 $ 1,179,696
Net realized gain (loss) 420,487 (339,622)
Increase in net unrealized appreciation 292,261 38,407
- ---------------------------------------------------------------------------------
Increase in Net Assets From Operations 2,477,758 878,481
- ---------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,060,922) (567,702)
Net realized gains -- (186,111)
- ---------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (1,060,922) (753,813)
- ---------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares 7,828,206 12,619,297
Net asset value of shares issued
for reinvestment of dividends 1,060,922 753,813
Cost of shares reacquired (2,059,096) (1,244,582)
- ---------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 6,830,032 12,128,528
- ---------------------------------------------------------------------------------
Increase in Net Assets 8,246,868 12,253,196
NET ASSETS:
Beginning of year 23,532,120 11,278,924
- ---------------------------------------------------------------------------------
End of year* $ 31,778,988 $ 23,532,120
=================================================================================
* Includes undistributed net investment income of: $ 1,768,287 $ 1,063,584
=================================================================================
</TABLE>
See Notes to Financial Statements.
33
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Statements of Changes in Net Assets (continued)
================================================================================
Years Ended October 31,
------------------------------
Smith Barney Money Market Portfolio 1997 1996
===============================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 5,355,692 $ 3,444,502
Net realized gain 47 549
- -------------------------------------------------------------------------------
Increase in Net Assets From Operations 5,355,739 3,445,051
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 2):
Net investment income (5,355,692) (3,444,502)
Net realized gains (47) (549)
- -------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (5,355,739) (3,445,051)
- -------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net proceeds from sale of shares 199,654,882 98,594,062
Net asset value of shares issued
for reinvestment of dividends 5,314,435 3,325,266
Cost of shares reacquired (192,951,787) (40,255,629)
- -------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 12,017,530 61,663,699
- -------------------------------------------------------------------------------
Increase in Net Assets 12,017,530 61,663,699
NET ASSETS:
Beginning of year 99,150,498 37,486,799
- -------------------------------------------------------------------------------
End of year $ 111,168,028 $ 99,150,498
===============================================================================
</TABLE>
See Notes to Financial Statements.
34
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
The MFS Total Return, TBC Managed Income and Smith Barney Money Market
Portfolios ("Portfolio(s)") are separate investment portfolios of the Travelers
Series Fund Inc. ("Fund"). The Fund, a Maryland corporation, is registered under
the Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company and consists of these Portfolios and nine other
separate investment portfolios: Alliance Growth, AIM Capital Appreciation,
GT Global Strategic Income, Putnam Diversified Income, Smith Barney High Income,
Smith Barney Income and Growth, Smith Barney International Equity, Smith Barney
Pacific Basin, and Van Kampen American Capital Enterprise Portfolios. Shares of
the Fund are offered only to insurance company separate accounts that fund
certain variable annuity and variable life insurance contracts. The financial
statements and financial highlights for the other portfolios are presented in
separate annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) security transactions are accounted for on trade date; (b) the Smith
Barney Money Market Portfolio uses the amortized cost method for valuing all of
its portfolios securities; the MFS Total Return and TBC Managed Income
Portfolios use the amortized cost method for valuing securities with maturities
less than 60 days; accordingly, the cost of securities plus accreted discount or
minus amortized premium, which approximates value; (c) securities traded on
national securities markets are valued at the closing prices on such markets;
securities for which no sales price was reported and U.S. government agencies
and obligations are valued at the mean between the bid and ask prices; (d)
dividend income is recorded on the ex-dividend date; foreign dividends are
recorded on the ex-dividend date or as soon as practical after the Portfolio
determines the existence of a dividend declaration after exercising reasonable
due diligence; (e) gains or losses on the sale of securities are calculated by
using the specific identification method; (f) interest income, adjusted for
amortization of premium and accretion of discount, is recorded on an accrual
basis; (g) dividends and distributions to shareholders are recorded on the
ex-dividend date; (h) the accounting records of the Portfolios are maintained in
U.S. dollars. All assets and liabilities denominated in foreign currencies are
translated into U.S. dollars based on the rate of exchange of such currencies
against U.S. dollars on the date of valuation. Purchases and sales of
securities, and income and expenses are translated at the rate of exchange
quoted on the respective date that such transactions are recorded. Differences
between income or expense amounts recorded and collected or paid are adjusted
when reported by the custodian bank; (i) the character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from
35
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
generally accepted accounting principles. At October 31, 1997, reclassifications
were made to the capital accounts of the MFS Total Return Portfolio and the TBC
Managed Income Portfolio to reflect permanent book/tax differences and income
and gains available for distributions under income tax regulations. Accordingly,
a portion of undistributed net investment income amounting to $2,784 was
reclassified to paid-in capital for the TBC Managed Income Portfolio. Net
investment income, net realized gains and net assets were not affected by this
change; (j) the Portfolios intend to comply with the requirements of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve it
from substantially all Federal income and excise taxes; and (k) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
2. DIVIDENDS
The Smith Barney Money Market Portfolio declares and records a dividend of
substantially all its net investment income on each business day. Such dividends
are paid or reinvested monthly on the payable date.
3. MANAGEMENT AGREEMENT AND TRANSACTIONS WITH AFFILIATED PERSONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as investment manager of the Smith Barney
Money Market Portfolio ("SBMM"). Travelers Investment Adviser, Inc. ("TIA"), an
affiliate of SBMFM, acts as the investment manager of the MFS Total Return
("MFSTR") and the TBC Managed Income ("TBCMI") Portfolios. SBMM pays SBMFM a
management fee calculated at an annual rate of 0.60% of the average daily net
assets of the Portfolio. MFSTR and TBCMI pay TIA a management fee calculated at
an annual rate of 0.80% and 0.65%, respectively, of the average daily net assets
of each Portfolio. These fees are calculated daily and paid monthly. SBMFM
waived a portion of its management fee for SBMM.
TIA has sub-advisory agreements with Massachusetts Financial Services
Company ("MFS") and The Boston Company Asset Management, Inc. ("TBC"). Pursuant
to each sub-advisory agreement, MFS and TBC are responsible for the day-to-day
portfolio operations and investment decisions for MFSTR and TBCMI, respectively,
and are compensated for such services at an annual rate of 0.375% and 0.30%,
respectively, of the average daily net assets of MFSTR and TBCMI. These fees are
calculated daily and paid monthly.
36
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
TIA has entered into a sub-administrative services agreement with SBMFM.
TIA pays SBMFM, as sub-administrator, a fee calculated at an annual rate of
0.10% of the average daily net assets of MFSTR and TBCMI.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares.
All officers and one Director of the Fund are employees of SB.
4. INVESTMENTS
During the year ended October 31, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
MFSTR TBCMI
================================================================================
<S> <C> <C>
Purchases $254,214,112 $76,334,271
- --------------------------------------------------------------------------------
Sales 172,309,745 68,367,159
================================================================================
</TABLE>
At October 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
MFSTR TBCMI
================================================================================
<S> <C> <C>
Gross unrealized appreciation $28,076,096 $ 716,194
Gross unrealized depreciation (1,659,156) (134,323)
- --------------------------------------------------------------------------------
Net unrealized appreciation $26,416,940 $ 581,871
================================================================================
</TABLE>
5. REPURCHASE AGREEMENTS
The Portfolios purchase (and their custodian takes possession of) U.S.
government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolios require
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
37
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
6. FUTURES CONTRACTS
MFSTR has the ability to enter into futures contracts.
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contracts. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are received or made and recognized as assets
due from or liabilities due to broker, depending upon whether unrealized gains
or losses are incurred. When the contract is closed, the Portfolio records a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transactions and the Portfolio's basis in the contract. MFSTR
enters into such contracts to hedge a portion of its portfolio. The Portfolio
bears the market risk that arises from changes in the value of the financial
instruments and securities indices(futures contracts).
At October 31, 1997, MFSTR had no open futures contracts.
7. LENDING OF PORTFOLIO SECURITIES
The Portfolios have an agreement with their custodian whereby the custodian
may lend securities owned by the Portfolios to brokers, dealers and other
financial organizations. Fees earned by the Portfolios on securities lending are
recorded as interest income. Loans of securities by the Portfolios are
collateralized by cash, U.S. government securities or high quality money market
instruments that are maintained at all times in an amount at least equal to the
current market value of the loaned securities, plus a margin which may vary
between 2% and 5% depending on the type of securities loaned. The custodian
establishes and maintains the collateral in segregated accounts.
At October 31, 1997, the Portfolios had no securities on loan.
38
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
8. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Portfolios
represent investments, which are marked-to-market daily and are included in the
schedule of investments. When a purchased option expires, the Portfolios will
realize a loss in the amount of the premium paid. When the Portfolios enter into
a closing sales transaction, the Portfolios will realize a gain or loss
depending on whether the proceeds from the closing sales transaction are greater
or less than the premium paid for the option. When the Portfolios exercise a put
option, they will realize a gain or loss from the sale of the underlying
security and the proceeds from such sale will be decreased by the premium
originally paid. When the Portfolios exercise a call option, the cost of the
security which the Porfolios purchase upon exercise will be increased by the
premium originally paid.
At October 31, 1997, the Portfolios had no open purchased put or call
option contracts.
When the Porfolios write a covered call or put option, an amount equal to
the premium received by the Portfolios is recorded as a liability, the value of
which is marked-to-market daily. When a written option expires, the Portfolios
realize a gain. When the Portfolios enter into a closing purchase transaction,
the Portfolios realize a gain or loss depending upon whether the cost of the
closing transaction is greater or less than the premium originally received
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is eliminated. When a written call option
is exercised, the cost of the security sold will be decreased by the premium
originally received. When a put option is exercised, the amount of the premium
originally received will reduce the cost of the security which the Portfolios
purchased upon exercise. When the written index options are exercised,
settlement is made in cash.
The risk associated with purchasing options is limited to the premium
originally paid. The Portfolios enter into options for hedging purposes. The
risk in writing a covered call option is that the Portfolios give up the
opportunity to participate in any increase in the price of the underlying
security beyond the exercise price. The risk in writing a put option is that the
Portfolios are exposed to the risk of a loss if the market price of the
underlying security declines.
During the period ended October 31, 1997, the Portfolios did not write any
options.
39
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
9. SECURITIES TRADED ON A TO-BE-ANNOUNCED BASIS
The Portfolios may trade securities on a "to-be-announced" ("TBA") basis.
In a TBA transaction, the Portfolios commits to purchasing or selling securities
for which specific information is not yet known at the time of the trade,
particularly the face amount and maturity date in GNMA transactions. Securities
purchased on a TBA basis are not settled until they are delivered to the
Portfolios normally 15 to 45 days later. These transactions are subject to
market fluctuations and their current value is determined in the same manner as
for other securities.
At October 31, 1997, TBCMI held two TBA securities with a cost of
$1,152,584.
10. CAPITAL SHARES
At October 31, 1997, the Fund had six billion shares of capital stock
authorized with a par value of $0.00001 per share. Each share of a Portfolio
represents an identical interest in that Portfolio with each share of the same
Portfolio and has an equal entitlement to any dividends and distributions made
by the Portfolio.
Transactions in shares of each Portfolio were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1997 October 31, 1996
================================================================================
<S> <C> <C>
MFS Total Return
Shares sold 6,821,186 5,847,883
Shares issued on reinvestment 383,810 154,268
Shares redeemed (230,566) (35,887)
- -------------------------------------------------------------------------------
Net Increase 6,974,430 5,966,264
===============================================================================
TBC Managed Income
Shares sold 710,326 1,163,766
Shares issued on reinvestment 98,782 69,444
Shares redeemed (184,846) (116,880)
- -------------------------------------------------------------------------------
Net Increase 624,262 1,116,330
===============================================================================
SB Money Market
Shares sold 199,654,882 98,594,062
Shares issued on reinvestment 5,314,435 3,325,266
Shares redeemed (192,951,787) (40,255,629)
- -------------------------------------------------------------------------------
Net Increase 12,017,530 61,663,699
===============================================================================
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
======================================================================================================
Financial Highlights
======================================================================================================
For a share of capital stock outstanding throughout each year:
MFS Total Return Portfolio 1997 1996 1995 1994(1)
======================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $13.13 $11.53 $9.98 $10.00
- ------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.38 0.33 0.45 0.13
Net realized and unrealized gain (loss) 2.27 1.62 1.15 (0.15)
- ------------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 2.65 1.95 1.60 (0.02)
- ------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.29) (0.27) (0.05) --
Net realized gains (0.18) (0.08) -- --
- ------------------------------------------------------------------------------------------------------
Total Distributions (0.47) (0.35) (0.05) --
- ------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $15.31 $13.13 $11.53 $9.98
- ------------------------------------------------------------------------------------------------------
Total Return 20.64% 17.16% 16.12% (0.20)%++
- ------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $263,585 $134,529 $49,363 $8,504
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.86% 0.91% 0.95% 0.93%+
Net investment income 3.54 3.82 4.40 3.51+
- ------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 99% 139% 104% 18%
- ------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions(3) $0.06 $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 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 effect on net investment income and expense ratios would have
been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Income Without Fee Waivers
Per Share Decreases and Reimbursement
------------------- -----------------
<S> <C> <C>
1995 $0.01 1.06%
1994 0.06 2.51+
</TABLE>
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
41
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================================
Financial Highlights (continued)
=====================================================================================================
For a share of capital stock outstanding throughout each year:
TBC Managed Income Portfolio 1997 1996(1) 1995 1994(2)
=====================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $11.06 $11.16 $10.04 $10.00
- -----------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(3) 0.63 0.65 0.61 0.21
Net realized and unrealized gain (loss) 0.35 (0.14) 0.64 (0.17)
- -----------------------------------------------------------------------------------------------------
Total Income From Operations 0.98 0.51 1.25 0.04
- -----------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.49) (0.46) (0.13) --
Net realized gains -- (0.15) -- --
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.49) (0.61) (0.13) --
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $11.55 $11.06 $11.16 $10.04
- -----------------------------------------------------------------------------------------------------
Total Return 9.19% 4.61% 12.68% 0.40%++
- -----------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $31,779 $23,532 $11,279 $3,840
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 0.87% 0.92% 0.92% 0.87%+
Net investment income 6.48 6.19 6.13 5.67+
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 259% 255% 170% 42%
=====================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(3) 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 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 effect on net investment income and the expense ratios would
have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Income Without Fee Waivers
Per Share Decreases and Reimbursement
------------------- -----------------
<S> <C> <C>
1995 $0.04 1.29%
1994 0.07 2.91+
</TABLE>
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
42
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================================
Financial Highlights (continued)
==========================================================================================================
For a share of capital stock outstanding throughout each year:
Smith Barney Money Market Portfolio 1997 1996 1995 1994(1)
==========================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------------------------------------------------------------
Net investment income(2) 0.049 0.049 0.052 0.014
Distributions from net investment income (0.049) (0.049) (0.052) (0.014)
- ----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------------------------------------------------------------
Total Return 5.05% 5.05% 5.35% 1.46%++
- ----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $111,168 $99,150 $37,487 $5,278
- ----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.65% 0.65% 0.65% 0.66%+
Net investment income 4.94 4.86 5.26 3.83+
==========================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) The Manager waived all or part of its fees for the years ended October 31,
1997, October 31, 1996 and October 31, 1995 and the period ended October
31, 1994. In addition, the Manager reimbursed the 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 effect on net investment
income and the expense ratios would have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Income Without Fee Waivers
Per Share Decreases and Reimbursement
------------------- -----------------
<S> <C> <C>
1997 $0.000* 0.67%
1996 0.001 0.74
1995 0.003 0.94
1994 0.005 2.11+
</TABLE>
* Amount represents less than $0.001.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
================================================================================
Tax Information (unaudited)
================================================================================
For Federal tax purposes the Travelers Series Fund Inc. hereby designates
for the fiscal year ended October 31, 1997:
Long-term capital gain distributions paid:
MFS Total Return Portfolio $1,528,081
Percentages of ordinary income distributions designated as qualifying for
the dividends received deduction available to corporate shareholders:
MFS Total Return Portfolio 75.64%
43
<PAGE>
================================================================================
Independent Auditor's Report
================================================================================
The Shareholders and Board of Directors of
Travelers Series Fund Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the MFS Total Return, TBC Managed
Income and Smith Barney Money Market Portfolios of Travelers Series Fund Inc. as
of October 31, 1997, and the related statements of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the three-year period then ended and the period from June 16, 1994
(commencement of operations) to October 31, 1994. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997, by correspondence with the custodian. As to securities
purchased or sold but not yet received or delivered, we performed other
appropriate auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
MFS Total Return, TBC Managed Income and Smith Barney Money Market Portfolios of
Travelers Series Fund Inc. as of October 31, 1997, and the results of their
operations for the year then ended, the changes in their net assets for each of
the years in the two-year period then ended, and the financial highlights for
each of the years in the three-year period then ended and for the period from
June 16, 1994 to October 31, 1994, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
December 18, 1997
44
<PAGE>
Travelers Series SMITH BARNEY
Fund Inc. ------------
A Member of TravelersGroup[LOGO]
Directors Investment Managers
Victor K. Atkins Smith Barney Mutual Funds
A.E. Cohen Management Inc.
Robert A. Frankel Travelers Investment Adviser, Inc.
Rainer Greeven
Susan M. Heilbron
Heath B. McLendon, Chairman Distributor
James M. Shuart
Smith Barney Inc.
Officers
Custodian
Heath B. McLendon
President and PNC Bank, N.A.
Chief Executive Officer
Lewis E. Daidone Annuity Administration
Senior Vice President and Treasurer
Travelers Annuity Investor Services
John C. Bianchi 5 State House Square
Vice President 1 Tower Square
Hartford, CT 06183
James B. Conheady
Vice President
Martin Hanley
Vice President
Jeffrey J. Russell This report is submitted for the general
Vice President information of the shareholders of
Travelers Series Fund Inc. -- MFS Total
Bruce D. Sargent Return, TBC Managed Income and Smith
Vice President Barney Money Market Portfolios. It is
not authorized for distribution to
Phyllis Zahorodny prospective investors unless accompanied
Vice President or preceded by a current Prospectus for
the Portfolios, which contains
Irving P. David information concerning the Portfolios'
Controller investment policies and expenses as well
as other pertinent information.
Thomas M. Reynolds
Controller
Christina T. Sydor Travelers Series
Secretary Fund Inc.
388 Greenwich Street
New York, New York 10013
IN0253 12/97
<PAGE>
================================================================================
A N N U A L R E P O R T
================================================================================
1997
1997
1997
1997
1997
Travelers Series
Fund Inc.
Smith Barney Income
and Growth Portfolio
Alliance Growth Portfolio
Van Kampen American
Capital Enterprise Portfolio
---------------------------------------
October 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
================================================================================
Smith Barney Income and Growth, Alliance Growth
and Van Kampen American Capital Enterprise Portfolios
================================================================================
Dear Shareholder:
We are pleased to provide the annual report for the Travelers Series Fund Inc.
- -- Smith Barney Income and Growth Portfolio, Alliance Growth Portfolio and Van
Kampen American Capital Enterprise Portfolio ("Portfolios") for the year ended
October 31, 1997. In this report, we summarize the period's prevailing economic
and market conditions and outline each Portfolio's investment strategy. A
detailed summary of performance and current holdings for each Portfolio can be
found in the appropriate sections that follow.
Portfolio Highlights
Smith Barney Income and Growth Portfolio
For the year ended October 31, 1997, the Smith Barney Income and Growth
Portfolio had a total return of 23.38% compared to the total return of 27.08%
for its Lipper Analytical Services, Inc. ("Lipper") growth fund peer group
average over the same period. (Lipper is a major independent fund-tracking
organization.)
The Portfolio's managers typically choose large-capitalization companies that
have an above-market dividend yield and are undervalued by the marketplace. The
managers look to find a fundamental improvement underway, such as a new product
development or new management, the positive effect of which has not yet been
reflected in the stock price.
At the beginning of the reporting period, corporate earnings growth was healthy
and the inflation picture was benign. As a result, the price/earnings ratios of
many companies expanded during the first three quarters of 1997 and the market
performed extremely well. (A price/earnings ratio is a widely used gauge of a
stock's valuation and indicates what investors are paying for a company's
earnings at the current stock price.)
While the inflation picture has improved due in large part to the deflationary
pressures arising from the current economic troubles in Asia, the managers
believe that there's now a much greater risk of corporate earnings
disappointments going forward for globally exposed U.S. companies. (For example,
if Asia's excess supply becomes worse, some U.S. companies may import the
region's problems. Encouraged by inexpensive raw materials and the ability to
import cheap Asian labor, some U.S. producers may add so much capacity that our
markets will ultimately become flooded with inexpensive goods.)
1
<PAGE>
In light of the managers' expectations for higher corporate earnings risk in the
months ahead, they have become more conservative and have begun to shift assets
out of higher earnings risk companies that are economically sensitive and into
more conservative market sectors such as utilities. (Domestic utilities
generally don't have to worry about currency risk, export markets and future
earnings growth.) In the opinion of the managers, select utilities are becoming
more attractive investment opportunities because of their relative stability as
well as their excellent yield and total return potential. The key is to evaluate
each opportunity in the utilities sector on a company-by-company basis.
Two companies in the Portfolio that demonstrate the managers' value approach to
investing are Sprint Corp. and Bristol-Myers Squibb Co. While Sprint's earnings
have been lower than expected over the near term because of substantial
investment in private cellular systems nationwide, the company's core
long-distance telephone and computer businesses have grown at the expense of
competitors AT&T and MCI. According to the Portfolio's managers, the recent
historic merger of WorldCom and MCI also underscores the enormous upside
potential of Sprint's undervalued assets.
Bristol-Myers Squibb has also come a long way under new management the last few
years. While the company was once a peer group laggard with bloated costs and a
slow growth rate, the momentum has shifted as Bristol-Myers Squibb has become
more of a marketing powerhouse in the drug industry and a more formidable
competitor versus Merck. Recent product introductions from Bristol-Myers Squibb
should also significantly improve its future earnings potential.
Looking ahead, the managers believe that global deflation remains a serious
problem and that Asia's recent troubles will require investment professionals to
become more proactive and more judicious with respect to their stock selections.
In the aftermath of the collapse of Japan's financial services and real estate
industries in recent years, the managers think the hard lessons of not dealing
with the effects of deflation and overcapacity are there for everyone to see.
Alliance Growth Portfolio
For the year ended October 31, 1997, the Alliance Growth Portfolio generated a
total return of 32.59%, outperforming the total return of 27.28% for its Lipper
growth fund peer group average.
The Portfolio's fiscal year ended October 31, 1997 was another good one for
investors generally, albeit marked by more market volatility than seen in recent
years. The U.S. economy performed well throughout the reporting period,
providing better-than-expected growth with no resurgence of inflation. Indeed,
2
<PAGE>
many stock market investors who were preoccupied with the threat of inflation
throughout the year found that their fears were unfounded. The reporting period
ended with interest rates at their lowest level for the year.
The stock market went through two phases of pronounced weakness during the
period under review. In March and April, the major stock market averages dropped
nearly 10% with much greater weakness in technology and over-the-counter stocks.
On October 27, 1997, the Dow Jones Industrial Average ("DJIA") fell 554.26
points to 7161.15 in reaction to disarray in most Asian markets. (The DJIA is a
price-weighted average of 30 actively traded blue chip stocks, primarily
industrials.) However, investors did not panic and the stock market seemed to
quickly regain its equilibrium.
There was a marked change in market leadership following the lows of April with
large capitalization stocks (which had dominated the market for many months)
giving way to a broadening market with much better performance by mid-cap and
small-cap issues. During this time, technology stocks also recovered broadly.
This broadening of the market had a positive impact on the relative performance
of the Portfolio which traditionally has emphasized stocks of large and
mid-sized companies that are somewhat smaller than those that dominate the
Standard & Poor's 500 Index ("S&P 500"), a capitalization-weighted measure of
500 widely held common stocks.
The primary areas of emphasis for the Portfolio over the past twelve months have
been in the stocks of technology and financial services companies. While the
Portfolio lagged the S&P 500 early on in its fiscal year, it came back strongly
after April to finish the reporting period close to the performance of the S&P
500.
The managers continue to be impressed by the potential of the Internet industry,
specifically, and the communications industries in general. As many of you know,
technological change and deregulation are rapidly changing the face of these
industries. Worldcom (a telecommunications and Internet backbone giant that
recently successfully bid $37 billion for MCI Communications) and Cisco Systems
(a leading provider of equipment and software for computer inter-networking)
continue to be major holdings of the Portfolio.
The managers have substantially reduced their holdings of Intel and some of the
smaller technology stocks because they have identified more weakness in the
short term. (An estimated 89% of the world's PCs are powered by Intel chips.) As
noted, financial services company stocks remain important holdings led by MBNA
Corp., American Express and American International Group.
3
<PAGE>
While the significant challenges facing Asian markets may dampen near-term
prospects for a while, the managers do not think a bear market in stocks is
likely as long as the U.S. economy remains strong and interest rates stay low.
In addition, despite the fact that the managers now have more moderate
expectations regarding the short-term performance of the stock market, their
optimism about long-term market performance remains intact.
Van Kampen American Capital Enterprise Portfolio
For the year ended October 31, 1997, the Van Kampen American Capital Enterprise
Portfolio generated a total return of 29.81%, which compares favorably to the
total return of 27.28% for its Lipper growth fund peer group average.
The Portfolio is managed with a consistent investment philosophy -- to own
companies with positive future fundamentals at attractive current prices.
Although this philosophy may sound simplistic, the managers believe that the
best total return potential has usually been achieved by a primary focus on
disciplined stock selection. In selecting stocks, the managers of the Portfolio
generally look for at least one of the following fundamental characteristics:
o Consistent earnings growth
o Accelerating earnings growth
o Better-than-expected fundamentals
o An underlying change in a company, industry or regulatory environment
As long as the original criteria for purchasing a particular stock holds true
and its value remains relatively attractive, the stock usually stays in the
Portfolio. Today, high valuations are prevalent throughout much of the stock
market, so the Portfolio's managers are monitoring stock prices even more
closely than usual.
Throughout the reporting period, sector weightings tended to reflect where the
managers found the best opportunities. Once again, technology, finance, and
health-care stocks were attractive options. Financial stocks often thrive in a
moderate-growth economy like the one we are experiencing, and companies such as
BankAmerica and Conseco aided the Portfolio's performance. Technology stocks
continue to have strong fundamentals, as it becomes increasingly critical for
companies to invest in technology that will help them in managing their
businesses and stay competitive. As a result, the Portfolio's managers have been
pleased with their holdings in Compaq Computer, BMC Software, IBM and Dell
Computer. Finally, healthcare stocks, including select pharmaceutical companies
and health services providers, had a favorable
4
<PAGE>
impact on the Portfolio's performance. Prudent stock selection by the
Portfolio's management team pinpointed strong performers such as Bristol-Myers
Squibb Co., Pfizer, HealthSouth and Health Management Associates.
The only sector weighting that was increased notably during the reporting period
was consumer services, which rose from 7% of the Portfolio's assets on October
31, 1996 to 11% by October 31, 1997. Consumer services holdings included several
newspaper publishers (New York Times Co., Gannett and Tribune), restaurants
(Cracker Barrel, Brinker International and Foodmaker) and Time Warner (a
movie/entertainment producer.) Despite the volatility that the market
experienced at the end of the reporting period, the nation's economic
fundamentals -- slow but steady economic growth, solid corporate earnings and
controlled inflation -- continue to be favorable. As such, the managers believe
these conditions should benefit the Portfolio, and they encourage investors to
remember that short-term market turbulence can be expected on the journey toward
long-term goals. While the stock market will have a major impact on performance,
the Portfolio's management team is optimistic about adding value over the long
term based on their disciplined management philosophy.
In closing, thank you for investing in the Smith Barney Income and Growth,
Alliance Growth and Van Kampen American Capital Enterprise Portfolios. We look
forward to continuing to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman
November 28, 1997
5
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Smith Barney Income and Growth Portfolio
- --------------------------------------------------------------------------------
Historical Performance
================================================================================
Net Asset Value
------------------
Beginning End of Income Capital Gain Total
Year Ended of Year Year Dividends Distributions Returns+
================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $14.84 $17.90 $0.18 $0.17 23.38%
- --------------------------------------------------------------------------------
10/31/96 12.12 14.84 0.17 0.05 24.55
- --------------------------------------------------------------------------------
10/31/95 10.14 12.12 0.06 0.00 20.21
- --------------------------------------------------------------------------------
6/16/94*-10/31/94 10.00 10.14 0.00 0.00 1.40++
================================================================================
Total $0.41 $0.22
================================================================================
<CAPTION>
================================================================================
Alliance Growth Portfolio
- --------------------------------------------------------------------------------
Historical Performance
================================================================================
Net Asset Value
------------------
Beginning End of Income Capital Gain Total
Year Ended of Year Year Dividends Distributions Returns+
================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $16.30 $20.82 $0.02 $0.62 32.59%
- --------------------------------------------------------------------------------
10/31/96 13.28 16.30 0.09 0.32 26.55
- --------------------------------------------------------------------------------
10/31/95 10.65 13.28 0.02 0.10 26.18
- --------------------------------------------------------------------------------
6/16/94*-10/31/94 10.00 10.65 0.00 0.00 6.50++
================================================================================
Total $0.13 $1.04
================================================================================
<CAPTION>
================================================================================
Van Kampen American Capital Enterprise Portfolio
- --------------------------------------------------------------------------------
Historical Performance
================================================================================
Net Asset Value
------------------
Beginning End of Income Capital Gain Total
Year Ended of Year Year Dividends Distributions Returns+
================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $15.37 $19.89 $0.05 $0.00 29.81%
- --------------------------------------------------------------------------------
10/31/96 12.89 15.37 0.04 0.40 23.35
- --------------------------------------------------------------------------------
10/31/95 10.38 12.89 0.02 0.03 24.74
- --------------------------------------------------------------------------------
6/16/94*-10/31/94 10.00 10.38 0.00 0.00 3.80++
================================================================================
Total $0.11 $0.43
================================================================================
</TABLE>
IT IS THE FUNDS' POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
6
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Average Annual Total Return+
================================================================================
Smith Barney Alliance Van Kampen
Income and Growth American Capital
Growth Portfolio Portfolio Enterprise Portfolio
================================================================================
<S> <C> <C> <C>
Year Ended 10/31/97 23.38% 32.59% 29.81%
- --------------------------------------------------------------------------------
6/16/94* through 10/31/97 20.42 27.21 24.08
================================================================================
<CAPTION>
================================================================================
Cumulative Total Return+
================================================================================
Smith Barney Alliance Van Kampen
Income and Growth American Capital
Growth Portfolio Portfolio Enterprise Portfolio
================================================================================
<S> <C> <C> <C>
6/16/94* through 10/31/97 87.31% 125.49% 107.33%
================================================================================
</TABLE>
+ Assumes the reinvestment of all dividend and capital gain distributions, if
any, at net asset value.
* Commencement of operations.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
7
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Shares of the
Smith Barney Income and Growth Portfolio vs. S&P 500 Index+
- --------------------------------------------------------------------------------
June 1994 -- October 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Smith Barney Income
and Growth Portfolio S&P 500 Index
-------------------- -------------
<S> <C> <C>
6/16/94 $10,000 $10,000
10/94 $10,140 $10,324
4/95 $10,982 $11,404
10/95 $12,189 $13,053
4/96 $13,943 $14,684
10/96 $15,181 $16,018
4/97 $16,911 $18,374
10/31/97 $18,731 $21,159
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares of the Smith Barney
Income and Growth Portfolio on June 16, 1994 (commencement of operations),
assuming reinvestment of dividends and capital gains, if any, at net asset
value through October 31, 1997. The Standard & Poor's 500 Index ("S&P 500
Index") is an index of widely held common stocks listed on the New York and
American Stock Exchanges and the over-the-counter markets. Figures for the
S&P 500 Index include reinvestment of dividends. The index is unmanaged and
is not subject to the same management and trading expenses of a mutual
fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
8
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Shares of the
Alliance Growth Portfolio vs. S&P 500 Index
and Russell 1000 Index+
- --------------------------------------------------------------------------------
June 1994 -- October 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Alliance
Growth Portfolio S&P 500 Index Russell 1000 Index
---------------- ------------- ------------------
<S> <C> <C> <C>
6/16/94 $10,000 $10,000 $10,000
10/94 $10,650 $10,324 $10,191
04/95 $11,475 $11,404 $11,050
10/95 $13,428 $13,053 $12,612
04/96 $15,557 $14,684 $14,327
10/96 $17,007 $16,018 $15,501
04/97 $17,491 $18,374 $17,529
10/31/97 $22,549 $21,159 $19,822
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares of the Alliance
Growth Portfolio on June 16, 1994 (commencement of operations), assuming
reinvestment of dividends and capital gains, if any, at net asset value
through October 31, 1997. The Standard & Poor's 500 Index ("S&P 500 Index")
is an index of widely held common stocks listed on the New York and
American Stock Exchanges and the over-the-counter markets. Figures for the
S&P 500 Index include reinvestment of dividends. The Russell 1000 Index is
comprised of 1,000 of the largest capitalized U.S. domiciled companies
whose common stock is traded on either the New York, American or NASDAQ
stock exchanges. The indexes are unmanaged and are not subject to the same
management and trading expenses of a mutual fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
9
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Shares of the
Van Kampen American Capital Enterprise Portfolio vs.
S&P 500 Index+
- --------------------------------------------------------------------------------
June 1994 -- October 1997
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Van Kampen American
Capital Enterprise Portfolio S&P 500 Index
---------------------------- -------------
<S> <C> <C>
6/16/94 $10,000 $10,000
10/94 $10,380 $10,324
04/95 $11,160 $11,404
10/95 $12,948 $13,053
04/96 $14,933 $14,684
10/96 $15,972 $16,018
04/97 $17,283 $18,374
10/31/97 $20,733 $21,159
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares of the Van Kampen
American Capital Enterprise Portfolio on June 16, 1994 (commencement of
operations), assuming reinvestment of dividends and capital gains, if any,
at net asset value through October 31, 1997. The Standard & Poor's 500
Index ("S&P 500 Index") is an index of widely held common stocks listed on
the New York and American Stock Exchanges and the over-the-counter markets.
Figures for the S&P 500 Index include reinvestment of dividends. The index
is unmanaged and is not subject to the same management and trading expenses
of a mutual fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and
redemption value may be more or less than the original cost. No adjustment
has been made for shareholder tax liability on dividends or capital gains.
10
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments October 31, 1997
================================================================================
SMITH BARNEY INCOME AND GROWTH PORTFOLIO
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 95.1%
================================================================================
<S> <C> <C>
Capital Goods -- 4.0%
120,000 Emerson Electric Co. $ 6,292,500
80,000 General Electric Co. 5,165,000
- --------------------------------------------------------------------------------
11,457,500
- --------------------------------------------------------------------------------
Communication Equipment & Services -- 5.3%
50,000 BellSouth Corp. 2,365,625
140,000 GTE Corp. 5,941,250
130,000 Sprint Corp. 6,760,000
- --------------------------------------------------------------------------------
15,066,875
- --------------------------------------------------------------------------------
Conglomerates -- 1.5%
100,000 National Service Industries, Inc. 4,425,000
- --------------------------------------------------------------------------------
Consumer Cyclicals -- 13.9%
100,000 Dow Jones & Co., Inc. 4,650,000
190,000 Federal Mogul Corp. 8,039,375
80,000 Ford Motor Co. 3,495,000
50,000 General Motors Corp. 3,209,375
160,000 Hudson's Bay Co. 3,662,172
200,000 The Limited, Inc. 4,712,500
100,000 Masco Corp. 4,387,500
30,000 Sears, Roebuck & Co. 1,256,250
150,000 Stanley Works, Inc. 6,337,500
- --------------------------------------------------------------------------------
39,749,672
- --------------------------------------------------------------------------------
Consumer Staples -- 8.6%
100,000 AMP, Inc. 4,500,000
100,000 Giant Foods, Inc., Class A Shares 3,062,500
80,000 Kimberly-Clark Corp. 4,155,000
100,000 Quaker Oats Corp. 4,787,500
50,000 Seagram Co. Ltd. 1,684,375
120,000 Unilever NV, New York Shares 6,405,000
- --------------------------------------------------------------------------------
24,594,375
- --------------------------------------------------------------------------------
Energy -- 12.4%
40,000 Amoco Corp. 3,667,500
100,000 Ashland, Inc. 4,768,750
80,000 Chevron Corp. 6,635,000
100,000 Dresser Industries, Inc. 4,212,500
60,000 Exxon Corp. 3,686,250
100,000 Mobil Corp. 7,281,250
100,000 The Williams Cos., Inc. 5,093,750
- --------------------------------------------------------------------------------
35,345,000
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
11
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
SMITH BARNEY INCOME AND GROWTH PORTFOLIO
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Financial Services -- 18.2%
100,000 Banc One Corp. $ 5,212,500
40,000 Chase Manhattan Corp. 4,615,000
90,000 Chubb Corp. 5,962,500
80,000 First Chicago NBD Corp. 5,820,000
50,000 Hartford Financial Services Group, Inc. 4,050,000
60,000 Mid Ocean Ltd. 3,892,500
240,000 Provident Cos., Inc. 8,010,000
60,000 St. Paul Cos., Inc. 4,796,250
80,000 Toronto-Dominion Bank 2,920,000
100,000 Washington Mutual, Inc. 6,843,750
- --------------------------------------------------------------------------------
52,122,500
- --------------------------------------------------------------------------------
Health Care -- 10.0%
120,000 American Home Products Corp. 8,895,000
120,000 Baxter International, Inc. 5,550,000
100,000 Bristol-Myers Squibb Co. 8,775,000
80,000 Eli Lilly & Co. 5,350,000
- --------------------------------------------------------------------------------
28,570,000
- --------------------------------------------------------------------------------
Raw and Intermediate Materials -- 8.3%
110,000 Ball Corp. 3,850,000
120,000 Imperial Chemicals Corp. 7,185,000
100,000 International Paper Co. 4,500,000
80,000 Reynolds Metals Co. 4,875,000
60,000 Union Camp Corp. 3,251,250
- --------------------------------------------------------------------------------
23,661,250
- --------------------------------------------------------------------------------
Real Estate Investment Trust -- 0.5%
4,000 Crescent Operating, Inc.* 93,000
40,000 Crescent Real Estate Equities, Inc. 1,440,000
- --------------------------------------------------------------------------------
1,533,000
- --------------------------------------------------------------------------------
Technology -- 3.6%
60,000 Lockheed Martin Corp. 5,703,750
50,000 Pitney Bowes, Inc. 3,965,625
8,000 United Technologies Corp. 560,000
- --------------------------------------------------------------------------------
10,229,375
- --------------------------------------------------------------------------------
Transportation -- 2.2%
10,000 Alexander & Baldwin, Inc. 275,000
100,000 Union Pacific Corp. 6,125,000
- --------------------------------------------------------------------------------
6,400,000
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
12
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
SMITH BARNEY INCOME AND GROWTH PORTFOLIO
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Utilities -- 6.6%
100,000 Boston Edison Co. $ 3,156,250
100,000 Duke Energy Corp. 4,825,000
70,000 EL Paso Natural Gas Co. 4,195,625
60,000 Enron Global Power & Pipelines, L.L.C. 2,066,250
150,000 Keyspan Energy Corp. 4,659,375
- --------------------------------------------------------------------------------
18,902,500
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $231,265,225) 272,057,047
<CAPTION>
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C> <C>
REPURCHASE AGREEMENT -- 4.9%
$ 13,963,000 Goldman, Sachs & Co., 5.648% due 11/3/97; Proceeds
at maturity -- $13,969,572; (Fully collateralized
by U.S. Treasury Notes, 5.625% due 10/31/99;
Market Value--$14,248,613) (Cost--$13,963,000) 13,963,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $245,228,225**) $286,020,047
================================================================================
</TABLE>
* Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
13
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
ALLIANCE GROWTH PORTFOLIO
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 84.0%
================================================================================
<S> <C> <C>
Airlines -- 3.0%
163,000 Continental Airlines, Inc., Class B Shares $ 7,049,750
38,900 Delta Airlines Inc. 3,919,175
40,300 Northwest Airlines Corp.* 1,813,500
26,500 UAL Corp.* 2,322,063
34,000 US Airways Group Inc.* 1,593,750
- --------------------------------------------------------------------------------
16,698,238
- --------------------------------------------------------------------------------
Banks -- 3.5%
92,304 Chase Manhattan Corp. 10,649,574
106,000 First Union Corp. 5,200,625
55,000 NationsBank Corp. 3,293,125
- --------------------------------------------------------------------------------
19,143,324
- --------------------------------------------------------------------------------
Commercial Services -- 5.4%
1,018,250 CUC International Inc.* 30,038,375
- --------------------------------------------------------------------------------
Computer Services -- 3.7%
346,600 Ceridian Corp.* 13,539,063
203,375 Sterling Commerce Inc.* 6,749,508
- --------------------------------------------------------------------------------
20,288,571
- --------------------------------------------------------------------------------
Diversified Operations -- 2.8%
333,000 Republic Industries Inc.* 9,823,500
144,398 Tyco International Ltd. 5,451,025
- --------------------------------------------------------------------------------
15,274,525
- --------------------------------------------------------------------------------
Drugs -- 3.3%
113,400 Merck & Co., Inc. 10,120,950
76,000 Pfizer Inc. 5,377,000
50,000 Schering-Plough Corp. 2,803,125
- --------------------------------------------------------------------------------
18,301,075
- --------------------------------------------------------------------------------
Electronics -- 6.6%
340,300 Cisco Systems Inc.* 27,915,234
211,600 3Com Corp.* 8,768,175
- --------------------------------------------------------------------------------
36,683,409
- --------------------------------------------------------------------------------
Financial Services -- 6.8%
168,600 American Express Co. 13,150,800
10,300 Household International Inc. 1,166,475
556,575 MBNA Corp. 14,644,880
51,200 Morgan Stanley Dean Witter Discover & Co. 2,508,800
264,825 Telecom-TCI Ventures, Class A Shares* 6,107,532
- --------------------------------------------------------------------------------
37,578,487
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
ALLIANCE GROWTH PORTFOLIO
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Hospital Supplies & Services -- 0.8%
82,600 Medtronic Inc. $ 3,593,100
102,000 Quest Medical Inc.* 841,500
- --------------------------------------------------------------------------------
4,434,600
- --------------------------------------------------------------------------------
Insurance -- 4.1%
163,000 Acceptance Insurance Cos., Inc.* 3,789,750
117,675 American International Group Inc. 12,010,205
31,000 Nationwide Financial Services, Inc. 943,562
16,800 The PMI Group Inc. 1,015,350
18,000 Progressive Corp. 1,876,500
131,600 20th Century Industries 3,290,000
- --------------------------------------------------------------------------------
22,925,367
- --------------------------------------------------------------------------------
Miscellaneous -- 2.9%
87,400 Boston Scientific Corp.* 3,976,700
49,000 Chrysler Corp. 1,727,250
66,000 ITT Corp.* 4,929,375
62,000 Loral Space & Communications* 1,302,000
45,000 Readers Digest Association, Inc. 1,023,750
126,800 Union Pacific Resources Corp. 3,122,450
- --------------------------------------------------------------------------------
16,081,525
- --------------------------------------------------------------------------------
Oil Related -- 10.1%
48,500 BJ Services Co.* 4,110,375
50,000 Baker Hughes Inc. 2,296,875
64,700 Dresser Industries Inc. 2,725,487
1,409,500 Gulf Canada Resources Ltd.* 11,804,562
132,200 Halliburton Co. 7,882,425
267,000 Nabors Industries Inc.* 10,980,375
160,000 Noble Drilling Corp.* 5,690,000
27,000 Rowan Cos. Inc.* 1,049,625
75,000 Santa Fe International Corp. 3,689,062
104,000 Transocean Offshore, Inc. 5,616,000
- --------------------------------------------------------------------------------
55,844,786
- --------------------------------------------------------------------------------
Real Estate -- 6.8%
180,900 Arden Realty Group Inc. 5,517,450
84,400 Equity Office Properties Trust 2,579,475
140,000 Excel Realty Trust, Inc. 4,217,500
191,300 Humphrey Hospitality Trust, Inc. 2,343,425
93,000 JP Realty, Inc. 2,266,875
250,000 Koger Equity Inc. 5,406,250
131,900 Macerich Co. 3,495,350
114,000 Prentiss Properties Trust 3,241,875
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
ALLIANCE GROWTH PORTFOLIO
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Real Estate -- 6.8% (continued)
70,000 SL Green Realty Corp. $ 1,754,375
138,000 Spieker Properties Inc. 5,399,250
40,000 Sun Communities Inc. 1,395,000
- --------------------------------------------------------------------------------
37,616,825
- --------------------------------------------------------------------------------
Retail -- 2.9%
62,100 Autozone Inc.* 1,835,831
154,850 The Home Depot, Inc. 8,613,531
236,700 The Limited Inc. 5,577,244
- --------------------------------------------------------------------------------
16,026,606
- --------------------------------------------------------------------------------
Technology -- 3.0%
19,000 Intel Corp. 1,463,000
18,000 Microsoft Corp.* 2,340,000
376,700 Sterling Software Inc.* 12,854,888
- --------------------------------------------------------------------------------
16,657,888
- --------------------------------------------------------------------------------
Telecommunications -- 6.6%
136,100 Brooks Fiber Properties Inc.* 7,604,588
232,800 Colt Telecommunications Group PLC ADR* 8,031,600
187,700 Nextel Communications Inc.* 4,927,125
66,000 ProSieben Media AG ADS 1,642,080
27,674 Tele-Communications Inc., Class A Shares* 634,790
148,787 Tele-Communications Liberty Media Group,
Class A Shares* 5,179,647
107,500 Teleport Communications Group Inc.* 5,200,312
107,100 Viacom Inc., Non Voting Class B Shares* 3,239,775
- --------------------------------------------------------------------------------
36,459,917
- --------------------------------------------------------------------------------
Tobacco -- 3.5%
113,800 Loews Corp. 12,710,038
166,000 Philip Morris Cos. Inc. 6,577,750
- --------------------------------------------------------------------------------
19,287,788
- --------------------------------------------------------------------------------
Utility - Telephone -- 8.2%
31,000 American Telephone & Telegraph Corp. 1,517,063
365,000 MCI Communications Corp. 12,957,500
94,000 Millicom International Cellular SA* 3,948,000
93,800 Telephone & Data Systems Inc. 3,986,500
682,060 Worldcom Inc.* 22,934,268
- --------------------------------------------------------------------------------
45,343,331
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost -- $352,149,315) 464,684,637
================================================================================
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
ALLIANCE GROWTH PORTFOLIO
SHARES SECURITY VALUE
================================================================================
PREFERRED STOCKS -- 0.9%
================================================================================
<S> <C> <C>
Drugs -- 0.1%
24,400 Gensia Inc., Exchangable $3.75*+ $ 625,250
- --------------------------------------------------------------------------------
Miscellaneous -- 0.3%
60,000 Automatic Common Exchange Security Trust 6.50% 1,695,000
- --------------------------------------------------------------------------------
Utility - Telephone -- 0.5%
22,000 Worldcom Inc. 8.00% 2,574,000
- --------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost -- $3,830,268) 4,894,250
================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
CONVERTIBLE BONDS -- 1.5%
================================================================================
<S> <C> <C>
Computers -- 1.0%
$ 2,000,000 Applied Magnetic Corp., 7.00% due 3/15/06+ 2,600,000
2,905,000 HMT Technology Corp., 5.75% due 1/15/04+ 2,806,956
- --------------------------------------------------------------------------------
5,406,956
- --------------------------------------------------------------------------------
Electronics -- 0.5%
920,000 Altera Corp., 5.75% due 6/15/02+ 1,589,300
1,300,000 3Com Corp., 10.25% due 11/1/01+ 1,576,250
- --------------------------------------------------------------------------------
3,165,550
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost -- $9,656,043) 8,572,506
================================================================================
SUB-TOTAL INVESTMENTS
(Cost -- $365,635,626) 478,151,393
================================================================================
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
ALLIANCE GROWTH PORTFOLIO
FACE
AMOUNT SECURITY VALUE
================================================================================
SHORT-TERM INVESTMENTS -- 13.6%
================================================================================
<S> <C> <C>
$ 30,290,000 Federal Home Loan Bank
Discount Notes, 5.43% to 5.60% due
11/3/97 to 11/17/97 $ 30,276,302
44,000,000 Federal Home Loan Mortgage Corp.
Discount Notes, 5.46% to 5.50% due
11/12/97 to 11/20/97 43,900,164
800,000 Federal National Mortgage Association
Discount Note, 5.43% due 11/12/97 798,673
- --------------------------------------------------------------------------------
TOTAL SHORT-TERM INVESTMENTS
(Cost -- $74,975,139) 74,975,139
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $440,610,765**) $553,126,532
================================================================================
</TABLE>
* Non-income producing security.
+ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
18
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
VAN KAMPEN AMERICAN CAPITAL ENTERPRISE PORTFOLIO
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 96.4%
================================================================================
<S> <C> <C>
Advertising -- 1.2%
25,900 Omnicom Group Inc. $ 1,829,188
9,900 Universal Outdoor Holdings, Inc. 418,275
- --------------------------------------------------------------------------------
2,247,463
- --------------------------------------------------------------------------------
Aircraft & Aerospace -- 1.0%
26,000 United Technologies Corp. 1,820,000
- --------------------------------------------------------------------------------
Airlines -- 0.4 %
17,400 Continental Airlines Inc., Class B Shares* 752,550
- --------------------------------------------------------------------------------
Automotive -- 1.1%
50,800 Ford Motor Co. 2,219,325
- --------------------------------------------------------------------------------
Banking -- 4.4%
38,800 BankAmerica Corp. 2,774,200
20,700 BankBoston Corp. 1,677,994
20,000 Chase Manhattan Corp. 2,307,500
11,800 NationsBank Corp. 706,525
11,100 U.S. Bancorp 1,128,731
- --------------------------------------------------------------------------------
8,594,950
- --------------------------------------------------------------------------------
Broadcast Media and Cable Television -- 1.7%
34,850 Chancellor Media Corp.* 1,912,394
24,500 Time Warner Inc. 1,413,344
- --------------------------------------------------------------------------------
3,325,738
- --------------------------------------------------------------------------------
Chemicals -- 2.2%
41,100 Crompton & Knowles Corp.* 1,037,775
31,700 Cytec Industries Inc.* 1,545,375
37,600 Praxair, Inc. 1,637,950
- --------------------------------------------------------------------------------
4,221,100
- --------------------------------------------------------------------------------
Commercial Services -- 1.8%
61,525 Accustaff Inc.* 1,757,308
38,100 Corestaff Inc.* 942,975
11,800 Federal Express Corp.* 787,650
- --------------------------------------------------------------------------------
3,487,933
- --------------------------------------------------------------------------------
Distribution/Wholesale -- 1.5%
20,500 Brightpoint Inc.* 676,500
24,450 CHS Electronics, Inc.* 597,497
32,500 Ingram Micro Inc., Class A Shares* 968,906
14,200 Tech Data Corp.* 631,900
- --------------------------------------------------------------------------------
2,874,803
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
VAN KAMPEN AMERICAN CAPITAL ENTERPRISE PORTFOLIO
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Diversified Operations/Manufacturing -- 3.1%
600 Aeroquip-Vickers Inc. $ 31,229
12,100 Lear Corp.* 581,556
28,000 Textron, Inc. 1,618,750
49,200 Tyco International Ltd. 1,857,300
69,600 Westinghouse Electric Corp. 1,840,050
- --------------------------------------------------------------------------------
5,928,885
- --------------------------------------------------------------------------------
Electronics - Semiconductors/Components -- 1.7%
22,200 Applied Materials, Inc.* 740,925
15,600 KLA-Tencor Corp.* 685,425
18,500 Philips Electronics NV* 1,449,937
10,800 Teradyne Inc.* 404,325
- --------------------------------------------------------------------------------
3,280,612
- --------------------------------------------------------------------------------
Energy - Oil & Gas -- 2.2%
19,300 British Petroleum Co. ADR 1,693,575
30,100 Texaco Inc. 1,713,819
30,000 YPF Sociedad Anonima ADR 960,000
- --------------------------------------------------------------------------------
4,367,394
- --------------------------------------------------------------------------------
Energy - Oilfield Services -- 2.2%
15,400 Schlumberger Ltd. 1,347,500
18,300 Smith International, Inc.* 1,395,375
12,700 Tidewater Inc.* 834,231
14,100 Weatherford Enterra, Inc. 719,981
- --------------------------------------------------------------------------------
4,297,087
- --------------------------------------------------------------------------------
Environmental Production/Services -- 1.4%
71,442 USA Waste Service, Inc.* 2,643,354
- --------------------------------------------------------------------------------
Financial Services -- 5.2%
24,900 Bear Stearns Cos., Inc.* 988,219
32,600 FANNIE MAE 1,579,063
39,500 FirstPlus Financial Group, Inc.* 2,172,500
31,300 Green Tree Financial Corp. 1,318,513
6,600 Household International, Inc.* 747,450
21,200 Merrill Lynch & Co., Inc. 1,433,650
29,100 Money Store Inc. 825,713
7,500 SLM Holding Corp. 1,052,812
- --------------------------------------------------------------------------------
10,117,920
- --------------------------------------------------------------------------------
Health Care - Hospital/Medical Services -- 6.7%
28,000 ESC Medical Systems, Ltd.* 1,099,000
16,000 Guidant Corp. 920,000
23,500 Health Care & Retirement Corp.* 888,594
43,968 Health Management Associates, Inc.* 1,071,720
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
VAN KAMPEN AMERICAN CAPITAL ENTERPRISE PORTFOLIO
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Health Care - Hospital/Medical Services -- 6.7% (continued)
69,800 HealthSouth Rehabilitation Corp.* $ 1,784,263
27,100 Lincare Holdings, Inc.* 1,453,238
25,800 Renal Treatment Centers, Inc.* 856,237
29,100 Tenet Healthcare Corp.* 889,369
23,500 Total Renal Care Holding Inc.* 724,094
29,600 Universal Health Services Inc., Class B Shares* 1,304,250
45,800 Wellpoint Health Networks Inc.* 2,095,350
- --------------------------------------------------------------------------------
13,086,115
- --------------------------------------------------------------------------------
Health Care - Pharmaceuticals -- 6.7%
43,300 Bristol-Myers Squibb Co. 3,799,575
11,800 McKesson Corp.* 1,266,288
28,700 Merck & Co., Inc. 2,561,475
23,500 Mylan Laboratories Inc. 515,531
16,500 Pfizer Inc. 1,167,375
40,400 Schering-Plough Corp. 2,264,925
48,000 Watson Pharmaceuticals, Inc.* 1,524,000
- --------------------------------------------------------------------------------
13,099,169
- --------------------------------------------------------------------------------
Hotels/Motels -- 2.0%
12,900 Doubletree Corp.* 536,963
32,100 HFS Inc.* 2,263,050
9,800 Hilton Hotels Corp. 301,962
12,100 Marriott International Inc. 843,975
- --------------------------------------------------------------------------------
3,945,950
- --------------------------------------------------------------------------------
Insurance -- 6.7%
16,900 Allstate Corp. 1,401,644
21,300 AMBAC Inc. 899,925
30,300 CMAC Investment Corp. 1,657,031
122,800 Conseco, Inc. 5,357,150
12,500 MGIC Investment Corp. 753,906
42,000 Sunamerica, Inc. 1,509,375
36,300 Torchmark Corp. 1,447,462
- --------------------------------------------------------------------------------
13,026,493
- --------------------------------------------------------------------------------
Manufacturing -- 2.1%
7,600 Cummins Engine Co., Inc. 463,126
26,300 Dana Corp. 1,231,169
19,400 Eaton Corp. 1,874,525
11,200 Illinois Tool Works Co. 550,900
- --------------------------------------------------------------------------------
4,119,720
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
VAN KAMPEN AMERICAN CAPITAL ENTERPRISE PORTFOLIO
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Newspapers -- 2.0%
23,500 Gannett Inc.* $1,235,219
22,200 New York Times Co., Class A Shares 1,215,450
26,600 Tribune Co.* 1,466,325
- --------------------------------------------------------------------------------
3,916,994
- --------------------------------------------------------------------------------
Office Automation & Equipment -- 0.4%
10,100 Xerox Corp. 801,060
- --------------------------------------------------------------------------------
Paper & Related Products -- 0.9%
20,800 Bowater Inc. 869,700
22,100 Fort James Corp.* 877,094
- --------------------------------------------------------------------------------
1,746,794
- --------------------------------------------------------------------------------
Retail - Department/Discount -- 3.8%
24,250 Consolidated Stores Corp.* 966,969
28,100 Dayton Hudson Corp. 1,765,031
35,300 Family Dollar Stores Inc.* 829,550
18,800 Proffitt's Inc.* 539,325
41,200 Ross Stores, Inc. 1,539,850
55,700 TJX Co. 1,650,112
- --------------------------------------------------------------------------------
7,290,837
- --------------------------------------------------------------------------------
Retail - Food/Drugs -- 3.8%
12,600 CVS Corp. 772,537
25,200 General Nutrition Co.* 793,800
52,500 Kroger Co.* 1,712,813
19,400 Rite Aid Corp. 1,151,875
50,897 Safeway Inc.* 2,958,417
- --------------------------------------------------------------------------------
7,389,442
- --------------------------------------------------------------------------------
Retail - Restaurants -- 1.9%
31,100 Applesouth Inc.* 579,237
66,300 Brinker International Inc.* 928,200
24,500 Cracker Barrel Old Country Store, Inc. 722,750
49,800 Foodmaker Inc.* 818,588
25,400 Landry's Seafood Restaurant Inc.* 711,200
- --------------------------------------------------------------------------------
3,759,975
- --------------------------------------------------------------------------------
Retail - Specialty -- 3.7%
16,100 Bed Bath & Beyond Inc.* 511,175
25,700 Borders Group Inc.* 666,594
22,350 The Home Depot, Inc. 1,243,219
25,800 Liz Claiborne, Inc. 1,307,737
</TABLE>
See Notes to Financial Statements.
22
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
VAN KAMPEN AMERICAN CAPITAL ENTERPRISE PORTFOLIO
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Retail - Specialty -- 3.7% (continued)
21,100 Nautica Enterprises, Inc.* $ 561,787
15,400 Tiffany & Co. 608,300
20,000 Tommy Hilfiger Corp.* 791,250
46,400 US Office Products Co.* 1,450,000
- --------------------------------------------------------------------------------
7,140,062
- --------------------------------------------------------------------------------
Technology - Computer Software -- 7.1%
56,500 BMC Software, Inc. 3,411,187
23,125 Cadence Design Systems, Inc.* 1,231,406
17,500 Cisco Systems Inc.* 1,435,547
13,600 Citrix Systems Inc.* 998,750
15,500 Computer Associates International Inc. 1,155,719
31,600 Compuware Corp.* 2,089,550
22,800 EMC Corp.* 1,276,800
23,600 Mcafee Associates Inc.* 1,174,100
8,400 Microsoft Corp.* 1,092,000
- --------------------------------------------------------------------------------
13,865,059
- --------------------------------------------------------------------------------
Technology - Computers & Office Equipment -- 5.9%
73,400 Compaq Computer Corp.* 4,679,250
10,100 Dell Computer Corp.* 809,263
32,900 International Business Machine Corp. 3,226,256
15,100 Sanmina Corp.* 1,128,725
36,600 SCI Systems Inc.* 1,610,400
- --------------------------------------------------------------------------------
11,453,894
- --------------------------------------------------------------------------------
Technology - Semiconductors -- 2.9%
20,666 Analog Devices, Inc.* 631,605
15,100 Lattice Semiconductor Corp.* 755,944
13,700 Linear Technology Co. 861,387
31,600 National Semiconductor Corp.* 1,137,600
11,700 Texas Instruments Inc. 1,248,244
32,900 VLSI Technology Inc. 974,662
- --------------------------------------------------------------------------------
5,609,442
- --------------------------------------------------------------------------------
Technology - Telecommunications Equipment -- 3.8%
27,900 Adaptec Inc.* 1,351,406
15,100 Ciena Corp.* 830,500
12,600 Lucent Technologies Inc. 1,038,712
10,000 Nokia Corp. ADR 882,500
50,900 Scientific-Atlanta Inc. 944,831
25,800 Tellabs, Inc.* 1,393,200
20,700 3Com Corp.* 857,756
- --------------------------------------------------------------------------------
7,298,905
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
23
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Schedules of Investments (continued) October 31, 1997
================================================================================
VAN KAMPEN AMERICAN CAPITAL ENTERPRISE PORTFOLIO
SHARES SECURITY VALUE
================================================================================
<S> <C> <C>
Tobacco -- 3.9%
189,200 Philip Morris Cos. $ 7,497,050
- --------------------------------------------------------------------------------
Utilities - Telephone -- 1.0%
9,900 Bell Atlantic Corp. 790,762
23,500 Cincinnati Bell, Inc. 634,500
5,000 Telecomunicacoes Brasileiras SA ADR* 507,500
- --------------------------------------------------------------------------------
1,932,762
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $148,622,033) 187,158,837
================================================================================
<CAPTION>
FACE
AMOUNT SECURITY VALUE
================================================================================
<S> <C> <C>
SHORT-TERM INVESTMENTS -- 3.6%
$ 7,020,000 U.S. Treasury Bills, 4.65% to
5.11% due 11/20/97 to 1/22/98
(Cost -- $6,975,047) 6,975,047
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $155,597,080**) $194,133,884
================================================================================
</TABLE>
* Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
24
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Statements of Assets and Liabilities October 31, 1997
===========================================================================================================
Van Kampen
Smith Barney American
Income Alliance Capital
and Growth Growth Enterprise
Portfolio Portfolio Portfolio
===========================================================================================================
<S> <C> <C> <C>
ASSETS:
Investments, at value
(Cost--$231,265,225, $365,635,626 and
$148,622,033, respectively) $272,057,047 $478,151,393 $187,158,837
Short-term investments, at value
(Cost--$13,963,000, $74,975,139 and
$6,975,047, respectively) 13,963,000 74,975,139 6,975,047
Cash 275 39,548 42,841
Receivable from Fund shares sold 578,084 566,158 404,227
Receivable from securities sold 571,619 3,517,722 2,441,743
Dividends and interest receivable 402,640 307,518 94,501
- -----------------------------------------------------------------------------------------------------------
Total Assets 287,572,665 557,557,478 197,117,196
- -----------------------------------------------------------------------------------------------------------
LIABILITIES:
Management fees payable 176,383 368,807 302,077
Payable for Fund shares purchased 52 -- --
Payable for securities purchased -- 12,599,416 186,796
Accrued expenses 63,426 63,240 45,378
- -----------------------------------------------------------------------------------------------------------
Total Liabilities 239,861 13,031,463 534,251
- -----------------------------------------------------------------------------------------------------------
Total Net Assets $287,332,804 $544,526,015 $196,582,945
===========================================================================================================
NET ASSETS:
Par value of capital shares $ 160 $ 262 $ 99
Capital paid in excess of par value 231,472,709 385,496,050 144,884,307
Undistributed net investment income 4,340,906 1,310,038 565,906
Accumulated net realized gain
on security transactions 10,727,207 45,203,898 12,595,829
Net unrealized appreciation
of investments 40,791,822 112,515,767 38,536,804
- -----------------------------------------------------------------------------------------------------------
Total Net Assets $287,332,804 $544,526,015 $196,582,945
===========================================================================================================
Shares Outstanding 16,049,793 26,153,412 9,883,658
- -----------------------------------------------------------------------------------------------------------
Net Asset Value $17.90 $20.82 $19.89
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================
Statements of Operations For the Year Ended October 31, 1997
===========================================================================================================
Van Kampen
Smith Barney American
Income Alliance Capital
and Growth Growth Enterprise
Portfolio Portfolio Portfolio
===========================================================================================================
INVESTMENT INCOME:
<S> <C> <C> <C>
Dividends $ 5,100,334 $ 3,423,936 $ 1,351,251
Interest 766,208 1,257,795 378,367
Less: Foreign withholding tax (32,436) (13,927) (907
- -----------------------------------------------------------------------------------------------------------
Total Investment Income 5,834,106 4,667,804 1,728,711
- -----------------------------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 1,399,650 3,268,019 1,045,925
Audit and legal 24,293 22,696 15,002
Shareholder communications 13,968 14,712 11,000
Directors' fees 12,999 17,647 6,501
Registration fees 12,506 -- --
Custody 12,000 26,000 22,000
Shareholder and system servicing fees 10,099 5,209 9,000
Other 5,491 3,690 4,000
- -----------------------------------------------------------------------------------------------------------
Total Expenses 1,491,006 3,357,973 1,113,428
- -----------------------------------------------------------------------------------------------------------
Net Investment Income 4,343,100 1,309,831 615,283
- -----------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN
ON INVESTMENTS (NOTE 3):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 92,993,646 257,973,744 107,049,192
Cost of securities sold 82,260,462 212,688,581 94,048,108
- -----------------------------------------------------------------------------------------------------------
Net Realized Gain 10,733,184 45,285,163 13,001,084
- -----------------------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investments:
Beginning of year 16,161,270 43,237,671 15,381,147
End of year 40,791,822 112,515,767 38,536,804
- -----------------------------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 24,630,552 69,278,096 23,155,657
- -----------------------------------------------------------------------------------------------------------
Net Gain on Investments 35,363,736 114,563,259 36,156,741
- -----------------------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $39,706,836 $115,873,090 $36,772,024
===========================================================================================================
</TABLE>
See Notes to Finanicial Statements.
26
<PAGE>
<TABLE>
<CAPTION>
====================================================================================
Statements of Changes in Net Assets
====================================================================================
Years Ended October 31,
-----------------------
Smith Barney Income and Growth Portfolio 1997 1996
====================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $4,343,100 $2,046,618
Net realized gain 10,733,184 1,773,083
Increase in net unrealized appreciation 24,630,552 13,610,166
- -----------------------------------------------------------------------------------
Increase in Net Assets From Operations 39,706,836 17,429,867
- -----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (1,809,911) (735,738)
Net realized gains (1,779,060) (199,857)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (3,588,971) (935,595)
- -----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 112,644,265 82,911,406
Net asset value of shares issued
for reinvestment of dividends 3,588,971 935,595
Cost of shares reacquired (3,730,616) (992,481)
- -----------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 112,502,620 82,854,520
- -----------------------------------------------------------------------------------
Increase in Net Assets 148,620,485 99,348,792
NET ASSETS:
Beginning of year 138,712,319 39,363,527
- -----------------------------------------------------------------------------------
End of year* $287,332,804 $138,712,319
====================================================================================
* Includes undistributed net investment income of: $4,340,906 $1,807,717
====================================================================================
</TABLE>
See Notes to Financial Statements.
27
<PAGE>
<TABLE>
<CAPTION>
===================================================================================
Statements of Changes in Net Assets (continued)
===================================================================================
Years Ended October 31,
-----------------------------
Alliance Growth Portfolio 1997 1996
===================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 1,309,831 $ 806,429
Net realized gain 45,285,163 11,897,595
Increase in net unrealized appreciation 69,278,096 34,972,974
- -----------------------------------------------------------------------------------
Increase in Net Assets From Operations 115,873,090 47,676,998
- -----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (322,517) (966,222)
Net realized gains (12,082,073) (3,357,984)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (12,404,590) (4,324,206)
- -----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 139,218,982 137,418,319
Net asset value of shares issued
for reinvestment of dividends 12,404,591 4,324,206
Cost of shares reacquired (5,161,944) (2,072,279)
- -----------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 146,461,629 139,670,246
- -----------------------------------------------------------------------------------
Increase in Net Assets 249,930,129 183,023,038
NET ASSETS:
Beginning of year 294,595,886 111,572,848
- -----------------------------------------------------------------------------------
End of year* $544,526,015 $294,595,886
===================================================================================
* Includes undistributed net investment income of: $1,310,038 $353,728
===================================================================================
</TABLE>
See Notes to Financial Statements.
28
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================
Statements of Changes in Net Assets (continued)
=====================================================================================
Years Ended October 31,
------------------------------
Van Kampen American Capital Enterprise Portfolio 1997 1996
=====================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 615,283 $ 367,123
Net realized gain (loss) 13,001,084 (286,655)
Increase in net unrealized appreciation 23,155,657 14,042,324
- ------------------------------------------------------------------------------------
Increase in Net Assets From Operations 36,772,024 14,122,792
- ------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (361,911) (141,540)
Net realized gains -- (1,367,253)
- ------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (361,911) (1,508,793)
- ------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 8):
Net proceeds from sale of shares 58,656,790 57,624,883
Net asset value of shares issued
for reinvestment of dividends 361,911 1,508,793
Cost of shares reacquired (2,536,998) (503,508)
- ------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 56,481,703 58,630,168
- ------------------------------------------------------------------------------------
Increase in Net Assets 92,891,816 71,244,167
NET ASSETS:
Beginning of year 103,691,129 32,446,962
- ------------------------------------------------------------------------------------
End of year* $196,582,945 $103,691,129
====================================================================================
* Includes undistributed net investment income of: $565,906 $312,534
====================================================================================
</TABLE>
See Notes to Financial Statements.
29
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Income and Growth, Alliance Growth and Van Kampen American
Capital Enterprise Portfolios ("Portfolio(s)") are separate investment
portfolios of the Travelers Series Fund Inc. ("Fund"). The Fund, a Maryland
corporation, is registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company and consists of these Portfolios
and nine other separate investment portfolios: AIM Capital Appreciation, Smith
Barney International Equity, Smith Barney Pacific Basin, TBC Managed Income,
Putnam Diversified Income, GT Global Strategic Income, Smith Barney High Income,
MFS Total Return and Smith Barney Money Market Portfolios. Shares of the Fund
are offered only to insurance company separate accounts which fund certain
variable annuity and variable life insurance contracts. The financial statements
and financial highlights for the other portfolios are presented in separate
annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing prices on such
markets; securities for which no sales price was reported and U.S. government
agencies and obligations are valued at the mean between bid and ask prices; (c)
securities maturing within 60 days are valued at cost plus accreted discount, or
minus amortized premium, which approximates value; (d) dividend income is
recorded on the ex-dividend date; foreign dividends are recorded on the
ex-dividend date or as soon as practical after the Portfolios determine the
existence of a dividend declaration after exercising reasonable due diligence;
(e) interest income is recorded on an accrual basis; (f) dividends and
distributions to shareholders are recorded on the ex-dividend date; (g) gains or
losses on the sale of securities are calculated by using the specific
identification method; (h) the accounting records of the Portfolios are
maintained in U.S. dollars. All assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the rate of exchange of
such currencies against U.S. dollars on the date of valuation. Purchases and
sales of securities, and income and expenses are translated at the rate of
exchange quoted on the respective date that such transactions are recorded.
Differences between income or expense amounts recorded and collected or paid are
adjusted when reported by the custodian bank; (i) the character of income and
gains to be distributed are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. At October 31,
1997, reclassifications were made to the capital accounts of the Alliance Growth
Portfolio to reflect permanent book/tax differences and income and gains
available for distributions under income tax regulations. Net investment income,
net
30
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
realized gains and net assets were not affected by this change; (j) the
Portfolios intend to comply with the requirements of the Internal Revenue Code
of 1986, as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; and (k) estimates and assumptions are required
to be made regarding assets, liabilities and changes in net assets resulting
from operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
2. MANAGEMENT AGREEMENT AND TRANSACTIONS WITH AFFILIATED PERSONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as the investment manager of the Smith Barney
Income and Growth Portfolio ("SBIG"). Travelers Investment Adviser, Inc.
("TIA"), an affiliate of SBMFM, acts as the investment manager of the Alliance
Growth ("AGP") and the Van Kampen American Capital Enterprise ("VKACEP")
Portfolios. SBIG pays SBMFM a management fee calculated at an annual rate of
0.65% of the average daily net assets of the Portfolio. AGP and VKACEP pay TIA a
management fee calculated at an annual rate of 0.80% and 0.70%, respectively, of
the average daily net assets of each Portfolio. These fees are calculated daily
and paid monthly.
TIA has entered into sub-advisory agreements with Alliance Capital
Management L.P. ("Alliance Capital") and Van Kampen American Capital Asset
Management, Inc. ("VKAC"). Pursuant to each sub-advisory agreement, Alliance
Capital and VKAC are responsible for the day-to-day portfolio operations and
investment decisions and are compensated for such services at an annual rate of
0.375% and 0.325% of the average daily net assets of AGP and VKACEP,
respectively. These fees are calculated daily and paid monthly.
TIA has entered into a sub-administrative services agreement with SBMFM.
TIA pays SBMFM, as sub-administrator, a fee calculated at an annual rate of
0.10% of the average daily net assets of AGP and VKACEP.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares. For the year ended October 31, 1997, SB received brokerage
commissions of $115,624.
All officers and one Director of the Fund are employees of SB.
31
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
3. INVESTMENTS
During the year ended October 31, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were:
<TABLE>
<CAPTION>
Van Kampen
Smith Barney American
Income and Alliance Capital
Growth Growth Enterprise
================================================================================
<S> <C> <C> <C>
Purchases $204,830,622 $336,754,398 $156,520,311
- --------------------------------------------------------------------------------
Sales 92,993,646 257,973,744 107,049,192
================================================================================
</TABLE>
At October 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
Van Kampen
Smith Barney American
Income and Alliance Capital
Growth Growth Enterprise
================================================================================
<S> <C> <C> <C>
Gross unrealized appreciation $43,370,194 $119,105,890 $41,670,360
Gross unrealized depreciation (2,578,372) (6,590,123) (3,133,556)
- --------------------------------------------------------------------------------
Net unrealized appreciation $40,791,822 $112,515,767 $38,536,804
================================================================================
</TABLE>
4. REPURCHASE AGREEMENTS
The Portfolios purchase (and their custodian takes possession of) U.S.
government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolios require
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
5. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contract. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading.
32
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
Variation margin payments are received or made and recognized as assets
due from or liabilities due to broker, depending upon whether unrealized gains
or losses are incurred. When the contract is closed, the Portfolios record a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transactions and the Portfolios' basis in the contract.
Only AGP and VKACEP may enter into such contracts to hedge a portion of
their portfolios. The Portfolios bear the market risk that arises from changes
in the value of the financial instruments and securities indices (futures
contracts).
At October 31, 1997, AGP and VKACEP had no open futures contracts.
6. OPTIONS CONTRACTS
AGP and VKACEP may purchase put or call options. Premiums paid when put or
call options are purchased represent investments, which are marked-to-market
daily and are included in the schedule of investments. When a purchased option
expires, a loss will be realized in the amount of the premium paid. When a
closing sales transaction is entered into, a gain or loss will be realized
depending on whether the proceeds from the closing sales transaction are greater
or less than the premium paid for the option. When a put option is exercised, a
gain or loss will be realized if the sale of the underlying security and the
proceeds from such sale decrease by the premium originally paid. When a call
option is exercised, the cost of the security purchased upon exercise will be
increased by the premium originally paid.
At October 31, 1997, AGP and VKACEP had no open purchased put or call
option contracts.
When AGP and VKACEP write a covered call or put option, an amount equal to
the premium received is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, a gain equal to the
amount of the premium received is realized. When a closing purchase transaction
is entered into, a gain or loss is realized depending upon whether the cost of
the closing transaction is greater or less than the premium originally received,
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is eliminated. When a written call option
is exercised, the cost of the security sold will be decreased by the premium
originally received. When a written put option is exercised, the amount of the
premium originally received will reduce the cost of the security purchased upon
exercise. When written index options are exercised, settlement is made in cash.
33
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
The risk associated with purchasing options is limited to the premium
originally paid. The Portfolios enter into options for hedging purposes. The
risk in writing a covered call option is that the Portfolios give up the
opportunity to participate in any increase in the price of the underlying
security beyond the exercise price. The risk in writing a put option is that the
Portfolios are exposed to the risk of a loss if the market price of the
underlying security declines.
During the period ended October 31, 1997, AGP and VKACEP did not write any
options.
7. LENDING OF PORTFOLIO SECURITIES
SBIG and AGP have an agreement with their custodian whereby the custodian
may lend securities owned by the Portfolios to brokers, dealers and other
financial organizations. Fees earned by the Portfolios on securities lending are
recorded as interest income. Loans of securities by the Portfolios are
collateralized by cash, U.S. government securities or high quality money market
instruments that are maintained at all times in an amount at least equal to the
current market value of the loaned securities, plus a margin depending on the
type of securities loaned. The custodian establishes and maintains the
collateral in segregated accounts.
At October 31, 1997, there were no securities on loan.
8. CAPITAL SHARES
At October 31, 1997, the Fund had six billion shares authorized with a par
value of $0.00001 per share. Each share of a Portfolio represents an equal
proportionate interest in that Portfolio with each other share of the same
Portfolio and has an equal entitlement to any dividends and distributions made
by the Portfolio.
34
<PAGE>
<TABLE>
<CAPTION>
================================================================================
Notes to Financial Statements (continued)
================================================================================
Transactions in shares of each Portfolio were as follows:
Year Ended Year Ended
October 31, 1997 October 31, 1996
================================================================================
<S> <C> <C>
Smith Barney Income and Growth
Shares sold 6,685,160 6,099,448
Shares issued on reinvestment 235,342 72,831
Shares redeemed (219,187) (71,100)
- --------------------------------------------------------------------------------
Net Increase 6,701,315 6,101,179
================================================================================
Alliance Growth
Shares sold 7,641,028 9,488,140
Shares issued on reinvestment 734,869 322,568
Shares redeemed (294,993) (142,507)
- --------------------------------------------------------------------------------
Net Increase 8,080,904 9,668,201
================================================================================
Van Kampen American Capital Enterprise
Shares sold 3,263,315 4,145,450
Shares issued on reinvestment 22,619 117,704
Shares redeemed (146,973) (35,328)
- --------------------------------------------------------------------------------
Net Increase 3,138,961 4,227,826
================================================================================
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
======================================================================================================
Financial Highlights
======================================================================================================
For a share of capital stock outstanding throughout each year:
Smith Barney Income and Growth Portfolio 1997 1996 1995 1994(1)
======================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 14.84 $ 12.12 $ 10.14 $ 10.00
- -----------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (2) 0.25 0.32 0.28 0.11
Net realized and unrealized gain 3.16 2.62 1.76 0.03
- -----------------------------------------------------------------------------------------------------
Total Income From Operations 3.41 2.94 2.04 0.14
- -----------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.18) (0.17) (0.06) --
Net realized gains (0.17) (0.05) -- --
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.35) (0.22) (0.06) --
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 17.90 $ 14.84 $ 12.12 $ 10.14
- -----------------------------------------------------------------------------------------------------
Total Return 23.38% 24.55% 20.21% 1.40%++
- -----------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $287,333 $138,712 $ 39,364 $ 6,377
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 0.69% 0.73% 0.73% 0.73%+
Net investment income 2.01 2.35 2.70 2.82+
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 46% 32% 38% 2%
- -----------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (3) $ 0.06 $ 0.06 $ 0.07 --
======================================================================================================
</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 Portfolio for $13,120 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 would have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Per Share Decreases Without Fee Waivers
in Net Investment Income and Reimbursement
------------------------ -------------------
<S> <C> <C>
1995 $0.02 0.94%
1994 0.05 2.08+
</TABLE>
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
36
<PAGE>
<TABLE>
<CAPTION>
============================================================================================================
Financial Highlights (continued)
============================================================================================================
For a share of capital stock outstanding throughout each year:
Alliance Growth Portfolio 1997 1996 1995 1994(1)
============================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 16.30 $ 13.28 $ 10.65 $ 10.00
- ------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (2) 0.05 0.04 0.14 0.06
Net realized and unrealized gain 5.11 3.39 2.61 0.59
- ------------------------------------------------------------------------------------------------------------
Total Income From Operations 5.16 3.43 2.75 0.65
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.02) (0.09) (0.02) --
Net realized gains (0.62) (0.32) (0.10) --
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.64) (0.41) (0.12) --
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 20.82 $ 16.30 $ 13.28 $ 10.65
- ------------------------------------------------------------------------------------------------------------
Total Return 32.59% 26.55% 26.18% 6.50%++
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $544,526 $294,596 $111,573 $ 17,086
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 0.82% 0.87% 0.90% 0.88%+
Net investment income 0.32 0.39 1.24 1.47+
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 66% 88% 78% 37%
- ------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (3) $ 0.05 $ 0.05 $ 0.06 --
============================================================================================================
</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 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 would have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Per Share Decreases Without Fee Waivers
in Net Investment Income and Reimbursement
------------------------ -------------------
<S> <C> <C>
1995 $0.01 0.97%
1994 0.03 1.76+
</TABLE>
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
37
<PAGE>
<TABLE>
<CAPTION>
============================================================================================================
Financial Highlights (continued)
============================================================================================================
For a share of capital stock outstanding throughout each year:
Van Kampen American
Capital Enterprise Portfolio 1997 1996 1995 1994(1)
============================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $15.37 $12.89 $10.38 $10.00
- ------------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income (2) 0.06 0.05 0.03 0.03
Net realized and unrealized gain 4.51 2.87 2.53 0.35
- ------------------------------------------------------------------------------------------------------------
Total Income From Operations 4.57 2.92 2.56 0.38
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.05) (0.04) (0.02) --
Net realized gains -- (0.40) (0.03) --
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.05) (0.44) (0.05) --
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $19.89 $15.37 $12.89 $10.38
- ------------------------------------------------------------------------------------------------------------
Total Return 29.81% 23.35% 24.74% 3.80%++
- ------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $196,583 $103,691 $32,447 $5,734
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (2) 0.74% 0.83% 0.88% 0.84%+
Net investment income 0.41 0.53 0.65 0.79+
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 75% 112% 180% 55%
- ------------------------------------------------------------------------------------------------------------
Average commissions per share
paid on equity transactions (3) $0.05 $0.06 $0.05 --
============================================================================================================
</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 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 would have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Per Share Decreases Without Fee Waivers
in Net Investment Income and Reimbursement
------------------------ -------------------
<S> <C> <C>
1995 $0.06 1.26%
1994 0.07 2.66+
</TABLE>
(3) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
38
<PAGE>
================================================================================
Independent Auditors' Report
================================================================================
The Shareholders and Board of Directors of
Travelers Series Fund Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the Smith Barney Income and Growth,
Alliance Growth and Van Kampen American Capital Enterprise Portfolios of
Travelers Series Fund Inc. as of October 31, 1997, and the related statements of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the three-year period then ended and for the
period from June 16, 1994 (commencement of operations) to October 31, 1994.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997, by correspondence with the custodian. As to securities
purchased or sold but not yet received or delivered, we performed other
appropriate auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Smith Barney Income and Growth, Alliance Growth and VanKampen American Capital
Enterprise Portfolios of Travelers Series Fund Inc. as of October 31, 1997, the
results of their operations for the year then ended, the changes in their net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the three-year period then ended
and for the period from June 16, 1994 to October 31, 1994, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
December 18, 1997
39
<PAGE>
================================================================================
Tax Information (unaudited)
================================================================================
For Federal tax purposes the Travelers Series Fund Inc. hereby designates
for the fiscal year ended October 31, 1997:
<TABLE>
<CAPTION>
Long-term capital gain distributions paid:
<S> <C>
Income & Growth Portfolio $1,439,702
Alliance Growth Portfolio 6,472,800
Percentages of ordinary income distributions
designated as qualifying for the dividends
received deduction available to corporate
shareholders:
Income & Growth Portfolio 84.21%
Alliance Growth Portfolio 6.51
Van Kampen American Capital
Enterprise Portfolio 100.00
</TABLE>
40
<PAGE>
Travelers Series SMITH BARNEY
Fund Inc. ------------
A Member of TravelersGroup[LOGO]
Directors Investment Managers
Victor K. Atkins Smith Barney Mutual Funds
A.E. Cohen Management Inc.
Robert A. Frankel Travelers Investment Adviser, Inc.
Rainer Greeven
Susan M. Heilbron Distributor
Heath B. McLendon, Chairman Smith Barney Inc.
James M. Shuart
Custodian
Officers PNC Bank, N.A.
Heath B. McLendon Annuity Administration
President and Travelers Annuity Investor Services
Chief Executive Officer 5 State House Square
1 Tower Square
Lewis E. Daidone Hartford, CT 06183
Senior Vice President and Treasurer
John C. Bianchi
Vice President
James B. Conheady
Vice President
Martin Hanley
Vice President This report is submitted for the general
information of the shareholders of
Jeffrey J. Russell Travelers Series Fund Inc. It is not
Vice President authorized for distribution to prospective
investors unless accompanied or
Bruce D. Sargent preceded by a current Prospectus for the
Vice President Fund, which contains information
concerning the Fund's investment
Phyllis Zahorodny policies and expenses as well as other
Vice President pertinent information.
Thomas M. Reynolds
Controller Travelers Series Fund Inc.
388 Greenwich Street
Christina T. Sydor New York, New York 10013
Secretary
IN0251 12/97
<PAGE>
================================================================================
A N N U A L R E P O R T
================================================================================
1997
1997
1997
1997
1997
Travelers Series
Fund Inc.
Smith Barney High Income
Portfolio
Putnam Diversified Income
Portfolio
---------------------------
October 31, 1997
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
================================================================================
Smith Barney High Income and
Putnam Diversified Income Portfolios
================================================================================
Dear Shareholder:
We are pleased to provide the annual report for the Travelers Series Fund Inc.
- -- Smith Barney High Income and Putnam Diversified Income Portfolios
("Portfolios") for the year ended October 31, 1997. In this report, we summarize
the period's prevailing economic and market conditions and outline the
investment strategy employed by each Portfolio. A detailed summary of
performance and current holdings can be found in the appropriate sections that
follow.
Portfolio Highlights
Smith Barney High Income Portfolio
For the year ended October 31, 1997, the Smith Barney High Income Portfolio
returned 16.24%. This return compares favorably with its Lipper Analytical
Services, Inc. ("Lipper") peer group average of 14.46% for the same period.
(Lipper is an independent fund-tracking organization.)
The U.S. bond markets have generated respectable total returns so far in 1997
with interest rates modestly lower so far this year. The high yield bond market
generated the strongest total returns in the domestic fixed income arena as a
result of both strong technical market conditions as well as very positive
fundamental conditions.
Despite a considerable amount of new high yield bond issuance, there continues
to be significant demand from both institutional investors and retail mutual
funds. The Portfolio's manager has seen a record amount of new issuance (i.e.,
more than $90 billion) during the first ten months of this year and he expects
this trend to continue over the remainder of the year.
There has been more than adequate demand to absorb the heavy new issue supply.
Increasing amounts of capital are flowing into the high yield market from a
variety of sources. The open-end high yield mutual funds have had significant
cash inflows so far in 1997. More importantly, the high yield bond market has
continued to broaden and mature into a more widely accepted investment
alternative among more traditional institutional investors. Pension funds are
allocating larger percentages of their investment portfolios to the high yield
bond market.
Moreover, there has been a meaningful increase in the number of structured
transactions incorporating high yield securities during the reporting period,
which has coincided with the increased investor demand for high yield
1
<PAGE>
securities. In the past two years, a number of institutions, particularly
insurance companies and institutional money managers, have begun creating
collateralized bond obligations ("CBOs") which use high yield securities as
collateral. These instruments are similar to collateralized mortgage obligations
("CMOs") in structure except they utilize high yield bonds instead of mortgage
pass through securities as their collateral. Given the intense demand for
current yield over the past year from many bond investors, there has been a
significant increase in the creation of CBOs. Put simply, the amount of capital
being deployed into the high yield market has risen to record levels.
In light of record investor demand and with the significant amount of capital
invested into the market, many high yield bonds have appreciated to fully valued
levels. For example, yield premiums over U.S. Treasuries have narrowed
approximately 100 basis points (1.00%) tighter than their historical averages.
In addition to the above technical factors, there are a number of positive
fundamental factors affecting the valuations of high yield bonds. Economic
conditions remain generally supportive with moderate growth and low inflation.
The stock market, with its higher valuations, has enabled a number of high yield
companies to issue stock to further bolster their balance sheets. In addition,
the banking system remains highly liquid, allowing it to accommodate high yield
borrowers. Consequently, high yield bond default rates have been at the low end
of their historical range. As long as the overall economic and market conditions
remain relatively favorable, the Portfolio's manager believes that high yield
bond spreads should remain at the narrow end of their historical range.
Because of these positive fundamental factors, the Portfolio's manager does not
believe the high yield market is becoming increasingly speculative. However, the
Portfolio's manager is naturally becoming more sensitive to the possibility for
disappointment and underperformance among select individual issues. This has
happened in the stock market throughout the year. Given the high valuation
levels of many financial markets, the Portfolio's manager reports that he will
continue to be more selective and cautious with respect to his investments.
In this moderate growth environment, the manager still expects the stronger high
yield companies to outperform and these companies tend to be in industries that
stand to benefit from new technology. The Portfolio's manager continues to find
a number of attractive opportunities in the telecommunications, media, cable TV
and oil and natural gas industries, and the Portfolio remains heavily weighted
in these areas. The Portfolio's manager still firmly believes that over a full
economic cycle the better quality high-yield issues offer superior risk-adjusted
returns and lower default risk relative to lower-quality issues. In addition, he
continues to maintain a meaningful percentage of stronger BB-rated issues in the
Portfolio. He is also maintaining an intermediate average maturity in order to
2
<PAGE>
limit the Portfolio's interest rate sensitivity. Considering the trend toward
greater industry competition and little pricing power in most sectors of the
U.S. economy, he believes his prudent and conservative approach to high yield
bond investing should generate consistent positive returns for shareholders over
a full economic cycle. The Portfolio's manager therefore will continue to avoid
sectors of the economy that are not growing fast or are facing intense industry
competition, such as general retailers and restaurants.
The Portfolio's manager remains optimistic about the total return prospects for
the high yield bond market for the remainder of 1997. At the very least, he
expects a narrow trading range for general interest rates over the fourth
quarter, especially if U.S. economic activity remains moderate and inflation
stays subdued. In addition, he still believes the U.S. economy could grow more
slowly over the next several months with modest inflation. Given his
expectations, he has focused on maintaining sound credit quality in the
Portfolio.
Putnam Diversified Income Portfolio
Although the backdrop for investing in bonds around the world was generally
favorable during the year ended October 31, 1997, brief periods of volatility on
the interest-rate and currency fronts as well as persistent inflation fears
posed challenges for each of the three bond sectors of the Putnam Diversified
Income Portfolio -- U.S. taxable investment-grade bonds (formerly U.S.
government bonds), foreign bonds and high-yield bonds. Despite these episodes of
turbulence, the Portfolio generated a total return of 8.44% for the year ended
October 31, 1997, slightly underperforming the Fund's benchmark, the Lehman
Brothers Aggregate Bond Index, which posted a total return of 8.81% over the
same period. (The Lehman Brothers Aggregate Bond Index is an unmanaged index
composed of the Lehman Intermediate Government/Corporate Bond Index and the
Mortgage-Backed Securities Index and includes U.S. Treasury issues, agency
issues, corporate bond issues and mortgage-backed securities.)
Throughout the reporting period, maximizing yield potential was the name of the
game. As a result, the Portfolio's managers emphasized high-yield bonds and
mortgage-backed securities, which provided the lion's share of performance.
Mortgage-backed securities proved the most worthwhile position in the U.S.
investment-grade bond portion of the Portfolio. Bonds in Europe's core markets
also produced respectable gains in local terms, although in U.S. dollar terms
these securities dampened results.
Throughout the Portfolio's fiscal year, mortgage-backed securities were the
primary focus of its managers in the U.S. investment-grade bond portion for
several reasons. To compensate investors for their prepayment risk -- which
3
<PAGE>
can dampen the performance of mortgage-backed securities when interest rates go
down -- mortgage-backed securities carry higher yields than most other U.S.
government issues. Since interest rates remained relatively stable, prepayment
risk was not an issue this year. Because of this factor and favorable supply and
demand conditions in the marketplace, the Portfolio's mortgage-backed holdings
substantially outperformed U.S. Treasuries.
While it is true that mortgage-backed securities faltered a bit in late summer
because of declining interest rates and heightened prepayment fears, the
Portfolio's mortgage-backed holdings contributed significantly to its overall
performance during the reporting period. In addition, one area of concentration
for the Portfolio's managers in this sector has been current-coupon mortgages,
securities with coupons that reflect current market rates. The managers also
held some discount-coupon mortgages, securities that tend to experience less
prepayment risk when interest rates decline because their coupons are below
current market rates.
The Portfolio's U.S. Treasury holdings also performed well, particularly over
the summer. The managers extended the Portfolio's duration to better position it
for the likelihood of declining bond yields and rising prices. (Duration is a
measure of a fund's volatility relative to a given change in interest rates.)
They implemented this strategy by emphasizing long-term U.S. Treasury bonds, a
move that proved timely as the period under review progressed.
The economic and business environment that prevailed during the Portfolio's
fiscal year was ideal for U.S. corporate high-yield bonds. Extremely low default
rates, powerful stock markets, steady demand and continued brisk consolidation
activity that often leads to credit upgrades helped fuel performance during the
period.
Holdings in three industry sectors -- telecommunications, broadcasting, and
cable -- dominated the Portfolio's high-yield assets and contributed
substantially to its returns. Bonds of telecommunications companies, in
particular, led the charge, bouncing back from price declines suffered in March
when they fell out of favor because of rising interest rates and many investors'
flight to quality. During a period of weakness in the high yield bond sector,
the managers bolstered the Portfolio's holdings in high yield bonds. When prices
eventually recovered, the rewards to the Portfolio were substantial.
In addition to the ongoing positive effects of deregulation in these industries,
recent rulings favorable to competitive local exchange carriers ("CLECs") as
well as continued industry consolidation caused many Portfolio holdings to
appreciate substantially. In broadcasting, the managers added several new
4
<PAGE>
issues that have since proved their potential. Moreover, the Portfolio's
managers increased their weighting in several broadcasting preferred stocks
during the reporting period.
During the second half of the period under review, the managers also increased
the Portfolio's exposure to foreign cellular bonds and foreign dollar-based
corporate bonds. Paper companies are also experiencing a global rally and the
managers have added to the Portfolio's holdings in Indonesia and the
Philippines.
Although their performance in U.S. dollar terms has been a bit flat, core
European markets remained a key area of investment emphasis on the international
front since the midpoint of the Portfolio's fiscal year. Long-term bonds in
Germany, Denmark, and France were a primary interest of the managers mainly
because of their attractive yield potential. While the Portfolio's foreign bond
holdings performed well, the surge in value of the U.S. dollar relative to
European currencies caused the Portfolio's European holdings to provide
low-to-flat dollar-adjusted returns.
Performance of the core markets was further overshadowed by the dramatic
comeback staged by the higher-yielding peripheral markets of Spain, Italy, and
Sweden in response to budget improvements and the probability of a broader
Economic Monetary Union ("EMU"). Consequently, they had kept their exposure to
the peripheral markets fairly low. On the currency front, the Portfolio's
managers did employ hedging strategies in the Italian lire and Swedish krona
against the German mark, all of which proved to be effective.
The managers also maintained a significant weighting in the United Kingdom
throughout much of the reporting period. In fact, the United Kingdom has turned
out to be the best-performing government bond market so far in 1997. The Bank of
England's independence and tighter monetary policy, as well as the possibility
that the United Kingdom may enter the EMU after all, provided the catalyst that
U.K. bonds needed to rally.
During the second half of the reporting period, the managers reversed their
negative view on Japanese bonds and entered that market after avoiding Japanese
bonds for a long period of time. Signs of continued economic weakness in Japan
and currency difficulties in Southeast Asia prompted this investment decision.
By the close of the reporting period, this foray had proved to be successful.
The managers increased the Portfolio's emerging-markets exposure since the
outset of its fiscal year -- a strategy that also contributed to its
performance. Lower risk premiums worldwide, improving fundamentals, increased
global liquidity and investors' appetite for yield have fueled the performance
of many
5
<PAGE>
Portfolio holdings. Top performers included issues in South Africa, Eastern
Europe, Mexico and Argentina.
Going forward, the Portfolio's managers remain reasonably optimistic about the
prospects for bonds around the world. Moderate economic growth, low inflation,
relatively stable monetary policies and increased fiscal responsibility on the
part of many of the world's governments appear to bode well for bond investors
in the months ahead. Of course, the sustainability of these ideal conditions
bears close watching. Should adverse market conditions arise in any of the
Portfolio's investment sectors, the managers believe that its broad charter
should help them pursue the best opportunities the world has to offer. This, in
turn, should help to mitigate any volatility experienced by one or more of the
Portfolio's bond sectors.
In closing, thank you for your investment in the Travelers Series Fund Inc. --
Smith Barney High Income and Putnam Diversified Income Portfolios. We look
forward to continuing to help you pursue your financial goals.
Sincerely,
/s/Heath B. McLendon
- ----------------------------
Heath B. McLendon
Chairman
November 18, 1997
6
<PAGE>
<TABLE>
<CAPTION>
=================================================================================
Smith Barney High Income Portfolio
- ---------------------------------------------------------------------------------
Historical Performance
=================================================================================
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns+
=================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $12.09 $13.25 $0.66 $0.06 16.24%
- ---------------------------------------------------------------------------------
10/31/96 11.26 12.09 0.50 0.00 12.17
- ---------------------------------------------------------------------------------
10/31/95 10.07 11.26 0.22 0.00 14.30
- ---------------------------------------------------------------------------------
6/16/94*-10/31/94 10.00 10.07 0.00 0.00 0.70++
=================================================================================
Total $1.38 $0.06
=================================================================================
<CAPTION>
=================================================================================
Putnam Diversified Income Portfolio
- ---------------------------------------------------------------------------------
Historical Performance
=================================================================================
Net Asset Value
-------------------
Beginning End Income Capital Gain Total
Year Ended of Year of Year Dividends Distributions Returns+
=================================================================================
<S> <C> <C> <C> <C> <C>
10/31/97 $11.99 $12.31 $0.56 $0.09 8.44%
- ---------------------------------------------------------------------------------
10/31/96 11.46 11.99 0.39 0.13 9.43
- ---------------------------------------------------------------------------------
10/31/95 10.18 11.46 0.09 0.00 13.55
- ---------------------------------------------------------------------------------
6/16/94*-10/31/94 10.00 10.18 0.00 0.00 1.80++
=================================================================================
Total $1.04 $0.22
=================================================================================
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS AND CAPITAL GAINS, IF ANY,
ANNUALLY.
<TABLE>
<CAPTION>
=================================================================================
Average Annual Total Return+
=================================================================================
Smith Barney Putnam
High Diversified
Income Income
Portfolio Portfolio
=================================================================================
<S> <C> <C>
Year Ended 10/31/97 16.24% 8.44%
- ---------------------------------------------------------------------------------
6/16/94* through 10/31/97 12.77 9.81
=================================================================================
<CAPTION>
=================================================================================
Cumulative Total Return+
=================================================================================
Smith Barney Putnam
High Diversified
Income Income
Portfolio Portfolio
=================================================================================
<S> <C> <C>
6/16/94* through 10/31/97 50.08% 37.17%
=================================================================================
</TABLE>
+ Assumes the reinvestment of all dividends and capital gains distributions.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
* Commencement of operations.
7
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Shares of the
Smith Barney High Income Portfolio vs.
Salomon Brothers Intermediate High Yield Index+
- --------------------------------------------------------------------------------
June 1994 - October 1997
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Smith Barney Salomon Brothers Intermediate
High Income Portfolio High Yield Index
--------------------- ----------------
<S> <C> <C>
6/16/94 $10,000 $10,000
10/94 $10,070 $10,113
10/95 $11,510 $11,723
10/96 $12,912 $12,690
10/97 $15,008 $14,580
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares of the Smith Barney
High Income Portfolio on June 16, 1994 (commencement of operations), assuming
reinvestment of dividends and capital gains, if any, at net asset value
through October 31, 1997. The Salomon Brothers Intermediate High Yield Index
is comprised of 434 issues, both cash-pay and deferred interest bonds with a
remaining maturity of at least seven years, but less than ten years. The bonds
are all public, non-convertible issues with at least $50 million outstanding.
The index is unmanaged and is not subject to the same management and trading
expenses of a mutual fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
value may be more or less than the original cost.
8
<PAGE>
================================================================================
Historical Performance (unaudited)
================================================================================
Growth of $10,000 Invested in Shares of the
Putnam Diversified Income Portfolio vs. Lehman Brothers
Aggregate Bond Index and Salomon Brothers
Non-U.S. World Government Bond Index+
- --------------------------------------------------------------------------------
June 1994 - October 1997
[THE FOLLOWING TABLE WAS REPRESENTED AS A LINE GRAPH IN THE PRINTED MATERIAL]
<TABLE>
<CAPTION>
Salomon Brothers Non-U.S.
Putnam Diversified World Government Lehman Brothers Aggregate
Income Portfolio Bond Index--Unhedged Bond Index
---------------- ------------------------- -------------------------
<S> <C> <C> <C>
6/16/94 $10,000 $10,000 $10,000
10/94 $10,180 $10,554 $10,052
10/95 $11,560 $12,155 $11,626
10/96 $12,650 $12,818 $12,305
10/31/97 $13,717 $14,410 $13,399
</TABLE>
+ Hypothetical illustration of $10,000 invested in shares of the Putnam
Diversified Income Portfolio on June 16, 1994 (commencement of operations),
assuming reinvestment of dividends and capital gains, if any, at net asset
value through October 31, 1997. The Lehman Brothers Aggregate Bond Index is
comprised of over 6,500 issues of U.S. Treasuries, Agencies, Corporate Bonds
and Mortgage-Backed Securities. The Salomon Brothers Non-U.S. World Government
Bond Index-Unhedged is comprised of fixed rate bonds with a maturity of one
year or longer, and at least $25 million outstanding. This index includes
securities from 10 countries, providing a comprehensive measure of the total
return performance of the domestic bond markets in each country included, as
well as the ten combined countries. These indexes are unmanaged and are not
subject to the same management and trading expenses of a mutual fund.
All figures represent past performance and are not a guarantee of future
results. Investment returns and principal value will fluctuate, and redemption
value may be more or less than the original cost.
9
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
Schedules of Investments October 31, 1997
==============================================================================================================
SMITH BARNEY HIGH INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
==============================================================================================================
CORPORATE BONDS AND NOTES -- 86.6%
==============================================================================================================
<S> <C> <C> <C>
Aerospace/Defense -- 0.8%
$ 500,000 BB Airplanes Pass Through Trust Corporate Collateralized
Mortgage Obligation, Series D, 10.875% due 3/15/19 $ 597,755
350,000 B Howmet Corp., Sr. Sub. Notes, 10.000% due 12/1/03 381,500
- --------------------------------------------------------------------------------------------------------------
979,255
- --------------------------------------------------------------------------------------------------------------
Banks/Savings and Loans -- 8.8%
1,250,000 B Amresco, Inc., Sr. Sub. Notes, 10.000% due 3/15/04 1,293,750
2,150,000 B First Nationwide Holdings, Sr. Notes, 12.500% due 4/15/03 2,434,875
350,000 B+ Imperial Credit Industries, Inc., Sr. Notes, 9.875% due 1/15/07 344,750
700,000 B3* Intertek Finance, PLC, Sr. Sub. Notes, Series B,
10.250% due 11/1/06 736,750
600,000 B Netia Holdings, Company Guaranteed, 10.250% due 11/1/07+ 580,500
1,075,000 B2* Ocwen Capital Trust I, Company Guaranteed,
10.875% due 8/1/27 1,139,500
1,000,000 B+ Ocwen Federal Bank, Sub. Debentures, 12.000% due 6/15/05 1,102,500
1,400,000 B+ Ocwen Financial Corp., Notes, 11.875% due 10/1/03 1,571,500
1,350,000 BB+ SIG Capital Trust, Company Guaranteed, 9.500% due 8/15/27+ 1,353,375
- --------------------------------------------------------------------------------------------------------------
10,557,500
- --------------------------------------------------------------------------------------------------------------
Broadcasting -- 12.4%
400,000 B- All American Communications, Inc., Sr. Sub. Notes,
10.875% due 10/15/01 443,500
8,858 CCC+ Australis Media Ltd. Sr. Discount Notes, step bond
to yield 11.739% due 5/15/03 6,599
Cablevision Systems Corp., Sr. Sub. Debentures:
1,775,000 BB- 9.875% due 2/15/13 1,890,375
1,000,000 BB- 10.500% due 5/15/16 1,112,500
800,000 BB- 9.875% due 4/1/23 848,000
750,000 BB- Century Communications, Sr. Notes, 8.750% due 10/1/07 746,250
1,350,000 B2* Comcast UK Cable, Sr. Unsecured Discount Debentures,
step bond to yield 10.839% due 11/15/07 1,046,250
Marcus Cable Capital Corp., Sr. Discount Notes:
525,000 B Step bond to yield 11.325% due 8/1/04 473,813
275,000 B Step bond to yield 12.747% due 12/15/05 233,750
Rogers Cablesystems, Sr. Secured Second Priority:
Debentures:
1,000,000 BB+ 10.000% due 3/15/05 1,090,000
1,000,000 BB+ 10.000% due 12/1/07 1,090,000
1,000,000 BB- Sr. Sub. Debentures, 11.000% due 12/1/15 1,140,000
650,000 BB- Rogers Communications, Sr. Notes, 8.875% due 7/15/07 650,000
TV Azteca SA De CV, Sr. Sub. Notes:
550,000 B+ 10.125% due 2/15/04 541,750
300,000 B+ 10.500% due 2/15/07 297,000
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
Schedules of Investments (continued) October 31, 1997
==============================================================================================================
SMITH BARNEY HIGH INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
==============================================================================================================
<S> <C> <C> <C>
Broadcasting -- 12.4% (continued)
United International Holdings, Inc., Australia/Pacific,
Sr. Discount Notes:
$ 750,000 B- Step bond to yield 12.775% due 5/15/06+ $ 521,250
1,200,000 B- Step bond to yield 13.609% due 5/15/06 864,000
United International Holdings, Inc. Sr. Discount Notes:
500,000 B- Zero coupon bond to yield 11.530% due 11/15/99 415,000
750,000 B- Zero coupon bond to yield 12.100% due 11/15/99 622,500
450,000 BBB- Videotron (Le Groupe), Sr. Notes, 10.625% due 2/15/05 499,500
700,000 B- Wireless One Inc., Sr. Notes, 13.000% due 10/15/03 381,500
- --------------------------------------------------------------------------------------------------------------
14,913,537
- --------------------------------------------------------------------------------------------------------------
Building/Construction -- 0.4%
425,000 BB- CIA Latino Americana, Company Guaranteed,
11.625% due 6/1/04 448,375
- --------------------------------------------------------------------------------------------------------------
Chemical -- 2.0%
500,000 B1* NL Industries, Sr. Notes, 11.750% due 10/15/03 552,500
650,000 BB+ PT Polysindo Eka Perkasa, Sr. Secured Notes,
13.000% due 6/15/01 702,000
1,000,000 BB- Terra Industries, Inc., Sr. Notes, 10.500% due 6/15/05 1,092,500
- --------------------------------------------------------------------------------------------------------------
2,347,000
- --------------------------------------------------------------------------------------------------------------
Consumer Durables -- 0.9%
Coleman Escrow Corp., Sr. Discount Notes:
1,125,000 B Zero coupon bond to yield 11.140% due 5/15/01+ 742,500
500,000 B Zero coupon bond to yield 12.370% due 5/15/01+ 310,000
- --------------------------------------------------------------------------------------------------------------
1,052,500
- --------------------------------------------------------------------------------------------------------------
Consumer Products -- 0.4%
750,000 B- Revlon Worldwide, Sr. Discount Notes, zero coupon
bond to yield 12.280% due 3/15/01 521,250
- --------------------------------------------------------------------------------------------------------------
Diversified/Conglomerate Manufacturing -- 1.7%
450,000 B3* Interlake Corp., Sr. Sub. Debentures, 12.125% due 3/1/02 468,562
800,000 B- Terex Corp., Sr. Notes, 13.250% due 5/15/02 912,000
600,000 B Unifrax Investment Corp., Sr. Notes, 10.500% due 11/1/03 622,500
- --------------------------------------------------------------------------------------------------------------
2,003,062
- --------------------------------------------------------------------------------------------------------------
Diversified/Conglomerate Services -- 1.2%
525,000 B- Alvey Systems, Inc., Sr. Sub. Notes, 11.375% due 1/31/03 548,625
850,000 B- Outsourcing Solutions, Sr. Sub. Notes, 11.000% due 11/1/06 945,625
- --------------------------------------------------------------------------------------------------------------
1,494,250
- --------------------------------------------------------------------------------------------------------------
Electric Utilities -- 2.6%
Aes Corp., Sr. Sub. Notes:
300,000 Ba1* 8.375% due 8/15/07 296,250
900,000 Ba1* 8.500% due 11/1/07+ 893,250
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
Schedules of Investments (continued) October 31, 1997
==============================================================================================================
SMITH BARNEY HIGH INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
==============================================================================================================
<S> <C> <C> <C>
Electric Utilities -- 2.6% (continued)
Calpine Corp., Sr. Notes:
$1,000,000 BB- 10.500% due 5/15/06 $1,080,000
850,000 BB- 8.750% due 7/15/07+ 854,250
16,903 BB Midland Cogeneration Venture Limited Partnership,
Midland Funding, Sr. Secured Lease Bond, Series C,
10.330% due 7/23/02 18,128
- --------------------------------------------------------------------------------------------------------------
3,141,878
- --------------------------------------------------------------------------------------------------------------
Electronics and Computers -- 7.9%
1,000,000 B- Axiohm Transaction Services, Sr. Sub. Notes,
9.750% due 10/1/07+ 1,020,000
650,000 NR Celestica International, Sr. Sub. Notes, 10.500% due 12/31/06 705,250
1,350,000 B Fairchild Semiconductor Corp., Sr. Sub. Notes,
10.125% due 3/15/07 1,424,250
300,000 B Flextronics International Ltd., Sr. Sub. Notes,
8.750% due 10/15/07+ 300,000
500,000 B- Graphic Controls Corp., Sr. Sub. Notes, 12.000% due 9/15/05 558,750
Unisys Corp., Sr. Notes:
1,300,000 B+ 12.000% due 4/15/03 1,465,750
2,500,000 B+ 11.750% due 10/15/04 2,837,500
1,150,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750% due 6/1/07+ 1,190,250
- --------------------------------------------------------------------------------------------------------------
9,501,750
- --------------------------------------------------------------------------------------------------------------
Food -- 0.9%
300,000 B+ Ameriserv Food Distributors, Sr. Notes, 8.875% due 10/15/06+ 300,000
300,000 B- B&G Foods Inc., Sr. Sub. Notes, 9.625% due 8/1/07+ 300,750
450,000 B2* Van De Kamp, Inc., Sr. Sub. Notes, 12.000% due 9/15/05 500,063
- --------------------------------------------------------------------------------------------------------------
1,100,813
- --------------------------------------------------------------------------------------------------------------
Health Care -- 2.5%
1,150,000 BB ICN Pharmaceuticals, Inc., Sr. Notes, 9.250% due 8/15/05+ 1,210,375
750,000 B Magellan Health Services, Sr. Sub. Notes, 11.250% due 4/15/04 832,500
Tenet Healthcare Corp.:
400,000 Ba1* Sr. Notes, 8.000% due 1/15/05 417,500
500,000 B+ Sr. Sub. Notes, 8.625% due 1/15/07 535,625
- --------------------------------------------------------------------------------------------------------------
2,996,000
- --------------------------------------------------------------------------------------------------------------
Hotel, Casinos and Gaming -- 4.4%
450,000 B Aztar Corp., Sr. Sub. Notes, 13.750% due 10/1/04 516,375
700,000 B Courtyard by Marriott, Sr. Secured Notes, 10.750% due 2/1/08 763,000
500,000 B Hermes Europe Railtel, Sr. Notes, 11.500% due 8/15/07+ 542,500
200,000 Ba3* HMC Acquisition Properties, Sr. Notes, 9.000% due 12/15/07 206,000
HMH Properties, Sr. Notes:
1,500,000 BB- 9.500% due 5/15/05 1,575,000
375,000 Ba3* 8.875% due 7/15/07+ 384,375
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
Schedules of Investments (continued) October 31, 1997
==============================================================================================================
SMITH BARNEY HIGH INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
==============================================================================================================
<S> <C> <C> <C>
Hotel, Casinos and Gaming -- 4.4% (continued)
$ 200,000 BB+ Mohegan Tribal Gaming Authority, Sr. Secured Notes,
13.500% due 11/15/02 $ 261,000
500,000 B Showboat Inc., Sr. Sub. Notes, 13.000% due 8/1/09 578,125
450,000 B Signature Resorts, Inc., Sr. Sub. Notes, 9.750% due 10/1/07+ 459,000
- --------------------------------------------------------------------------------------------------------------
5,285,375
- --------------------------------------------------------------------------------------------------------------
Industrial -- 0.1%
250,000 NR Knology Holdings, Inc., Sr. Discount Notes, step bond to yield
11.875% due 10/15/07+ 133,125
- --------------------------------------------------------------------------------------------------------------
Metals and Mining -- 2.7%
500,000 BB- Echo Bay Mines, Jr. Sub. Debentures, 11.000% due 4/1/27 485,000
1,075,000 B- Haynes International, Inc., Sr. Notes, 11.625% due 9/1/04 1,244,312
900,000 B2* Kaiser Aluminum and Chemical, Sr. Sub. Notes,
12.750% due 2/1/03 968,625
125,000 B Russell Metals, Sr. Notes, 10.250% due 6/15/00 130,625
400,000 BB- UCAR Global Enterprises Inc., Sr. Sub. Notes,
12.000% due 1/15/05 456,000
- --------------------------------------------------------------------------------------------------------------
3,284,562
- --------------------------------------------------------------------------------------------------------------
Oil and Natural Gas -- 7.3%
500,000 B Canadian Forest Oil Ltd., Sr. Sub. Notes, 8.750% due 9/15/07+ 502,500
850,000 B+ Clark USA, Sr. Notes, 10.875% due 12/1/05 935,000
525,000 B2* Coho Energy, Inc., Sr. Sub. Notes, 8.875% due 10/15/07 519,750
1,550,000 B+ Dawson Production Services, Sr. Sub. Notes,
9.375% due 2/1/07 1,631,375
750,000 CCC+ Deeptech International, Sr. Notes, 12.000% due 12/15/00 797,812
450,000 B+ ICO Inc., Sr. Notes, 10.375% due 6/1/07+ 483,750
1,350,000 B+ Parker Drilling Corp., Sr. Notes, 9.750% due 11/15/06 1,444,500
650,000 BB- Pride Petroleum, Sr. Notes, 9.375% due 5/1/07 695,500
1,000,000 BB- Santa Fe Energy Resources, Sr. Sub. Debentures,
11.000% due 5/15/04 1,083,750
475,000 B2* Stone Energy Corp., Sr. Sub. Notes, 8.750% due 9/15/07+ 475,000
200,000 B United Meridian Corp., Sr. Sub. Guaranteed Notes,
10.375% due 10/15/05 217,750
- --------------------------------------------------------------------------------------------------------------
8,786,687
- --------------------------------------------------------------------------------------------------------------
Packaging and Containers -- 1.4%
300,000 B- Gaylord Container Corp., Sr. Sub. Debentures,
12.750% due 5/15/05 326,250
1,025,000 B Huntsman Packaging Corp., Sr. Sub. Notes,
9.125% due 10/1/07+ 1,048,062
550,000 B Impress Metal Packaging, Sr. Sub. Notes,
9.875% due 5/29/07+ 327,552
- --------------------------------------------------------------------------------------------------------------
1,701,864
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
Schedules of Investments (continued) October 31, 1997
==============================================================================================================
SMITH BARNEY HIGH INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
==============================================================================================================
<S> <C> <C> <C>
Paper/Forest Products/Printing -- 4.9%
$ 445,000 B- American Pad & Paper, Sr. Sub. Notes, 13.000% due 11/15/05 $ 520,650
900,000 B Asia Pulp and Paper, Sr. Sub. Notes, 12.000% due 2/15/04 859,500
750,000 B Goss Graphic Systems, Inc., Sr. Sub. Notes,
12.000% due 10/15/06 841,875
800,000 BB Indah Kiat International Finance Co., Secured Notes,
11.875% due 6/15/02 824,000
2,100,000 B+ SD Warren Co., Sr. Sub. Notes, 12.000% due 12/15/04 2,367,750
500,000 BB Tjiwi Kimia Industries, Sr. Notes, 13.250% due 8/1/01 526,250
- --------------------------------------------------------------------------------------------------------------
5,940,025
- --------------------------------------------------------------------------------------------------------------
Pollution Control -- 0.5%
500,000 B+ Allied Waste, Sr. Sub. Notes, 10.250% due 12/1/06 545,000
- --------------------------------------------------------------------------------------------------------------
Publishing -- 1.6%
2,025,000 NR ITT Promedia, Sr. Sub. Notes, 9.125% due 9/15/07+ 1,194,221
700,000 B- ITT Publimedia BV, Sr. Sub. Notes, 9.375% due 9/15/07+ 715,750
- --------------------------------------------------------------------------------------------------------------
1,909,971
- --------------------------------------------------------------------------------------------------------------
Real Estate Investment -- 0.2%
200,000 BB+ Trizec Finance., Sr. Notes, 10.875% due 10/15/05 227,750
- --------------------------------------------------------------------------------------------------------------
Retail -- 0.2%
175,000 B3* American Builders & Contractors, Sr. Sub. Notes,
10.625% due 5/15/07 182,000
- --------------------------------------------------------------------------------------------------------------
Telecommunications -- 18.2%
2,150,000 B3* Clearnet Communications, Inc., Sr. Discount Notes, step bond
to yield 12.823% due 12/15/05 1,623,250
1,250,000 NR Colt Telecom Group, step bond to yield 11.726% due 12/15/06 950,000
800,000 BB- Fonorola Inc., Sr. Secured Notes, 12.500% due 8/15/028 92,000
725,000 B Globalstar L.P., Sr. Sub. Notes, 11.375% due 2/15/04 721,375
500,000 NR Intelcom Group Inc., Sr. Discount Notes,
step bond to yield 11.825% due 5/1/06 370,000
1,600,000 B Intermedia Communications of Florida, Sr. Discount Unsecured
Notes, step bond to yield 11.212% due 5/15/06 1,224,000
Iridium LLC Capital Corp., Sr. Notes:
925,000 B- 13.000% due 7/15/05 943,500
500,000 B- 14.000% due 7/15/05 530,000
1,200,000 B McLeod, Inc., Sr. Discount Notes, step bond to yield
10.642% due 3/1/07 828,000
Metronet Communications:
275,000 NR Sr. Discount Notes, step bond to yield
10.750% due 11/1/07+ 162,250
1,525,000 NR Sr. Notes, 12.000% due 8/15/07+# 1,719,438
675,000 NR Microcell Telecommunications Inc., Sr. Discount Notes,
step bond to yield 11.832% due 6/1/06 447,188
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
Schedules of Investments (continued) October 31, 1997
==============================================================================================================
SMITH BARNEY HIGH INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
==============================================================================================================
<S> <C> <C> <C>
Telecommunications -- 18.2% (continued)
$1,000,000 B- Millicom International Cellular S.A., Sr. Discount Notes,
step bond to yield 12.844% due 6/1/06 $ 760,000
Nextel Communications Inc., Sr. Discount Notes:
2,150,000 B3* Step bond to yield 12.026% due 8/15/04 1,827,500
975,000 B3* Step bond to yield 10.650% due 9/15/07+ 575,250
1,950,000 B3* Step bond to yield 9.750% due 10/31/07+ 1,092,000
750,000 B Nextlink Communications, Sr. Notes, 12.500% due 4/15/06 851,250
1,175,000 NR Pagemart Inc., Sr. Discount Notes, step bond to yield
11.441% due 11/1/03 1,086,875
500,000 NR Pagemart Nationwide Inc., Sr. Discount Notes, step bond to
yield 12.405% due 2/1/05 423,750
1,000,000 B- Primus Telecom Group, 11.750% due 8/1/04 1,062,500
Qwest Communications Inc.:
750,000 B+ Sr. Discount Notes, step bond to yield
9.470% due 10/15/07+ 481,875
400,000 B+ Sr. Notes, 10.875% due 4/1/07 449,000
RCN Corp.:
675,000 B3* Sr. Discount Notes, step bond to yield
11.125% due 10/15/07+ 393,188
450,000 B3* Sr. Notes, 10.000% due 10/15/07+ 447,750
700,000 B- RSL Communications Ltd., 12.250% due 11/15/06 777,000
675,000 B+ Teleport Communications Group Inc., Sr. Discount Notes,
step bond to yield 11.416% due 7/1/07 528,188
Telesystems International Wireless, Sr. Discount Notes:
575,000 B- Step bond to yield 13.109% due 6/30/07+ 377,344
500,000 B- Step bond to yield 10.514% due 11/1/07+ 271,250
- --------------------------------------------------------------------------------------------------------------
21,815,721
- --------------------------------------------------------------------------------------------------------------
Tobacco -- 0.1%
165,000 B Consolidated Cigar Acquisition Corp., Sr. Sub. Notes,
10.500% due 3/1/03 171,600
- --------------------------------------------------------------------------------------------------------------
Transportation -- 2.5%
750,000 B3* Central Transportation Rental, Notes, 9.500% due 4/30/03 799,688
1,100,000 BB GS Superhighway Holdings, Sr. Notes, 10.250% due 8/15/07+ 1,036,750
1,000,000 BB- Sea Containers Limited, Sr. Sub. Debentures,
12.500% due 12/1/04 1,135,000
- --------------------------------------------------------------------------------------------------------------
2,971,438
- --------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $100,658,204) 104,012,288
==============================================================================================================
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
Schedules of Investments (continued) October 31, 1997
==============================================================================================================
SMITH BARNEY HIGH INCOME PORTFOLIO
SHARES SECURITY VALUE
==============================================================================================================
PREFERRED STOCKS -- 5.2%
==============================================================================================================
<S> <C> <C>
Banks/Savings and Loans -- 0.2%
10,100 California Federal Capital, Series A, 9.125% Exchangeable $ 267,650
- --------------------------------------------------------------------------------------------------------------
Cable -- 3.1%
3,262 Time Warner, Inc., Series M, 10.250% Exchangeable 3,759,455
- --------------------------------------------------------------------------------------------------------------
Oil and Natural Gas -- 0.9%
1,000 Clark USA Inc., 11.500% Exchangeable+ 1,010,000
- --------------------------------------------------------------------------------------------------------------
Telecommunications -- 1.0%
3,000 American Communications Services, 12.750% Exchangeable+ 285,000
750 IXC Communications Inc., 12.500% Exchangeable+ 875,625
- --------------------------------------------------------------------------------------------------------------
1,160,625
- --------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost-- $5,933,389) 6,197,730
==============================================================================================================
CONVERTIBLE PREFERRED STOCK -- 0.4%
==============================================================================================================
Automobiles and Trucking -- 0.4%
7,500 Navistar International, Series G, Convertible $6.00
(Cost-- $401,776) 448,125
==============================================================================================================
COMMON STOCK -- 0.0%
==============================================================================================================
Telecommunications -- 0.0%
2,323 Nextel Communications, Inc.
(Cost-- $37,485) 42,685
==============================================================================================================
WARRANTS -- 0.2%
==============================================================================================================
Broadcasting - TV, Cable and Radio -- 0.0%
1,075 Australis Holdings, Expire 10/30/01++ 32
750 Wireless One Inc., Expire 10/15/03++ 188
- --------------------------------------------------------------------------------------------------------------
220
- --------------------------------------------------------------------------------------------------------------
Telecommunications -- 0.2%
4,950 Clearnet Communications, Expire 9/15/05+++ 29,700
875 Globalstar LP, Expire 2/15/04+++ 111,125
925 Iridium LLC Corp., Expire 7/15/05++ 129,500
200 Nextel Communications, Inc., Expire 4/25/99++ 2
700 RSL Communications Ltd., Expire 11/15/06+++ 7,000
- --------------------------------------------------------------------------------------------------------------
277,327
- --------------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost-- $183,086) 277,547
==============================================================================================================
</TABLE>
16
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================================
Schedules of Investments (continued) October 31, 1997
==============================================================================================================
SMITH BARNEY HIGH INCOME PORTFOLIO
SHARES SECURITY VALUE
==============================================================================================================
<S> <C> <C>
REPURCHASE AGREEMENT -- 7.6%
$9,080,000 Chase Securities Inc., 5.650% due 11/3/97; Proceeds at
maturity -- $9,084,275; (Fully collateralized by U.S.
Treasury Notes, 5.625% due 10/31/99; Market value --
$9,265,731) (Cost -- $9,080,000) $ 9,080,000
==============================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $116,293,940**) $120,058,375
==============================================================================================================
</TABLE>
+ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
# Security issued with attached warrants.
++ Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
17
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
U.S. GOVERNMENT SECTOR -- 33.2%
=============================================================================================
<S> <C> <C> <C>
U.S. Government & Agency Obligations -- 32.1%
$ 1,880,000 AAA U.S. Treasury Notes, 5.875% due 7/31/99(a) $ 1,886,713
1,700,000 AAA U.S. Treasury Notes, 6.000% due 7/31/02(a) 1,715,130
1,370,000 AAA U.S. Treasury Notes, 6.125% due 8/15/07(a) 1,400,674
1,025,000 AAA U.S. Treasury Notes, 6.250% due 6/30/02(a) 1,043,901
905,000 AAA U.S. Treasury Notes, 6.250% due 8/31/02(a) 922,222
5,885,000 AAA U.S. Treasury Notes, 6.375% due 8/15/27(a) 6,064,081
2,125,000 AAA U.S. Treasury Notes, 6.500% due 11/15/26(a) 2,219,095
1,297,000 AAA U.S. Treasury Notes, 6.500% due 10/15/06(a) 1,347,700
655,000 AAA U.S. Treasury Notes, 8.125% due 8/15/19(a) 800,875
789,433 AAA Federal Home Loan Mortgage Corp. Gold,
6.500% due 11/1/11(a) 789,679
145,948 AAA Federal Home Loan Mortgage Corp. Gold,
6.500% due 4/1/12(a) 145,994
580,524 AAA Federal National Mortgage Association,
6.500% due 2/1/27(a) 570,726
2,295,142 AAA Federal National Mortgage Association,
6.500% due 9/1/27(a) 2,256,400
312 AAA Federal National Mortgage Association,
7.000% due 5/1/26 312
445,409 AAA Government National Mortgage Association,
7.500% due 9/15/25(a) 455,707
843,431 AAA Government National Mortgage Association,
7.500% due 10/15/25(a) 862,933
284,854 AAA Government National Mortgage Association,
7.500% due 11/15/25(a) 291,440
133,359 AAA Government National Mortgage Association,
7.500% due 8/15/26(a) 136,443
558,686 AAA Government National Mortgage Association,
7.500% due 10/15/26(a) 571,604
659,713 AAA Government National Mortgage Association,
7.500% due 1/15/27(a) 674,966
1,828,603 AAA Government National Mortgage Association,
7.500% due 2/15/27(a) 1,870,884
147,995 AAA Government National Mortgage Association,
7.500% due 5/15/27(a) 151,417
382,817 AAA Government National Mortgage Association,
7.500% due 7/15/27(a) 391,669
236,978 AAA Government National Mortgage Association,
7.500% due 8/15/27(a) 242,458
2,365,919 AAA Government National Mortgage Association,
7.500% due 10/15/27(a) 2,420,619
</TABLE>
See Notes to Financial Statements.
18
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
U.S. Government & Agency Obligations -- 32.1% (continued)
$ 282,602 AAA Government National Mortgage Association,
8.500% due 2/15/06 $ 296,467
340,267 AAA Government National Mortgage Association,
8.500% due 9/15/26 356,961
1,292,930 AAA Government National Mortgage Association,
8.500% due 10/15/26 1,356,362
155,718 AAA Government National Mortgage Association,
8.500% due 12/15/26 163,358
476,159 AAA Government National Mortgage Association,
8.500% due 2/15/27 499,519
309,282 AAA Government National Mortgage Association,
8.500% due 7/15/27(a) 324,455
907,300 AAA Government National Mortgage Association,
8.500% due 8/15/27(a) 951,813
297,568 AAA Government National Mortgage Association,
8.500% due 9/15/27 312,167
1,150,000 AAA Government National Mortgage Association, 6.000%(b) 1,160,063
1,600,000 AAA Government National Mortgage Association, 7.000%(b) 1,609,488
745,000 AAA Government National Mortgage Association II, 7.500%(b) 761,062
625,000 AAA Government National Mortgage Association Arms, 5.500%(b) 623,731
- ---------------------------------------------------------------------------------------------
37,649,088
- ---------------------------------------------------------------------------------------------
Collateralized Mortgage Obligations -- 1.1%
552,000 AAA Chemical Master Credit Card Trust, 6.230% due 6/15/03 556,614
95,000 AAA Contimortgage Home Equity Loan Trust,
7.670% due 3/15/28 97,138
205,000 AAA GNMA Guarantee Pass Through, 7.500% due 1/16/27 208,612
186,838 AAA Rural Housing Trust, 6.330% due 4/1/26 185,726
255,000 AAA Sears Credit Account Master Trust, 6.050% due 1/15/08 255,026
- ---------------------------------------------------------------------------------------------
1,303,116
- ---------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECTOR
(Cost-- $38,126,937) 38,952,204
=============================================================================================
</TABLE>
See Notes to Financial Statements.
19
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
HIGH YIELD SECTOR -- 40.2%
=============================================================================================
CORPORATE DEBENTURES -- 37.6%
=============================================================================================
<S> <C> <C> <C>
Advertising - Communications -- 1.1%
$ 450,000 B1* Lamar Advertising Corp., Sr. Sub. Notes,
9.625% due 12/1/06(a) $ 479,250
Outdoor Systems Inc.:
15,000 B1* Sr. Notes, 9.375% due 10/15/06 15,825
100,000 NR Sr. Sub. Notes, 8.875% due 6/15/07 103,500
580,000 B Universal Outdoor Inc., Sr. Notes, 9.750% due 10/15/06 642,350
- ---------------------------------------------------------------------------------------------
1,240,925
- ---------------------------------------------------------------------------------------------
Aerospace -- 0.1%
20,000 B+ Hawk Corp., Sr. Notes, 10.250% due 12/1/03 21,000
45,000 B2* L-3 Comms Corp., Sr. Sub. Notes, 10.375% due 5/1/07(c) 48,375
55,000 B+ Tracor Inc., Sr. Sub. Notes, 8.500% due 3/1/07 55,894
- ---------------------------------------------------------------------------------------------
125,269
- ---------------------------------------------------------------------------------------------
Automotive -- 0.5%
55,000 B2* Autotote Corp., Sr. Notes, 10.875% due 8/1/04(c) 56,925
35,000 B Blue Bird Body Co., Sr. Sub. Notes, 10.750% due 11/15/06 37,494
25,000 B2* Delco Remy International, Sr. Sub. Notes,
10.625% due 8/1/06(c) 26,625
95,000 BB+ Lear Corp., Sub. Notes, 9.500% due 7/15/06 104,500
330,000 NR MCII Holdings Inc., Sr. Secured Discount Notes,
step bond to yield 12.109% due 11/15/02 297,000
60,000 B Motor & Gear Inc., Sr. Notes, 10.750% due 11/15/06 63,300
- ---------------------------------------------------------------------------------------------
585,844
- ---------------------------------------------------------------------------------------------
Aviation Components -- 0.7%
180,000 BB- BE Aerospace, Sr. Notes, 9.750% due 3/1/03 190,800
275,000 B Howmet Corp., Sr. Sub. Notes, 10.000% due 12/1/03 299,750
50,000 B- K&F Industries Inc., Sr. Sub. Discount Debentures,
9.250% due 10/15/07(c) 50,750
Sequa Corp., Sr. Notes:
75,000 BB 9.625% due 10/15/99 77,625
20,000 BB 8.750% due 12/15/01 20,300
183,000 B- Terex Corp., Sr. Secured Notes, 13.250% due 5/15/02 208,620
- ---------------------------------------------------------------------------------------------
847,845
- ---------------------------------------------------------------------------------------------
Banking -- 0.6%
500,000 B First Nationwide, Sr. Exchange Notes, 12.500% due 4/15/03 566,250
Imperial Credit Corp.:
60,000 B+ Remarketing Par Securities Par Series A,
Variable Rate, 10.250% due 6/14/02(c) 60,000
30,000 B+ Senior Notes, 9.875% due 1/15/07 29,550
</TABLE>
See Notes to Financial Statements.
20
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Banking -- 0.6% (continued)
$ 30,000 BB- Indah Kiat Financial Mauritius, Guaranteed Sr. Notes,
10.000% due 7/1/07(c) $ 26,775
- ---------------------------------------------------------------------------------------------
682,575
- ---------------------------------------------------------------------------------------------
Brewers -- 0.1%
75,000 NR Canandaigua Wine, Sr. Sub. Notes, Series B,
8.750% due 12/15/03 76,500
- ---------------------------------------------------------------------------------------------
Broadcasting -- 0.9%
125,000 BB+ Argyle Television, Sr. Sub. Notes, 9.750% due 11/1/05 133,594
155,000 B- Capstar, Sr. Discount Notes, step bond to yield
12.750% due 2/1/09 107,725
60,000 BB- Globo Communicacoes Inc., Notes, 10.500% due 12/20/06(c) 60,150
183,000 NR Petracom Holdings, Sr. Discount Notes, Series B,
zero coupon bond to yield 3.714% due 2/1/03 175,680
100,000 BB+ Rogers Cablesystems of America Inc., Debentures,
10.125% due 9/1/12 108,250
100,000 B Sinclair Broadcast Group, Sr. Sub. Notes,
10.000% due 9/30/05 104,000
300,000 B- Sullivan Broadcasting Inc., Sr. Sub. Notes,
10.250% due 12/15/05 318,000
25,000 B+ TV Azteca de CV, Sr. Notes, 10.500% due 2/15/07 24,750
- ---------------------------------------------------------------------------------------------
1,032,149
- ---------------------------------------------------------------------------------------------
Building Materials -- 0.7%
55,000 B Atrium Inc., Sr. Sub. Notes, 10.500% due 11/15/06 57,063
20,000 Ba3* Building Material, Sr. Notes, 8.625% due 12/15/06 20,600
100,000 BB Cemex Inc., Notes, 12.750% due 7/15/06(c) 113,750
200,000 B+ Intercity Products Corp., Sr. Secured Notes,
9.750% due 3/1/00 205,000
25,000 BB- Johns Manville International Group, Sr. Notes,
10.875% due 12/15/04 27,906
150,000 Ba2* Southdown Inc., Sr. Sub. Notes, Series B,
10.000% due 3/1/06 163,875
150,000 BB- Triangle Pacific Corp., Sr. Notes, 10.500% due 8/1/03 160,125
50,000 CCC+ Waxman Industries, Sr. Secured Notes, Series B,
step bond to yield 12.973% due 6/1/04 44,250
- ---------------------------------------------------------------------------------------------
792,569
- ---------------------------------------------------------------------------------------------
Business Services -- 0.1%
117,000 B- Pierce Leahy Corp., Sr. Sub. Notes, 11.125% due 7/15/06 131,625
- ---------------------------------------------------------------------------------------------
Casinos -- 1.6%
75,000 B+ Argosy Gaming, 1st Mortgage Notes, 13.250% due 6/1/04 76,500
60,000 B Casino America Inc., 1st Mortgage Notes, 12.500% due 8/1/03 64,200
</TABLE>
See Notes to Financial Statements.
21
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Casinos -- 1.6% (continued)
$ 20,000 B Casino Magic, 1st Mortgage Notes, 11.500% due 10/15/01 $ 19,000
275,000 B Coast Hotels & Casinos Inc., 1st Mortgage Notes,
13.000% due 12/15/02 308,000
386,600 NR Colorado Gaming, Sr. Secured Notes, payment-in-kind
12.000% due 6/1/03(a) 415,595
75,000 BB Empress River Casino Financial Corp., Guaranteed Sr. Notes,
10.750% due 4/1/02 80,719
75,000 B Great Bay Property Funding, Guaranteed 1st Mortgage Notes
10.875% due 1/15/04 66,375
25,000 B Harveys Casinos, Sr. Sub. Notes, 10.625% due 6/1/06 26,375
200,000 B Lady Luck Gaming Financial Corp., Guaranteed 1st Mortgage
Notes, 11.875% due 3/1/01 203,000
22,000 BB+ Louisiana Casino Cruises, 1st Mortgage Notes,
11.500% due 12/1/98 22,385
125,000 BB+ Mohegan Tribal Gaming, Sr. Secured Notes,
13.500% due 11/15/02 163,125
175,000 CCC+ Preferred Receivable Funding, Sr. Notes, 11.625% due 4/15/04 146,781
225,000 BB- Trump Atlantic City Associates, 1st Mortgage Notes,
11.250% due 5/1/06 223,313
- ---------------------------------------------------------------------------------------------
1,815,368
- ---------------------------------------------------------------------------------------------
Chemicals -- 0.9%
125,000 BB- Acetex Corp., Sr. Notes, 9.750% due 10/1/03 129,375
25,000 B Chemical Leaman Corp., Sr. Notes, 10.375% due 6/15/05(c) 26,063
100,000 B Harris Chemical, Sr. Secured Notes, 10.750% due 10/15/03 103,250
200,000 BB- ISP Holding, Sr. Notes, 9.750% due 2/15/02 211,000
150,000 B- Magellan Health Services Inc., Sr. Sub. Notes,
11.250% due 4/15/04 166,500
75,000 B NL Industries Inc., Sr. Notes, step bond to yield
11.551% due 10/15/05 74,625
25,000 BB- Sifto Canada Inc., Guaranteed Secured Notes,
8.500 % due 7/15/00 25,313
80,000 B- Sovereign Specialty Chemicals Inc., Sr. Sub. Notes,
9.500% due 8/1/07(c) 81,800
105,000 B+ Sterling Chemical Holdings, Sr. Secured Discount Notes,
step bond to yield 13.112% due 8/15/08 76,125
60,000 NR Sterling Chemicals Inc., Sr. Sub. Notes, 11.250% due 4/1/07 66,000
20,000 NR Texas Petrochemical, Sr. Sub. Notes, 11.125% due 7/1/06 22,000
65,000 BB- Trikem SA, Bond Debentures, 10.625% due 7/24/07(c) 61,100
- ---------------------------------------------------------------------------------------------
1,043,151
- ---------------------------------------------------------------------------------------------
Computer Software Services -- 0.3%
300,000 B- Graphic Controls Corp., Sr. Sub. Notes, 12.000% due 9/15/05 335,250
- ---------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
22
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Conglomerates -- 0.6%
$ 20,000 B Cliffs Drilling Co., Sr. Notes, Series B, 10.250% due 5/15/03 $ 21,700
Iron Mountain Inc., Sr. Sub. Notes:
20,000 B- 10.125% due 10/1/06 21,700
100,000 B- 8.750% due 9/30/09(c) 101,000
75,000 B MacAndrews and Forbes Co. Inc., Sr. Sub. Notes,
11.875% due 11/15/02 79,406
220,000 NR MacAndrews and Forbes Holdings Inc., Sub. Debentures,
13.000% due 3/1/99 220,000
100,000 B+ MDC Holdings Inc., Sr. Notes, 11.125% due 12/15/03 111,000
15,000 B- Nebco Evans Holding Co., Sr. Discount Notes, step bond
to yield 12.375% due 7/15/07(c) 8,531
Netia Holdings Corp.:
20,000 NR Guaranteed Sr. Discount Notes, step bond to yield
13.943% due 11/1/07 12,050
40,000 NR Guaranteed Sr. Notes, 10.250% due 11/1/07 38,700
Radnor Holdings Inc., Sr. Notes:
30,000 BB- 10.000% due 12/1/03 30,900
60,000 BB- 10.000% due 12/1/03(c) 61,800
- ---------------------------------------------------------------------------------------------
706,787
- ---------------------------------------------------------------------------------------------
Consumer Products -- 0.6%
100,000 B- Carson Inc., Sr. Sub. Notes, 10.375% due 11/1/07(c) 101,000
150,000 B+ Coty Inc., Guaranteed Sr. Sub. Notes, 10.250% due 5/1/05 161,250
30,000 NR French Fragrance Inc., Sr. Notes, 10.375% due 5/15/07 31,350
200,000 B Herff Jones Inc., Sr. Sub. Notes, 11.000% due 8/15/05 217,250
155,000 B+ International Semi-Tech., Sr. Secured Discount Notes,
step bond to yield 13.492% due 8/15/03 72,850
60,000 CCC+ Remington Product Co., Sr. Sub. Notes, 11.000% due 5/15/06 47,100
80,000 B Selmer Co. Inc., Sr. Sub. Notes, 11.000% due 5/15/00 88,400
- ---------------------------------------------------------------------------------------------
719,200
- ---------------------------------------------------------------------------------------------
Consumer Services -- 0.2%
252,000 B+ Coinmach Corp., Sr. Notes, 11.750% due 11/15/05 277,830
- ---------------------------------------------------------------------------------------------
Defense -- 0.2%
150,000 B Alliant Techsystems Inc., Sr. Sub. Notes, 11.750% due 3/1/03 165,375
50,000 B- United Defense Industries Inc., Sr. Sub. Notes,
8.750% due 11/15/07(c) 50,750
- ---------------------------------------------------------------------------------------------
216,125
- ---------------------------------------------------------------------------------------------
Electronics -- 0.3%
40,000 B- Argo Technology Corp., Sr. Sub. Notes, 8.625% due 10/1/07(c) 40,000
70,000 B DII Group Inc., Sr. Sub. Notes, 8.500% due 9/15/07(c) 70,350
Fairchild Semiconductor Inc., Sr. Sub. Notes:
60,000 B 10.125% due 3/15/07(c) 63,300
68,900 NR Payment-in-kind, 11.740% due 3/14/08(d) 70,451
</TABLE>
See Notes to Financial Statements.
23
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Electronics -- 0.3% (continued)
$ 20,000 B Moog Inc., Sr. Sub. Notes, 10.000% due 5/1/06 $ 20,750
20,000 B3* Wavetek Corp., Sr. Sub. Notes, 10.125% due 6/15/07(c) 20,800
- ---------------------------------------------------------------------------------------------
285,651
- ---------------------------------------------------------------------------------------------
Entertainment -- 1.4%
200,000 B AMC Entertainment Inc., Sr. Sub. Notes, 9.500% due 3/15/09 204,000
75,000 BB- Players International Inc., Sr. Notes, 10.875% due 4/15/05 79,875
Premier Parks, Sr. Notes:
250,000 B+ 12.000% due 8/15/03 279,063
50,000 B+ 9.750% due 1/15/07 52,500
400,000 B Six Flags, Sr. Sub. Discount Notes, Series A, step bond to
yield 7.958% due 6/15/05 418,000
115,000 BBB- Time Warner Inc., Notes, 8.180% due 8/15/07 125,638
525,000 BB- Viacom Inc., Sub. Debentures Exchangeable,
8.000% due 7/7/06 514,500
- ---------------------------------------------------------------------------------------------
1,673,576
- ---------------------------------------------------------------------------------------------
Financial Services -- 2.5%
65,000 BB- Aames Financial Corp., Sr. Notes, 9.125% due 11/1/03 61,913
45,000 BB Albank Capitial Trust, Guaranteed, 9.270% due 6/6/27(c) 48,847
105,000 BB Asia Pulp & Paper Global Finance Inc., Secured Notes,
2.000% due 7/25/00(c) 98,700
200,000 BB Asia Pulp & Paper International Financial Corp., Guaranteed,
11.750% due 10/1/05 202,000
200,000 B+ Chevy Chase Savings Bank, Sub. Notes, 9.250% due 12/1/05 203,000
30,000 B Coleman Escrow Corp., Sr. Secured Notes,
zero coupon bond to yield 7.957% due 5/15/01(c) 18,600
30,000 BB Colonial Capital, Company Guaranteed, 8.920% due 1/15/27 32,288
55,000 BB+ Conti Financial Corp., Sr. Notes, 8.375% due 8/15/03 57,750
60,000 B- Delta Financial Corp., Sr. Notes, 9.500% due 8/1/04 60,450
30,000 BB Dime Capital Trust., Capital Securities, Series A,
9.330% due 5/6/27 33,525
30,000 B+ Dollar Financial Inc., Sr. Notes, 10.875% due 11/15/06 32,025
65,000 B+ ESAT Holdings Inc., step
bond to yield 13.513% due 2/1/07 43,875
80,000 BB- Espirito Santo Centrais, Sr. Notes, 10.000% due 7/15/07(c) 76,000
71,000 BB- First PV Funding Corp., Lease Obligation Bond Series 86B,
10.150% due 1/15/16 75,349
30,000 NR Greenpoint Capital Inc., Notes, 9.100% due 6/1/27(c) 32,438
45,000 NR Intertek Finance Inc., Sr. Sub. Notes, 10.250% due 11/1/06 47,363
Iridum Capital Corp.:
250,000 B- Sr. Discount Notes, 14.000% due 7/15/05 265,000
120,000 B- Sr. Notes, 11.250% due 7/15/05(c) 110,400
45,000 Baa3* North Fork Bancorp, Bonds, 8.700% due 12/15/26 47,925
305,000 Baa3* NTL Inc., Sr. Notes, 10.000% due 2/15/07 315,675
</TABLE>
See Notes to Financial Statements.
24
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Financial Services -- 2.5% (continued)
Ocwen Federal Bank,:
$ 30,000 B- Capital Secured Guaranteed, 10.875% due 8/1/27 $ 31,800
25,000 B+ Notes, 11.875% due 10/1/03 28,063
45,000 B+ Sub. Debentures, 12.000% due 6/15/05 49,613
115,000 B+ Polytama International Finance Inc.,
Guaranteed Secured Notes, 11.250% due 6/15/07 108,675
60,000 NR Provident Capital Corp., Company Guaranteed,
8.600% due 12/1/26 62,400
25,573 NR PSF Finance LP, Sr. Secured Notes, payment-in-kind
11.000% due 9/17/03 28,131
35,000 Caa1* Resource America Inc., Sr. Notes, 12.000% due 8/1/04(c) 36,663
30,000 BB- Riggs Capital Trust, Bonds, 8.625% due 12/31/26(c) 31,538
45,000 BB Sovereign Capital Corp., Company Guaranteed,
9.000% due 4/1/27(c) 47,588
150,000 B+ Tanger Properties Ltd. Partnership, Guaranteed Notes,
8.750% due 3/11/01 154,500
335,000 BB Tjiwi Kimia Finance Mauritius Ltd., Guaranteed Sr. Notes,
10.000% due 8/1/04(c) 302,338
105,000 B- Vicap SA de CV, Guaranteed Sr. Notes, 10.250% due 5/15/02(c) 105,525
40,000 BB- Webster Capital Trust Inc., Bonds, 9.360% due 1/29/27(c) 43,800
40,000 NR Williams Scotsman Inc., Sr. Notes, 9.875% due 6/1/07(c) 41,100
- ---------------------------------------------------------------------------------------------
2,934,857
- ---------------------------------------------------------------------------------------------
Foods -- 0.6%
Ameriserve Food Corp.:
95,000 B+ Sr. Notes, 8.875% due 10/15/06(c) 95,000
45,000 B- Sr. Sub. Notes, 10.125% due 7/15/07(c) 47,025
20,000 NR Aurora Foods Inc., Sr. Sub. Notes, 9.875% due 2/15/07 20,700
200,000 B+ Chiquita Brands, Sr. Notes, 9.625% due 1/15/04 212,000
25,000 B- Del Monte Corp., Sr. Sub. Notes, 12.250% due 4/15/07 27,000
250,000 B3* FRD Aquisition Corp., Sr. Sub. Notes, 12.500% due 7/15/04 271,250
40,000 B+ NBTY Inc., Sr. Sub. Notes, 8.625% due 9/15/07(c) 39,600
45,000 BB- Southern Foods Group Inc., Sr. Sub. Notes,
9.875% due 9/1/07(c) 46,800
- ---------------------------------------------------------------------------------------------
759,375
- ---------------------------------------------------------------------------------------------
Gas/Oil Exploration -- 1.9%
45,000 B Abraxas Petroleum Corp., Sr. Notes, 11.500% due 11/1/04 48,825
Benton Oil & Gas Co., Sr. Notes:
100,000 B+ 11.625% due 5/1/03 111,500
15,000 B+ 9.375% due 11/1/07 15,113
50,000 BB- Chesapeake Energy Corp., Sr. Notes, 9.125% due 4/15/06 51,625
70,000 BB CMS Energy Corp., Notes, 8.125% due 5/15/02 72,188
15,000 B Costilla Energy Inc., Sr. Sub. Notes, 10.250% due 10/1/06 15,675
</TABLE>
See Notes to Financial Statements.
25
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Gas/Oil Exploration -- 1.9% (continued)
$ 25,000 B+ Dailey Petroleum Service Corp., Sr. Notes,
9.750% due 8/15/07(c) $ 26,125
45,000 B+ DI Industries Inc., Sr. Notes, 8.875% due 7/1/07 46,800
150,000 BB- Maxus Energy Corp., Notes, 9.500% due 2/15/03 160,313
120,000 B- Ocean Energy Inc., Sr. Sub. Notes, 8.875% due 7/15/07(c) 124,200
45,000 B- Panaco Inc., Sr. Notes, 10.625% due 10/1/04(c) 45,450
45,000 BB- Pride Petroleum Service Inc., Sr. Sub. Notes,
9.375% due 5/1/07 48,150
440,000 B+ Transamerican Energy Corp., Sr. Secured Notes,
11.500% due 6/15/02(c) 452,100
855,000 B+ Transamerican Refinery, Guaranteed 1st Mortgage Discount
Notes, step bond to yield 13.000% due 6/15/02(c) 718,200
128,094 NR Transtexas Gas, Sr. Notes, 13.750% due 12/31/01(c) 142,985
30,000 B2* Wiser Oil Corp., Sr. Sub. Notes, 9.500% due 5/15/07(c) 29,625
80,000 NR XCL Ltd., Sr. Secured Discount Notes, 13.500% due 5/1/04(c) 104,000
- ---------------------------------------------------------------------------------------------
2,212,874
- ---------------------------------------------------------------------------------------------
Health Care -- 1.4%
80,000 B Alaris Medical Inc., Sr. Sub. Notes, 9.750% due 12/1/06 83,800
100,000 B Dade International Inc., Sr. Sub. Notes, 11.125% due 5/1/06 111,500
100,000 B- Genesis Eldercare Inc., Sr. Sub. Notes, 9.000% due 8/1/07(c) 98,000
120,000 B- Genesis Health Ventures, Sr. Sub. Notes, 9.250% due 10/10/06 123,000
90,000 BB ICN Pharmaceuticals Inc., Sr. Notes, 9.250% due 8/15/05(c) 94,725
85,000 Caa3* Icon Fitness, Sr. Discount Notes, step bond to yield
14.000% due 11/15/06 49,725
20,000 B- Leiner Health Products Inc., Sr. Sub. Notes,
9.625% due 7/1/07(c) 21,000
120,000 B- Paracelsus Healthcare Corp., Sr. Sub. Notes,
10.000% due 8/15/06 125,400
100,000 BB- Quorum Health Group, Sr. Sub. Notes, 8.750% due 11/1/05 104,500
115,000 B- Sun Healthcare Group Inc., Sr. Sub. Notes,
9.500% due 7/1/07(c) 118,450
Tenet Healthcare Corp., Sr. Notes:
50,000 BB 9.625% due 9/1/02 54,875
45,000 BB 8.000% due 1/15/05 46,969
100,000 BB 10.125% due 3/1/05 110,000
245,000 B+ 8.625% due 1/15/07 262,456
145,000 B3* Urohealth Systems Inc., Sr. Sub. Notes,
12.500% due 4/1/04(c) 144,275
100,000 B3* Wright Medical Technology Inc., Sr. Sub. Notes,
10.750% due 7/1/00(c) 98,625
- ---------------------------------------------------------------------------------------------
1,647,300
- ---------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
26
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Hotels -- 0.7%
HMH Properties Inc., Sr. Notes:
$ 135,000 BB- 9.500% due 5/15/05 $141,750
120,000 Ba3* 8.875% due 7/15/07(c) 123,000
275,000 BB- Host Marriot Travel Plazas Inc., Sr. Secured Notes,
Series B, 9.500% due 5/15/05 290,125
15,000 BB- John Q. Hammons Hotels LP, 1st Mortgage Notes,
8.875% due 2/15/04 15,300
60,000 CCC Presley Companies Del., Sr. Notes, 12.500% due 7/1/01 57,075
200,000 B Showboat Marina Partnership, 1st Mortgage Notes,
13.500% due 3/15/03 229,500
- ---------------------------------------------------------------------------------------------
856,750
- ---------------------------------------------------------------------------------------------
Industrial Goods & Services -- 0.1%
50,000 B- Merit Behavioral Care Corp., Sr. Sub. Notes,
11.500% due 11/15/05 57,750
105,000 B- Panda Global Corp., Sr. Notes, 12.500% due 4/15/04(c) 101,850
- ---------------------------------------------------------------------------------------------
159,600
- ---------------------------------------------------------------------------------------------
Insurance -- 0.2%
30,000 B- Outsourcing Solutions Inc., Sr. Sub. Notes,
11.000% due 11/1/06 33,375
Reliance Group Holdings Inc., Sr. Sub. Debentures:
148,000 BB+ 9.000% due 11/15/00 153,550
35,000 BB- 9.750% due 11/15/03 36,794
- ---------------------------------------------------------------------------------------------
223,719
- ---------------------------------------------------------------------------------------------
Lodging -- 0.1%
90,000 NR Prime Hospitality Inc., Sr. Sub. Notes, 9.750% due 4/1/07 94,950
- ---------------------------------------------------------------------------------------------
Media - Cable -- 4.4%
85,000 B- Acme Television Corp., Sr. Discount Notes,
step bond to yield 10.875% due 9/30/04(c) 62,688
Adelphia Communications Corp., Sr. Notes:
100,000 B 10.250% due 7/15/00 104,500
25,000 B 12.500% due 5/15/02 26,438
85,312 B Series B, payment-in-kind, 9.500% due 2/15/04 85,312
135,000 CCC+ Advanced Radio Telecommunications Corp., Sr. Notes,
14.000% due 2/15/07 124,538
Affinity Group, Sr. Sub. Notes:
150,000 B 11.500% due 10/15/03 160,125
110,000 NR 11.000% due 4/1/07 116,875
150,000 B- American Media Operation Inc., Sr. Sub. Notes,
11.625% due 11/15/04 162,000
152,000 CCC+ American Telecasting Inc., Sr. Discount Notes,
step bond to yield 12.321% due 8/15/05 55,480
55,000 BB- Antenna TV Corp., Sr. Notes, 9.000% due 8/1/07(c) 54,725
</TABLE>
See Notes to Financial Statements.
27
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Media - Cable -- 4.4% (continued)
$ 40,000 B- Azteca Holdings, Sr. Secured Notes, 11.000% due 6/15/02(c) $ 39,400
Cablevision Systems Corp., Sr. Sub. Debentures:
25,000 BB- 9.875% due 2/15/13 26,625
100,000 BB- 10.500% due 5/15/16 111,250
150,000 BB- 9.875% due 4/1/23 159,000
40,000 B+ Central Europe Media Enterprises, Sr. Notes,
9.375% due 8/15/04 39,250
140,000 BB- Century Communications Corp., Sr. Notes, 9.500% due 3/1/05 147,000
190,000 B- Chancellor Broadcasting, Sr. Sub. Notes, 9.375% due 10/1/04 197,125
250,000 B Charter Communications Southeast, Secured Debentures,
step bond to yield 14.000% due 3/15/07 191,875
85,000 B Cinemark USA Inc., Sr. Sub. Notes, 9.625% due 8/1/08 87,550
60,000 B- Citadel Broadcasting Co., Sr. Sub. Notes, 10.250% due 7/1/07(c) 63,300
200,000 B- Comcast Corp., Sr. Sub. Notes, step bond to yield
10.435% due 11/15/07(c) 155,000
250,000 B2* Commodore Media Inc., Sr. Sub. Notes, 7.500% due 5/1/03 275,000
200,815 NR Falcon Holdings Group Inc., Sr. Sub. Notes, Series B,
11.000% due 9/15/03 210,354
Frontiervision:
200,000 B Sr. Discount Notes, step bond to yield
11.523% due 9/15/07(c) 137,500
30,000 B Sr. Sub. Notes, 11.000% due 10/15/06 32,475
Fox Kids Worldwide Corp.:
210,000 B Sr. Discount Notes, step bond to yield
10.250% due 11/1/07(c) 119,175
275,000 B Sr. Notes, 9.250% due 11/1/07(c) 266,750
220,000 B Fox Liberty Networks Inc., Sr. Notes, 8.875% due 8/15/07(c) 220,550
Heartland Wireless Communications Inc.:
100,000 B 14.000% due 10/15/04 47,500
25,000 B Sr. Notes, 13.000% due 4/15/03 10,813
80,000 B- Innova Corp., Senior Notes, 12.875% due 4/1/07(c) 80,800
235,000 B Intermedia Communications, Sr. Notes, Series B,
8.875% due 11/1/07(c) 231,475
500,000 B- International Cabletel Inc., Sr. Deferred Notes,
Series A, step bond to yield 11.173% due 2/1/06 367,500
Jacor Communications Inc.:
30,000 B Company Guaranteed, 9.750% due 12/15/06 32,550
140,000 B Guaranteed Sr. Sub. Notes, 8.750% due 6/15/07(c) 141,400
20,000 B JCAC, Inc., Sr. Sub. Notes, 10.125% due 6/15/06 21,900
100,000 B+ Jones Intercable Inc., Sr. Sub. Notes, 10.500% due 3/1/08 108,750
140,000 B- Marcus Cable Operating Co., Sr. Discount Notes,
step bond to yield 11.174% due 8/1/04 126,350
Pegasus Media & Communications, Notes:
50,000 B- 12.500% due 7/1/05 56,750
25,000 B- 9.625% due 10/15/05 25,000
</TABLE>
See Notes to Financial Statements.
28
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Media - Cable -- 4.4% (continued)
$ 80,000 NR Radio One Inc., Sr. Sub. Notes, step bond to yield
11.958% due 5/15/04(c) $ 77,300
60,000 B Spanish Broadcasting Systems, Sr. Notes,
11.000% due 3/15/04 65,850
60,000 CCC+ TCI Satellite Entertainment Inc., Sr. Sub. Notes,
10.875% due 2/15/07(c) 63,000
50,000 Baa3* Telecommunications Inc., Notes, 9.250% due 1/15/23 55,813
UIH Australia Inc., Sr. Discount Notes:
55,000 B- Step bond to yield 12.775% due 5/15/06(c) 38,225
220,000 B- Step bond to yield 14.000% due 5/15/06 158,400
Wireless One Inc., Sr. Notes:
55,000 B- 13.000% due 10/15/03 29,975
100,000 B- Step bond to yield 13.500% due 8/1/06 27,000
- ---------------------------------------------------------------------------------------------
5,198,211
- ---------------------------------------------------------------------------------------------
Metals -- 0.7%
25,000 B+ Acindar Industries Inc., Yankee Notes, 11.250% due 2/15/04 25,125
35,000 NR Altos Hornos De Mexico, Bonds, 11.875% due 4/30/04(c) 35,788
70,000 B Anker Coal Group Inc., Sr. Notes, 9.750% due 10/1/07(c) 71,575
50,000 B+ Armco Inc., Sr. Notes, 9.000% due 9/15/07(c) 50,500
60,000 NR Continental Global Group, Sr. Notes, 11.000% due 4/1/07 64,650
150,000 B Great Lakes Carbon Corp., Sr. Secured Notes,
10.000% due 1/1/06 155,625
150,000 BB Hylsa SA, Notes, 9.250% due 9/15/07(c) 147,375
100,000 BB- Ucar Global Enterprises, Sr. Sub. Notes, 12.000% due 1/15/05 114,000
80,000 B+ WCI Steel Co., Sr. Notes, 10.000% due 12/1/04 84,000
100,000 B Weirton Steel Corp., Sr. Notes, 11.375% due 7/1/04 108,250
- ---------------------------------------------------------------------------------------------
856,888
- ---------------------------------------------------------------------------------------------
Miscellaneous -- 2.0%
Allied Waste Corp.:
130,000 B+ Sr. Discount Notes, step bond to yield 11.300% due 6/1/07(c) 87,750
65,000 B+ Sr. Sub. Notes, 10.250% due 12/1/06 70,850
35,000 B- Axiohm Transportation Corp., Sr. Sub. Notes,
9.750% due 10/1/07(c) 35,700
25,000 B- Cambridge Industries Inc., Sr. Sub. Notes,
10.250% due 7/15/07(c) 26,063
25,000 BB- Cia Latino, Guaranteed Sr. Notes, 11.625% due 6/1/04(c) 26,375
90,000 NR Conecel Holdings Inc., Secured Notes, 14.000% due 10/1/00(c) 98,325
130,000 B- Day International Group Inc., Sr. Sub. Notes,
11.125% due 6/1/05 132,925
Decision One Corp., Sr. Sub. Notes:
35,000 B- 9.750% due 8/1/07 36,663
35,000 B- Step bond to yield 11.500% due 8/1/08(e) 23,363
</TABLE>
See Notes to Financial Statements.
29
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Miscellaneous -- 2.0% (continued)
$ 45,000 NR Desc, SA DE, Guaranteed Notes, 8.750% due 10/15/07 $ 43,144
90,000 B+ Fleming Inc., Sr. Sub. Notes, 10.500% due 12/1/04(c) 94,275
70,000 B Flextronics Inc., Sr. Sub. Notes, 8.750% due 10/15/07 70,000
30,000 B- Foamex Inc., 9.875% due 6/15/07(c) 30,750
100,000 BB Guangzhou Shenzhen Superhighway, Notes,
10.250% due 8/15/07(c) 94,250
220,000 B3* Hayes Wheel International Inc., Sr. Sub. Notes,
9.125% due 7/15/07(c) 224,950
35,000 B- HCC Industries Inc., Sr. Sub. Notes, 10.750% due 5/15/07(c) 36,925
Hedstrom Corp:
15,000 B- Sr. Discount Notes, step bond to yield 12.000% due 6/1/09(c) 9,450
30,000 B- Sr. Sub. Notes, 10.000% due 6/1/07(c) 30,525
Hollinger International Inc., Company Guaranteed:
40,000 BB+ 8.625% due 3/15/05 40,800
40,000 BB- 9.250% due 3/15/07 41,200
110,000 NR Interact Systems, Sr. Discount Notes, step bond to yield
14.000% due 8/10/03 44,550
50,000 B2* Intergrated Device Technology Inc., Sr. Notes,
5.500% due 6/1/02 43,063
50,000 B- Isle of Capri Black Hawk Inc., 1st Mortgage Notes,
13.000% due 8/31/04(c) 50,750
55,000 B- Knietic Concepts, Sr. Sub. Notes, 9.625% due 11/1/07 55,275
215,000 NR Knology Inc., Sr. Discount Notes, step bond to yield
11.875% due 10/15/07(c)(e) 114,488
50,000 BB- Murrin Murrin Holdings Party Ltd., Sr. Secured Notes,
9.375% due 8/31/07(c) 52,000
30,000 BB National Semiconductor Corp., Convertible Debentures,
6.500% due 10/1/02(c) 32,438
30,000 BB Newport News Shipbuilding Corp., Sr. Notes,
8.625% due 12/1/06 31,125
30,000 BBB- Perez Companic SA, Notes, 9.000% due 1/30/04(c) 28,500
30,000 NR Pioneer Americas Acquisition Corp., Sr. Notes,
9.250% due 6/15/07(c) 30,150
15,000 B Pogo Producing Inc., Sr. Sub. Notes, 8.750% due 5/15/07 15,000
75,000 B Polymer Group Inc., Sr. Sub. Notes, 9.000% due 7/1/07(c) 75,938
70,000 B- Pratama Datakaom Inc., Guaranteed Sr. Notes,
12.750% due 7/15/05(c) 63,700
20,000 B- Roller Bearing Corp., Guaranteed Sr. Sub. Notes,
9.625% due 6/15/07(c) 20,500
60,000 B- Safety Components International Inc., Sr. Sub. Notes,
10.125% due 7/15/07(c) 62,250
</TABLE>
See Notes to Financial Statements.
30
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Miscellaneous -- 2.0% (continued)
TFM SA de CV:
$ 120,000 B+ Sr. Discount Debentures, step bond to yield
11.767% due 6/15/09(c) $ 75,900
25,000 B3* Sr. Notes, 10.250% due 6/15/07(c) 25,063
100,000 BB- Trico Marine Service Corp., Sr. Notes, 8.500% due 8/1/05(c) 101,000
67,000 B1* United Stationers Supply Corp., Sr. Sub. Notes,
12.750% due 5/1/05 74,956
50,000 B VLSI Technology, Sub. Notes, 8.250% due 10/1/05 51,250
15,000 B- Windy Hill Pet Food Inc., Sr. Sub. Notes, 9.750% due 5/15/07(c) 15,300
- ---------------------------------------------------------------------------------------------
2,317,479
- ---------------------------------------------------------------------------------------------
Oil Drilling & Services -- 0.0%
45,000 B+ Parker Drilling Corp., Sr. Notes, 9.750% due 11/15/06 48,150
- ---------------------------------------------------------------------------------------------
Paper Packaging/Products -- 1.0%
Domtar, Inc.:
60,000 BB+ Debentures, 9.500% due 8/1/16 64,575
25,000 BB+ Sr. Notes, 8.750% due 8/1/06 26,094
105,000 B- Florida Coast Paper, 1st Mortgage Notes, 12.750% due 6/1/03 112,875
Huntsmen Corp., Sr. Sub. Notes:
100,000 B+ Variable Rate, 9.094% due 7/1/07(c) 103,500
100,000 B+ 9.500% due 7/1/07(c) 104,999
80,000 B Huntsman Packaging Corp., Sr. Sub. Notes,
9.125% due 10/1/07(c) 81,800
135,000 BBB- Maxxam Group Holdings, Sr. Notes, 12.000% due 8/1/03(c) 145,124
130,000 BB Pindo Deli Fin Mauritius, Guaranteed Sr. Notes,
10.750% due 10/1/07(c) 117,650
30,000 BB- Printpack Inc., Sr. Notes, Series A, 9.875% due 8/15/04 31,650
125,000 CC Recap New Brunswick, Sr. Secured Notes,
10.625% due 4/15/05 126,875
Riverwood International:
50,000 B- Sr. Notes, 10.250% due 4/1/06 51,750
120,000 CCC+ Sr. Sub. Notes, 10.875% due 4/1/08 118,799
Stone Container Corp.:
60,000 B Sr. Sub. Debentures, 12.250% due 4/1/02 62,250
25,000 B+ Sr. Sub. Notes, 11.500% due 10/1/04 26,625
- ---------------------------------------------------------------------------------------------
1,174,566
- ---------------------------------------------------------------------------------------------
Plastics -- 0.0%
50,000 BB+ Owens Illinois Inc., Sr. Sub. Notes, 8.100% due 5/15/07 53,125
- ---------------------------------------------------------------------------------------------
Publishing -- 0.2%
80,000 B+ Garden State News, Sr. Sub. Notes, 8.750% due 10/1/09(c) 79,800
40,000 B- Globolstar Capital, 11.375% due 2/15/04(c)(e) 39,800
</TABLE>
See Notes to Financial Statements.
31
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Publishing -- 0.2% (continued)
$ 40,000 B Southwest Royalties Inc., Sr. Notes, 10.500% due 10/15/04(c) $ 39,700
30,000 B- Von Hoffman Corp., Sr. Sub. Notes, 10.375% due 5/15/07(c) 32,025
25,000 BB- World Color Press Inc., Sr. Sub. Notes, 9.125% due 3/15/03 26,125
- ---------------------------------------------------------------------------------------------
217,450
- ---------------------------------------------------------------------------------------------
Recreation -- 0.3%
275,000 B Adams Outdoor Advertising Ltd., Sr. Notes,
10.750% due 3/15/06 299,063
- ---------------------------------------------------------------------------------------------
Retailers -- 1.2%
225,000 B+ Brylane LP/Brylane Capital Corp., Sr. Sub. Notes A,
10.000% due 9/1/03 239,624
190,000 B Corporate Express, Sr. Sub. Notes, 9.125% due 3/15/04 193,799
25,000 B- J Crew Corp., Sr. Sub. Notes, 10.375% due 10/15/07(c) 25,125
50,000 B- J Crew Group, Sr. Discount Debentures, step bond to yield
13.117% due 10/15/08(c) 27,750
150,000 B Mothers Work Inc., Sr. Notes, 12.625% due 8/1/05 165,187
105,000 NR Sassco Fashions Ltd., Sr. Notes, 12.750% due 3/31/04 111,300
350,000 BB+ Southland Corp. First Priority, Sr. Sub. Debentures,
4.500% due 6/15/04 285,248
45,000 BB- Specialty Retailers Inc., Sr. Notes, 8.500% due 7/15/05 46,181
170,000 BB- Tultex Corp., Sr. Notes, 10.625% due 3/15/05 185,300
90,000 BB Zale Corp., Sr. Notes, 8.500% due 10/1/07(c) 89,100
- ---------------------------------------------------------------------------------------------
1,368,614
- ---------------------------------------------------------------------------------------------
Supermarkets -- 0.5%
250,000 NR Pagemart Nationwide Inc., Sr. Discount Notes,
step bond to yield 12.591% due 2/1/05 211,875
200,000 B Ralphs Grocery Co., Sr. Sub. Notes, 10.450% due 6/15/04 220,000
Stater Brothers Inc., Sr. Notes:
80,000 BB- 11.000% due 3/1/01(c) 87,200
80,000 B 9.000% due 7/1/04(c) 80,800
- ---------------------------------------------------------------------------------------------
599,875
- ---------------------------------------------------------------------------------------------
Telecommunications -- 7.0%
American Communications Service:
500,000 NR Sr. Discount Notes, step bond to yield
13.297% due 11/1/05 372,500
60,000 NR Sr. Notes, 13.750% due 7/15/07(c) 68,700
200,000 B- Benedek Communication Corp., Sr. Sub. Discount Notes,
step bond to yield 13.893% due 5/15/06 141,000
110,000 B+ BTI Telecom Corp., Sr. Notes, 10.500% due 9/15/07(c) 111,650
3,000 NR Celcaribe SA, Sr. Secured Notes, step bond to yield
9.611% due 3/15/04(c)(f) 60,000
</TABLE>
See Notes to Financial Statements.
32
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Telecommunications -- 7.0% (continued)
$ 250,000 NR Celcaribe SA, Sr. Secured Notes, step bond to yield
11.841% due 3/15/04 $257,500
35,000 NR Celestica International, Sr. Sub. Notes, 10.500% due 12/31/06 37,975
510,000 NR Cellnet Data System Inc., Sr. Discount Notes,
step bond to yield 14.000% due 10/1/07(c)(e) 261,375
100,000 B- Cellular Inc., Sr. Sub. Notes, step bond to yield
11.038% due 9/1/03 97,625
430,000 CCC- Cencall Communication Corp., Sr. Discount Notes,
step bond to yield 13.045% due 1/15/04(a) 389,150
Centennial Cellular Corp.:
100,000 B 8.875% due 11/1/01 101,250
200,000 B 10.125% due 5/15/05 212,250
65,000 NR Colt Telecommunications, step bond to yield
12.000% due 12/15/06(b) 49,400
120,000 BB+ Comcast Cellular Corp., Sr. Notes, 9.500% due 5/1/07(c) 124,200
250,000 BB+ Comcast Corp., Sr. Sub. Notes, 9.500% due 1/15/08 265,000
30,000 NR Consorcio Ecuatoriano, Notes, 14.000% due 5/1/02(c) 31,800
75,000 NR Dobson Communications Corp., Sr. Notes,
11.750% due 4/15/07 76,125
100,000 B- Echostar Corp., Sr. Secured Notes, 12.500% due 7/1/02(c) 109,000
15,000 B- Gray Communications Systems, Sr. Sub. Notes,
10.625% due 10/1/06 16,200
20,000 NR GST Unit Telecommunications Inc., Sr. Sub. Discount Notes,
step bond to yield 14.752% due 12/15/05(c) 14,900
360,000 NR GST USA Inc., Sr. Discount Exchangeable Notes,
step bond to yield 14.606% due 12/15/05 262,800
70,000 B Hermes Europe Railtel BV, Sr. Notes, 11.500% due 8/15/07(c)
Hyperion Telecommunications Inc.: 75,950
395,000 B Sr. Discount Notes, step bond to yield
13.426% due 4/15/03(c) 272,550
50,000 NR Sr. Secured Notes, 12.250% due 9/1/04(c) 53,375
Intelcom Group Inc., Sr. Discount Notes, step bond to yield:
200,000 NR 12.500% due 5/1/06 148,000
200,000 NR 13.236% due 9/15/05 160,000
45,000 NR International Wireless Unit. Sr. Secured Discount Notes,
zero coupon bond to yield 22.302% due 8/15/01 26,663
125,000 CCC McCaw International Ltd., Sr. Discount Notes,
step bond to yield 13.000% due 4/15/07(b) 76,250
130,000 B McLeod Inc., Sr. Discount Notes, step bond to yield
10.500% due 3/1/07 89,700
Metrocall Inc., Sr. Sub. Notes:
20,000 CCC 9.750% due 11/1/07 19,850
180,000 B- 10.375% due 10/1/07 183,150
</TABLE>
See Notes to Financial Statements.
33
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Telecommunications -- 7.0% (continued)
$ 50,000 B- Metronet Communications Inc., Sr. Discount Notes,
step bond to yield 10.750% due 11/1/07(c) $ 29,500
35,000 Caa* MGC Communications Inc., Sr. Secured Notes,
13.000% due 10/1/04(c)(e) 34,738
585,000 B- Millicom International Cellular, Sr. Sub. Discount Notes,
step bond to yield 12.422% due 6/1/06 444,600
125,000 B- Mobile Telecom, Sr. Notes, 13.500% due 12/15/02 140,000
Nextel Communications Inc.:
675,000 B3* Sr. Discount Notes, step bond to yield 12.982% due 8/15/04 573,749
390,000 CCC Sr. Discount Notes, step bond to yield
10.650% due 9/15/07(c) 230,100
250,000 CCC Sr. Discount Notes, step bond to yield 10.653% due 9/1/08 244,374
160,000 CCC Sr. Sub. Notes, step bond to yield 9.750% due 10/31/07(c) 89,600
Nextlink Communications LLC:
100,000 B Sr. Discount Notes, 12.500% due 4/15/06 113,500
125,000 B Sr. Notes, 9.625% due 10/1/07 126,250
190,000 CCC+ Omnipoint Corp., Sr. Notes, 11.625% due 8/15/06 199,500
210,000 B- Orbcomm Global, Sr. Notes, 14.000% due 8/15/04 221,549
25,000 B- Outdoor Communications Inc., Sr. Sub. Notes,
9.250% due 8/15/07 25,000
40,000 NR Paging Network Inc., Sr. Notes, 13.500% due 6/6/05(c) 41,200
160,000 NR Powertel Inc., Sr. Notes, 11.125% due 6/1/07 169,599
76,000 NR Pricellular Wire, Convertible Debentures, step bond to yield
10.054% due 8/15/04(c) 65,170
205,000 B+ Qwest Communications Inc., Sr. Discount Notes,
step bond to yield 12.591% due 10/15/07 131,712
RCN Corp.:
220,000 B3* Sr. Discount Notes, step bond to yield
11.125% due 10/15/07(c) 128,150
30,000 B3* Sr. Notes, 10.000% due 10/15/07(c) 29,850
100,000 BB+ Rogers Cantel, Debentures, 9.375% due 6/1/08 106,750
25,000 B2* Sygnet Wireless, Sr. Notes, 11.500% due 10/1/06 26,375
250,000 B+ Teleport Communications, Sr. Discount Notes,
step bond to yield 9.974% due 7/1/07 195,624
50,000 B- Telesystems International Inc., Sr. Discount Notes,
step bond to yield 10.500% due 11/1/07 27,125
45,000 B Transtel SA, Sr. Notes, 12.500% due 11/1/07(c) 43,200
80,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750% due 6/1/07(c) 82,800
Winstar Communications, Sr. Sub. Discount Notes,
step bond to yield:
130,000 NR 12.327% due 3/15/04(c) 141,049
300,000 CCC+ 12.327% due 10/15/05(c) 276,749
60,000 B3* Winstar Equipment Corp., Guaranteed Sr. Secured Notes,
12.500% due 3/15/04 65,100
- ---------------------------------------------------------------------------------------------
8,168,801
- ---------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
34
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Telephone -- 0.4%
Diamond Cable Communications PLC, Sr. Discount Notes,
step bond to yield:
$ 100,000 B- 10.920% due 9/30/04 $ 87,000
225,000 B- 11.468% due 12/15/05 167,624
115,000 B- 10.750% due 2/15/07 75,038
75,000 BB- Fonorola Inc., Sr. Notes, 12.500% due 8/15/02 83,625
120,000 B Intercel Inc., Sr. Discount Notes,
step bond to yield 12.000% due 5/1/06 84,600
- ---------------------------------------------------------------------------------------------
497,887
- ---------------------------------------------------------------------------------------------
Textiles -- 0.3%
25,000 B- Gear for Sports Inc., Sr. Sub. Notes, 9.625% due 3/1/07 25,625
30,000 B- Glenoit Corp., Sr. Sub. Notes, 11.000% due 4/15/07(c) 31,425
200,000 BB- Guess Inc., Sr. Sub. Notes, 9.500% due 8/15/03 206,498
70,000 BB+ Polysindo International Finance Corp.,
Guaranteed Secured Notes, 11.375% due 6/15/06 72,450
50,000 NR William Carter Holdings, Sr. Sub. Notes,
12.000% due 10/1/08(c) 52,500
15,000 B- William Carter, Sr. Sub. Notes, 10.375% due 12/1/06 15,713
- ---------------------------------------------------------------------------------------------
404,211
- ---------------------------------------------------------------------------------------------
Transportation -- 0.2%
15,000 B Atlantic Express Transportation Corp., Sr. Secured Notes,
10.750% due 2/1/04(c) 15,788
40,000 B+ Coach USA Inc., Sr. Sub. Notes, 9.375% due 7/1/07(c) 40,800
100,000 BB- Eletson Holdings Inc., 1st Preferred Notes,
9.250% due 11/15/03 102,249
75,000 B Johnstown America Industries Inc., Sr. Sub. Notes,
11.750% due 8/15/05(c) 81,750
- ---------------------------------------------------------------------------------------------
240,587
- ---------------------------------------------------------------------------------------------
Utility - Electric -- 1.0%
85,000 BB- AES China Generating Co., Sr. Notes, 10.125% due 12/15/06 89,675
80,000 BB+ AES Corp., Sr. Sub. Notes, 8.375% due 8/15/07 79,000
60,000 B- Coho Energy, Sr. Sub. Notes, 8.875% due 10/15/07 59,400
150,000 BB+ Long Island Lighting Corp., Debentures, 9.000% due 11/1/22 169,312
17,582 BB- Midland Funding Corp. I, Sr. Secured Lease Obligation Bond
Series C-91, 10.330% due 7/23/02 18,856
Midland Funding Corp. II, Sub. Secured Lease Obligation Bond:
115,000 B Series A, 11.750% due 7/23/05 135,555
75,000 B Series B, 13.250% due 7/23/06 91,594
Niagara Mohawk Power:
100,000 BB+ 1st Mortgage Notes, 5.875% due 9/1/02 96,375
150,000 B+ Medium Term Notes, 9.990% due 5/11/04 154,687
</TABLE>
See Notes to Financial Statements.
35
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT RATINGS SECURITY VALUE
=============================================================================================
<S> <C> <C> <C>
Utility - Electric -- 1.0% (continued)
Northeast Utilities, Notes:
$ 122,667 BB- 8.380% due 3/1/05 $ 122,820
19,036 BB- 8.580% due 12/1/06 19,012
100,000 CCC+ Petsec Energy Inc., Sr. Sub. Notes, 9.500% due 6/15/07(c) 102,750
- ---------------------------------------------------------------------------------------------
1,139,036
- ---------------------------------------------------------------------------------------------
TOTAL CORPORATE DEBENTURES
(Cost-- $42,303,555) 44,061,607
=============================================================================================
</TABLE>
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
================================================================================
COMMON STOCKS -- 0.3%
<S> <C> <C>
25 AmeriKing, Inc. 1,250
2,583 El Paso Electric Corp. 281,547
1,325 Grand Union Co. 2,981
1,881 Nextel Communications Inc.(g) 34,563
201 Petracom Holdings(c) 1,432
2,202 Premuim Standard Farms 66,077
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost-- $415,172) 387,850
================================================================================
PREFERRED STOCKS -- 2.2%
4 American Radio Systems 478
1,099 AmeriKing, Inc. 29,673
20 Anvil Holdings Inc.(c) 500
Cablevision Systems Inc.:
310 Series H 35,263
2,264 Series M, Payment-in-kind 248,474
5,400 California Federal Capitial Corp. 143,100
450 Capstar Broadcasting Inc.(c) 49,950
899 Chancellor Radio(c) 103,160
3,500 Chevy Chase Capital Corp. 179,375
2,300 Citadel Broadcasting Inc.(c) 253,000
650 Echostar Communications Corp. Payment-in-kind(c) 68,900
800 Fresenius Medical Care Trust 81,800
1,250 Granite Broadcasting 72,500
215 Intermedia Communication, Payment-in-kind 247,991
135 IXC Communications Inc.(c) 157,613
850 Nextel Communications Inc.(c) 97,750
2,046 Nextlink Communications Inc. 128,898
69 NTL Inc., Payment-in-kind 75,900
2,401 Public Service Co. 61,226
1,190 SFX Broadcasting Inc. 136,849
80 Spanish Broadcasting(c) 84,800
</TABLE>
See Notes to Financial Statements.
36
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
SHARES SECURITY VALUE
=============================================================================================
COMMON STOCKS -- 0.3%
<S> <C> <C>
PREFERRED STOCKS -- 2.2% (continued)
234 Time Warner Inc. $ 269,685
750 Von Hoffman Inc.(c) 21,450
- ---------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost-- $2,337,986) 2,548,335
=============================================================================================
WARRANTS -- 0.1%
900 Advanced Radio Telecom Inc., Expire 2/15/07 14,400
65 Esat Inc., Expire 2/1/07 1,300
40 Globalstar, Expire 2/15/04(c) 5,080
150 Heartland Wireless Communications Inc., Expire 4/26/00(c) 2
395 Hyperion Communications Inc., Expire 4/1/01(c) 29,644
495 Intelcom Group Inc., Expire 9/15/05(c) 7,425
110 Interact Systems, Expire 8/1/03(c) 28
125 Intermedia Communications Inc., Expire 6/1/00(c) 8,750
45 International Wireless, Expire 8/15/01(c) 0
75 Louisiana Casino Cruises, Expire 12/1/98 1
110 Orion Network Inc., Expire 1/31/07(c) 1,540
40 Paging Networks Inc., Expire 5/19/99(c) 0
221 President Riverboat Casinos Inc., Expire 9/30/99(c) 111
75 Spanish Broadcasting, Expire 6/30/99(c) 17,624
40 Sterling Chemicals Inc., Expire 8/15/08 1,520
700 Terex Corp., Appreciation Rights, Expire 5/15/02(c) 14,000
145 Urohealth Systems, Expire 4/1/04(c) 725
300 Wireless One Inc., Expire 10/15/03 75
- ---------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost-- $64,913) 102,225
=============================================================================================
TOTAL HIGH YIELD SECTOR
(Cost-- $45,121,626) 47,100,017
=============================================================================================
<CAPTION>
FACE
AMOUNT+ SECURITY VALUE
=============================================================================================
INTERNATIONAL SECTOR -- 21.8%
=============================================================================================
FOREIGN GOVERNMENT AGENCIES & OBLIGATIONS -- 21.6%
=============================================================================================
Argentina -- 1.1%
<S> <C> <C>
460,000 Argentina Bocon, zero coupon due 4/1/01 446,468
997,440 Republic of Argentina, 6.750% due 3/31/05 850,318
- ---------------------------------------------------------------------------------------------
1,296,786
- ---------------------------------------------------------------------------------------------
Australia -- 0.3%
415,000 FNMA Global, 6.375% due 8/15/07+ 295,137
- ---------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
37
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT+ SECURITY VALUE
=============================================================================================
<S> <C> <C>
Brazil -- 1.6%
2,665,116 Brazil Sinking Bond, 7.283% due 4/15/14 $1,838,930
- ---------------------------------------------------------------------------------------------
Canada -- 1.7%
Canada Government:
2,120,000 7.250% due 6/1/07(a) 1,701,845
370,000 8.000% due 6/1/27 335,084
- ---------------------------------------------------------------------------------------------
2,036,929
- ---------------------------------------------------------------------------------------------
Denmark -- 0.6%
5,050,000 NYKREDIT, 6.000% due 10/1/26 713,455
- ---------------------------------------------------------------------------------------------
France -- 3.2%
20,990,000 French BTAN Treasury Bill, 4.750% due 3/12/02(a) 3,608,705
Ivory Coast, Inc.:
800,000 FLRB, 2.000% due 12/29/49 41,696
800,000 PDI, 1.900% due 12/29/49 50,035
- ---------------------------------------------------------------------------------------------
3,700,436
- ---------------------------------------------------------------------------------------------
Germany -- 4.3%
DBR Unity:
1,465,000 8.000% due 1/21/02 947,130
3,015,000 6.500% due 7/4/27(a) 1,823,610
Deutschland Republic:
2,720,000 6.000% due 1/4/07(a) 1,624,635
1,060,000 6.500% due 7/4/27(a) 637,934
- ---------------------------------------------------------------------------------------------
5,033,309
- ---------------------------------------------------------------------------------------------
Great Britain -- 2.4%
United Kingdom Treasury:
805,000 7.500% due 12/7/06 1,432,583
705,000 8.000% due 6/7/21 1,396,487
- ---------------------------------------------------------------------------------------------
2,829,070
- ---------------------------------------------------------------------------------------------
Mexico -- 2.7%
Mexico Par:
2,214,000 6.250% due 12/31/19 1,737,990
877,000 6.250% due 12/31/19 688,445
880,000 United Mexico States, 6.813% due 12/13/19 783,200
- ---------------------------------------------------------------------------------------------
3,209,635
- ---------------------------------------------------------------------------------------------
New Zealand -- 1.4%
2,445,000 New Zealand Government, 8.000% due 4/15/04 1,634,077
- ---------------------------------------------------------------------------------------------
Peru -- 0.2%
395,000 Peru PDI 4.000% due 3/7/17 271,024
- ---------------------------------------------------------------------------------------------
Philippines -- 0.4%
632,000 Philippines, 5.250% due 12/1/17 521,400
- ---------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
38
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Schedules of Investments (continued) October 31, 1997
=============================================================================================
PUTNAM DIVERSIFIED INCOME PORTFOLIO
FACE
AMOUNT+ SECURITY VALUE
=============================================================================================
<S> <C> <C>
Russia -- 1.3%
1,010,000 Russian Loan, zero coupon due 4/1/19(c) $ 858,500
1,066,000 Russian Loan, zero coupon due 12/15/02(h) 628,940
- ---------------------------------------------------------------------------------------------
1,487,440
- ---------------------------------------------------------------------------------------------
South Africa -- 0.2%
1,158,000 Republic of South Africa, 13.000% due 8/31/10 219,010
- ---------------------------------------------------------------------------------------------
Turkey -- 0.2%
84,280,000,000 Turkey T-Bill, zero coupon due 9/16/98 226,950
- ---------------------------------------------------------------------------------------------
TOTAL FOREIGN GOVERNMENT AGENCIES
& OBLIGATIONS (Cost-- $25,248,619) 25,313,588
=============================================================================================
<CAPTION>
SHARES SECURITY VALUE
=============================================================================================
CALL OPTIONS -- 0.2%
<S> <C> <C>
1,010,000 German Deutschemark Future Call @ 1.78, Expire 11/13/97 1,313
900,000,000 Japan Government Bond Future Call @ 128, Expire 11/13/97 194,751
- ---------------------------------------------------------------------------------------------
TOTAL CALL OPTIONS (Cost-- $164,186) 196,064
=============================================================================================
TOTAL INTERNATIONAL SECTOR
(Cost-- $25,412,805) 25,509,652
=============================================================================================
FACE
AMOUNT SECURITY VALUE
=============================================================================================
REPURCHASE AGREEMENT -- 4.8%
$ 5,582,000 SBC Warburg Securities Inc., 5.650% due 11/3/97;
Proceeds at maturity-- $5,584,628; (Fully collateralized
by U.S. Treasury Notes, 6.250% due 8/15/23;
Market value-- $5,711,062) (Cost-- $5,582,000) 5,582,000
=============================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $114,243,368**) $117,143,873
=============================================================================================
</TABLE>
(a) Security is segregated for forward exchange contracts and/or for securities
traded on a "to-be-announced" or when issued basis.
(b) Security is traded on a "to-be-announced" basis (See Note 9).
(c) Security is exempt from registration under Rule 144A of Securities Act of
1933. This security may be resold in transactions that are exempt from
registration, generally to qualified institutional buyers.
(d) Rule 144 security.
(e) Security is issued with attached warrants.
(f) Security is issued with attached trust certificates.
(g) Security is valued by the Fund's Board of Directors (See Note 10).
(h) Security is traded on a when-issued basis (See Note 9).
+ Represents local currency.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
39
<PAGE>
================================================================================
Bond Ratings
================================================================================
All ratings are by Standard & Poor's Ratings Services ("Standard & Poor's"),
except that those identified by an asterisk (*) are rated by Moody's Investors
Service Inc.("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Ratings from "AA" to "CCC" may be modified by the addition
of a plus (+) or minus (-) sign to show relative standings within the major
rating categories
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and repay
principal and differs from the highest rated issue only in a small
degree.
A -- Bonds rated "A" have 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 bonds
in higher rated categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit 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 bonds in this category than in higher
rated categories.
BB -- Bonds rated "BB" have less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payments.
B -- Bonds rated "B" have a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal.
CCC -- Bonds rated "CCC" are regarded, on balance, as predominately speculative
with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation.
Moody's -- Numerical modifiers 1, 2, and 3 may be applied to each generic rating
from "Aa" to "Caa", where 1 is the highest and 3 the lowest rating within its
generic category.
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 edge." 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 which 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 which suggest a
susceptibility to impairment some time 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 that 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 that are rated "B" generally lack characteristics of desirable
investments. 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 that are rated "Caa" are of poor standing. These issues may be in
default, or present elements of danger may exist with respect to
principal or interest.
NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
40
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Statements of Assets and Liabilities October 31, 1997
=============================================================================================
Putnam
Smith Barney Diversified
High Income Income
Portfolio Portfolio
=============================================================================================
<S> <C> <C>
ASSETS:
Investments, at value (Cost--$116,293,940
and $114,243,368, respectively) $120,058,375 $117,143,873
Cash 180,189 --
Dividends and interest receivable 2,101,697 1,886,178
Receivable for securities sold 2,092,231 11,691,911
Receivable for Fund shares sold 170,972 141,704
Receivable for closed forward foreign currency contracts -- 160,892
Receivable for open forward foreign currency contracts -- 635,636
Other receivables -- 4,785
- --------------------------------------------------------------------------------------------
Total Assets 124,603,464 131,664,979
- --------------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 577,841 8,614,160
Management fees payable 217,480 74,289
Payable for open forward foreign currency contracts (Note 5) 42,125 870,605
Payable for closed forward foreign currency contracts -- 313,896
Payable to bank -- 117,709
Options written (Note 4) -- 12,827
Accrued expenses 39,920 60,433
- --------------------------------------------------------------------------------------------
Total Liabilities 877,366 10,063,919
- --------------------------------------------------------------------------------------------
Total Net Assets $123,726,098 $121,601,060
============================================================================================
NET ASSETS:
Par value of capital shares $ 93 $ 99
Capital paid in excess of par value 109,303,094 112,279,025
Undistributed net investment income 8,703,403 5,343,943
Accumulated net realized gain from security transactions,
options and foreign currencies 2,001,663 1,361,555
Net unrealized appreciation of investments,
options and foreign currencies 3,717,845 2,616,438
- --------------------------------------------------------------------------------------------
Total Net Assets $123,726,098 $121,601,060
============================================================================================
Shares Outstanding 9,337,510 9,881,456
- --------------------------------------------------------------------------------------------
Net Asset Value $13.25 $12.31
- --------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
41
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
Statements of Operations For the Year Ended October 31, 1997
=============================================================================================
Putnam
Smith Barney Diversified
High Income Income
Portfolio Portfolio
============================================================================================
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 9,027,386 $ 7,787,701
Dividends 363,797 147,602
Less: Foreign withholding tax -- (4,203)
- --------------------------------------------------------------------------------------------
Total Investment Income 9,391,183 7,931,100
- --------------------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 558,996 753,736
Shareholder communications 22,064 29,999
Audit and legal 20,044 16,002
Pricing service fees 12,071 19,998
Directors' fees 9,328 6,001
Shareholder and system servicing fees 7,522 7,001
Registration fees -- 1,079
Custody 5,713 30,999
Other 18,048 25,518
- --------------------------------------------------------------------------------------------
Total Expenses 653,786 890,333
- --------------------------------------------------------------------------------------------
Net Investment Income 8,737,397 7,040,767
- --------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS, OPTIONS AND FOREIGN
CURRENCIES (NOTES 3, 4 AND 5):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 1,990,921 1,369,385
Options purchased -- 323,210
Foreign currency transactions 186 (2,200,027)
- --------------------------------------------------------------------------------------------
Net Realized Gain (Loss) 1,991,107 (507,432)
- --------------------------------------------------------------------------------------------
Change in Net Unrealized Appreciation
of Investments, Options and Foreign Currencies:
Beginning of year 688,950 936,444
End of year 3,717,845 2,616,438
- --------------------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 3,028,895 1,679,994
- --------------------------------------------------------------------------------------------
Net Gain on Investments, Options and
Foreign Currencies 5,020,002 1,172,562
- --------------------------------------------------------------------------------------------
Increase in Net Assets From Operations $13,757,399 $ 8,213,329
============================================================================================
</TABLE>
See Notes to Financial Statements.
42
<PAGE>
<TABLE>
<CAPTION>
===================================================================================
Statements of Changes in Net Assets
===================================================================================
Years Ended October 31,
------------------------------
Smith Barney High Income Portfolio 1997 1996
===================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 8,737,397 $ 4,295,269
Net realized gain 1,991,107 325,168
Increase in net unrealized appreciation 3,028,895 323,019
- -----------------------------------------------------------------------------------
Increase in Net Assets From Operations 13,757,399 4,943,456
- -----------------------------------------------------------------------------------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income (3,902,709) (1,234,142)
Net realized gains (325,225) --
- -----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (4,227,934) (1,234,142)
- -----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares 46,549,788 41,371,503
Net asset value of shares issued
for reinvestment of dividends 4,227,935 1,234,142
Cost of shares reacquired (2,536,014) (809,848)
- -----------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 48,241,709 41,795,797
- -----------------------------------------------------------------------------------
Increase in Net Assets 57,771,174 45,505,111
NET ASSETS:
Beginning of year 65,954,924 20,449,813
- -----------------------------------------------------------------------------------
End of year* $ 123,726,098 $ 65,954,924
===================================================================================
* Includes undistributed net investment income of: $8,703,403 $3,902,810
===================================================================================
</TABLE>
See Notes to Financial Statements.
43
<PAGE>
<TABLE>
<CAPTION>
===================================================================================
Statements of Changes in Net Assets (continued)
===================================================================================
Years Ended October 31,
-----------------------------
Putnam Diversified Income Portfolio 1997 1996
===================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 7,040,767 $ 4,349,534
Net realized gain (loss) (507,432) 620,131
Increase in net unrealized appreciation 1,679,994 464,183
- -----------------------------------------------------------------------------------
Increase in Net Assets From Operations 8,213,329 5,433,848
- -----------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (4,024,282) (1,338,472)
Net realized gains (649,717) (505,992)
- -----------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (4,673,999) (1,844,464)
- -----------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 11):
Net proceeds from sale of shares 34,247,136 44,714,713
Net asset value of shares issued
for reinvestment of dividends 4,673,999 1,844,465
Cost of shares reacquired (1,935,399) (586,297)
- -----------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 36,985,736 45,972,881
- -----------------------------------------------------------------------------------
Increase in Net Assets 40,525,066 49,562,265
NET ASSETS:
Beginning of year 81,075,994 31,513,729
- -----------------------------------------------------------------------------------
End of year* $ 121,601,060 $ 81,075,994
===================================================================================
* Includes undistributed net investment income of: $5,343,943 $4,128,520
===================================================================================
</TABLE>
See Notes to Financial Statements.
44
<PAGE>
================================================================================
Notes to Financial Statements
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney High Income and Putnam Diversified Income Portfolios
("Portfolio(s)") are separate investment portfolios of the Travelers Series Fund
Inc. ("Fund"). The Fund, a Maryland corporation, is registered under the
Investment Company Act of 1940, as amended, as a diversified, open-end
management investment company and consists of these Portfolios and ten other
separate investment portfolios: AIM Capital Appreciation, Alliance Growth, Van
Kampen American Capital Enterprise, Smith Barney Income and Growth, Smith Barney
International Equity, Smith Barney Pacific Basin, TBC Managed Income, GT Global
Strategic Income, MFS Total Return and Smith Barney Money Market Portfolios.
Shares of the Fund are offered only to insurance company separate accounts which
fund certain variable annuity and variable life insurance contracts. The
financial statements and financial highlights for the other portfolios are
presented in separate annual reports.
The significant accounting policies consistently followed by the Portfolios
are: (a) security transactions are accounted for on trade date; (b) securities
traded on national securities markets are valued at the closing prices on such
markets; securities for which no sales price was reported and U.S. government
agencies and obligations are valued at the mean between the bid and ask prices;
(c) securities maturing within 60 days are valued at cost plus accreted
discount, or minus amortized premium, which approximates value; (d) dividend
income is recorded on the ex-dividend date; foreign dividends are recorded on
the ex-dividend date or as soon as practical after the Portfolio determines the
existence of a dividend declaration after exercising reasonable due diligence;
(e) interest income, adjusted for accretion of original issue discount, is
recorded on an accrual basis; (f) gains or losses on the sale of securities are
calculated by using the specific identification method; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) the
accounting records of the Portfolios are maintained in U.S. dollars. All assets
and liabilities denominated in foreign currencies are translated into U.S.
dollars based on the rate of exchange of such currencies against U.S. dollars on
the date of valuation. Purchases and sales of securities, and income and
expenses are translated at the rate of exchange quoted on the respective date
that such transactions are recorded. Differences between income or expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank; (i) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At October 31, 1997, reclassifications
were made to the Portfolios' capital accounts to reflect permanent book/tax
differences and income and gains available for distribution under income tax
regulations. Net investment income, net realized gains and net assets were not
affected by this
45
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
change; (j) the Portfolios intend to comply with the requirements of the
Internal Revenue Code of 1986, as amended, pertaining to regulated investment
companies and to make distributions of taxable income sufficient to relieve it
from substantially all Federal income and excise taxes; and (k) estimates and
assumptions are required to be made regarding assets, liabilities and changes in
net assets resulting from operations when financial statements are prepared.
Changes in the economic environment, financial markets and any other parameters
used in determining these estimates could cause actual results to differ.
In addition, Putnam Diversified Income and Smith Barney High Income
Portfolios may enter into foreign currency exchange contracts in order to hedge
against foreign currency risk. These contracts are marked-to-market daily, by
recognizing the difference between the contract exchange rate and the current
market rate as an unrealized gain or loss. Realized gains or losses are
recognized when contracts are settled or closed.
2. MANAGEMENT AGREEMENT AND TRANSACTIONS WITH AFFILIATED PERSONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), acts as the investment manager of the Smith Barney
High Income Portfolio ("SBHI"). Travelers Investment Adviser, Inc. ("TIA"), an
affiliate of SBMFM, acts as the investment manager of the Putnam Diversified
Income Portfolio ("PDIP"). SBHI pays SBMFM a management fee calculated at an
annual rate of 0.60% of the average daily net assets of the Portfolio. PDIP pays
TIA a management fee calculated at an annual rate of 0.75% of the average daily
net assets of the Portfolio. These fees are calculated daily and paid monthly.
TIA has entered into a sub-advisory agreement with Putnam Investment
Management, Inc. ("PIM"). Pursuant to the sub-advisory agreement, PIM is
responsible for the day-to-day portfolio operations and investment decisions for
PDIP and is compensated for such service at the annual rate of 0.35% of the
average daily net assets of PDIP. This fee is calculated daily and paid monthly.
TIA has entered into a Sub-Administrative Services Agreement with SBMFM.
TIA pays SBMFM, as sub-administrator, a fee calculated at an annual rate of
0.10% of the average daily net assets of PDIP.
Smith Barney Inc. ("SB"), another subsidiary of SBH, acts as distributor of
Fund shares.
All officers and one Director of the Fund are employees of SB.
46
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
3. INVESTMENTS
During the year ended October 31, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
<TABLE>
<CAPTION>
SBHI PDIP
================================================================================
<S> <C> <C>
Purchases $116,429,532 $271,061,776
- --------------------------------------------------------------------------------
Sales 73,836,895 233,505,199
================================================================================
</TABLE>
At October 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
<CAPTION>
SBHI PDIP
================================================================================
<S> <C> <C>
Gross unrealized appreciation $ 4,541,581 $5,280,669
Gross unrealized depreciation (777,146) (2,380,164)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 3,764,435 $2,900,505
================================================================================
</TABLE>
4. OPTION CONTRACTS
Premiums paid when put or call options are purchased by the Portfolios,
represent investments, which are marked-to-market daily and are included in the
schedules of investments. When a purchased option expires, the Portfolios will
realize a loss in the amount of the premium paid. When the Portfolios enter into
closing sales transaction, the Portfolios will realize a gain or loss depending
on whether the proceeds from the closing sales transaction are greater or lesser
than the premium paid for the option. When the Portfolios exercise a put option,
they will realize a gain or loss from the sale of the underlying security and
the proceeds from such sale will be decreased by the premium originally paid.
When the Portfolios exercise a call option, the cost of the security which the
Portfolios purchase upon exercise will be increased by the premium originally
paid.
At October 31, 1997, PDIP held two purchased call options with a cost of
$164,186.
When the Portfolios write a covered call or put option, an amount equal to
the premium received by the Portfolios is recorded as a liability, the value of
which is marked-to-market daily. When a written option expires, the Portfolios
realize a gain. When the Portfolios enter into a closing purchase transaction,
the Portfolios realize a gain or loss depending upon whether the cost of the
closing transaction is greater or less than the premium originally received
47
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
without regard to any unrealized gain or loss on the underlying security, and
the liability related to such option is eliminated. When a written call option
is exercised, the cost of the security sold will be decreased by the premium
originally received. When a written put option is exercised, the amount of the
premium originally received will reduce the cost of the security which the
Portfolios purchased upon exercise. When written index options are exercised,
settlement is made in cash.
The risk associated with purchasing options is limited to the premium
originally paid. The Portfolios enter into options for hedging purposes. The
risk in writing a covered call option is that the Portfolios give up the
opportunity to participate in any increase in the price of the underlying
security beyond the exercise price. The risk in writing a put option is that the
Portfolios are exposed to the risk of loss if the market price of the underlying
security declines.
The following covered call option transactions occurred in PDIP during the
year ended October 31, 1997:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
===============================================================================
<S> <C> <C>
Options written, outstanding at October 31, 1996 0 $ 0
Options written during the year ended October 31, 1997 27,977 75,647
Options cancelled in closing purchase transactions (26,967) (63,072)
- -------------------------------------------------------------------------------
Options written, outstanding at October 31, 1997 1,010 $12,575
===============================================================================
</TABLE>
The following represents the covered call option written contracts held by
PDIP open as of October 31, 1997:
<TABLE>
<CAPTION>
Number of Strike
Contracts Expiration Price Value
================================================================================
<S> <C> <C> <C>
1,010 USD/German Deutschemark 11/13/97 $1.73 $(12,827)
- --------------------------------------------------------------------------------
Total Covered Put Options Written
(Premiums received-- $12,575) $(12,827)
================================================================================
</TABLE>
5. FOREIGN CURRENCY EXCHANGE CONTRACTS
At October 31, 1997, the Portfolios had open foreign currency exchange
contracts as described below. The Portfolio records realized gains or losses at
the time the forward contract is offset by entry into a closing transaction or
settlement of the contract. The Portfolio bears the market risk that arises from
changes in foreign currency exchange rates. The unrealized gain (loss) on the
contracts is reflected in the accompanying financial statements as follows:
48
<PAGE>
<TABLE>
<CAPTION>
======================================================================================
Notes to Financial Statements (continued)
======================================================================================
Smith Barney High Income Portfolio
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Loss
======================================================================================
<S> <C> <C> <C> <C>
To Buy:
German Deutschemark 635,589 $369,961 12/1/97 $(10,274)
German Deutschemark 1,200,000 699,356 12/22/97 (19,123)
German Deutschemark 825,000 481,034 12/30/97 (12,728)
- --------------------------------------------------------------------------------------
Total Unrealized Loss on Forward
Foreign Currency Contracts $(42,125)
======================================================================================
</TABLE>
Putnam Diversified Income Portfolio
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
====================================================================================
<S> <C> <C> <C> <C>
To Buy:
Australian Dollar 316,900 222,370 12/17/97 $(15,647)
British Pound 154,000 257,250 12/17/97 (392)
French Franc 329,000 57,158 6/30/98 2,457
German Deutschemark 4,089,000 2,375,944 12/17/97 39,373
German Deutschemark 4,609,188 2,678,203 12/17/97 129,015
German Deutschemark 583,650 339,134 12/17/97 14,533
German Deutschemark 544,300 316,270 12/17/97 7,368
German Deutschemark 921,150 535,241 12/17/97 9,860
German Deutschemark 416,250 241,865 12/17/97 4,659
German Deutschemark 1,324,800 769,785 12/17/97 (3,347)
German Deutschemark 10,250 5,956 12/17/97 (20)
Indonesian Rupiah 2,588,246,700 698,231 2/23/98 (47,338)
Indonesian Rupiah 1,490,895,300 386,798 6/23/98 13,234
Italian Lira 1,308,640,760 771,968 12/17/97 29,650
Italian Lira 6,840,427,200 4,035,174 12/17/97 152,517
Japanese Yen 65,857,200 549,910 12/17/97 (2,120)
Japanese Yen 56,905,765 475,165 12/17/97 (1,832)
Japanese Yen 455,328,115 3,802,005 12/17/97 (14,660)
Japanese Yen 86,108,400 719,008 12/17/97 (13,351)
Japanese Yen 75,404,000 629,626 12/17/97 (7,706)
Japanese Yen 165,796,000 1,384,402 12/17/97 11,566
Japanese Yen 76,608,650 639,685 12/17/97 5,596
Japanese Yen 11,763,100 98,222 12/17/97 (490)
Philippines Peso 10,816,470 298,506 3/25/98 (10,110)
Poland Zlotty 560,050 144,903 6/05/98 (8,071)
Spanish Peseta 155,004,080 1,063,785 12/17/97 42,018
Swedish Krona 6,390,000 851,387 12/17/97 28,993
Swedish Krona 2,060,510 274,537 12/17/97 1,616
Swedish Krona 455,822 60,733 12/17/97 359
Swedish Krona 2,597,000 346,018 12/17/97 3,857
Swiss Franc 1,346,150 966,298 12/17/97 53,654
Venezuelan Bolivar 79,675,200 149,695 6/05/98 6,395
Venezuelan Bolivar 61,799,300 116,110 6/05/98 2,404
Venezuelan Bolivar 61,799,300 116,110 6/05/98 974
Venezuelan Bolivar 61,799,300 115,351 6/19/98 268
- ---------------------------------------------------------------------------------
435,282
- ---------------------------------------------------------------------------------
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
======================================================================================================
Notes to Financial Statements (continued)
======================================================================================================
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
======================================================================================================
<S> <C> <C> <C> <C>
To Sell:
Australian Dollar (173,581) (121,803) 12/17/97 $2,947
Canadian Dollar (1,455,800) (1,036,157) 12/17/97 15,834
Danish Krona (719,347) (109,861) 12/17/97 (5,049)
French Franc (21,694,000) (3,762,596) 12/17/97 (111,439)
German Deutschemark (928,300) (539,364) 12/17/97 (17,702)
German Deutschemark (4,217,800) (2,450,784) 12/17/97 (119,769)
German Deutschemark (934,500) (542,998) 12/17/97 (27,117)
German Deutschemark (118,785) (69,021) 12/17/97 (3,293)
German Deutschemark (2,800,150) (1,627,048) 12/17/97 (76,905)
German Deutschemark (4,091,610) (2,377,461) 12/17/97 (112,712)
German Deutschemark (414,300) (240,732) 12/17/97 (11,129)
German Deutschemark (477,800) (277,629) 12/17/97 (11,855)
German Deutschemark (2,738,000) (1,590,935) 12/17/97 (47,652)
German Deutschemark (695,000) (403,835) 12/17/97 (12,012)
German Deutschemark (1,123,700) (17,717) 12/17/97 (17,717)
German Deutschemark (1,724,700) (1,002,150) 12/17/97 (1,367)
German Deutschemark (93,400) (54,745) 6/05/98 1,158
Italian Lira (4,929,152,700) (2,907,712) 12/17/97 (111,299)
Japanese Yen (150,115,800) (1,253,472) 12/17/97 4,833
Japanese Yen (8,903,800) (74,347) 12/17/97 277
Japanese Yen (99,155,797) (827,954) 12/17/97 2,858
Japanese Yen (81,217,128) (678,166) 12/17/97 1,760
Japanese Yen (86,520,000) (722,445) 12/17/97 (5,454)
New Zealand Dollar (632,000) (392,181) 12/17/97 5,979
New Zealand Dollar (319,600) (198,325) 12/17/97 1,288
New Zealand Dollar (319,200) (198,325) 12/17/97 2,272
New Zealand Dollar (885,000) (549,178) 12/17/97 11,912
New Zealand Dollar (1,106,900) (686,876) 12/17/97 21,540
South African Rand (468,800) (96,099) 12/17/97 1,496
South African Rand (450,000) (92,245) 12/17/97 1,116
Swiss Franc (1,227,500) (881,128) 12/17/97 (48,699)
Swiss Franc (121,350) (87,108) 12/17/97 (4,351)
- ---------------------------------------------------------------------------------------------------
(670,251)
- ---------------------------------------------------------------------------------------------------
Total Unrealized Loss on Forward
Foreign Currency Contracts $(234,969)
===================================================================================================
</TABLE>
6. REPURCHASE AGREEMENTS
The Portfolios purchase (and their custodian takes possession of) U.S.
government securities from banks and securities dealers subject to agreements to
resell the securities to the sellers at a future date (generally, the next
business day) at an agreed-upon higher repurchase price. The Portfolios require
continual maintenance of the market value of the collateral in amounts at least
equal to the repurchase price.
50
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
7. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contracts. During
the period the futures contract is open, changes in the value of the contract
are recognized as unrealized gains or losses by "marking to market" on a daily
basis to reflect the market value of the contract at the end of each day's
trading. Variation margin payments are received or made and recognized as assets
due from or liabilities due to broker, depending upon whether unrealized gains
or losses are incurred. When the contract is closed, the Portfolios record a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transactions and the Portfolio's basis in the contract. The
Portfolios enter into such contracts to hedge a portion of their portfolios. The
Portfolios bear the market risk that arises from changes in the value of the
financial instruments and securities indices (futures contracts).
At October 31, 1997, the Portfolios had no open futures contracts.
8. LENDING OF PORTFOLIO SECURITIES
The Portfolios have an agreement with their custodian whereby the custodian
may lend securities owned by the Portfolios to brokers, dealers and other
financial organizations. Fees earned by the Portfolios on securities lending are
recorded as interest income. Loans of securities by the Portfolios are
collateralized by cash, U.S. government securities or high quality money market
instruments that are maintained at all times in an amount at least equal to the
current market value of the loaned securities, plus a margin which may vary
between 2% and 5% depending on the type of securities loaned. The custodian
establishes and maintains the collateral in segregated accounts.
At October 31, 1997, the Portfolios had no securities on loan.
51
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
9. SECURITIES TRADED ON A WHEN-ISSUED OR TO-BE-ANNOUNCED BASIS
PDIP may trade securities on a when-issued basis or on a to-be-announced
("TBA") basis.
In a when-issued transaction the securities are purchased or sold by the
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.
In a TBA transaction, the Portfolio commits to purchasing or selling
securities for which specific information is not yet known at the time of the
trade, particularly the face amount and maturity date. Securities purchased on a
TBA basis are not settled until they are delivered to the Portfolio, normally 15
to 45 days later. These transactions are subject to market fluctuations and
their current value is determined in the same manner as for other portfolio
securities.
At October 31, 1997, PDIP held five TBA securities with a cost of
$4,152,230 and one when-issued security with a cost of $735,954.
10. SECURITY VALUED BY THE FUND'S BOARD OF DIRECTORS
The following security held by the Portfolios on October 31, 1997, is a
restricted security under the Federal securities laws and is valued at fair
value in good faith by, or under the direction of, the Fund's Board of Directors
taking into consideration the appropriate economic, financial and other
pertinent available information pertaining to this security.
<TABLE>
<CAPTION>
Value 10/31/97 Percentage
Acquisition Per Fair of Total
Security Date Shares Unit Value Net Assets Cost
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
SBHI
Nextel Communications Inc.
Common Stock 9/11/97 2,323 $18.37 $42,685 0.03% $37,485
=======================================================================================================================
PDIP
Nextel Communications Inc.
Common Stock 9/10/97 1,881 $18.37 $34,563 0.03% $30,353
=======================================================================================================================
</TABLE>
52
<PAGE>
================================================================================
Notes to Financial Statements (continued)
================================================================================
11. CAPITAL SHARES
At October 31, 1997, the Fund had six billion shares of $0.00001 par value
capital stock authorized. Each share of a Portfolio represents an equal
proportionate interest in that Portfolio with each share of the same Portfolio
and has an equal entitlement to any dividends and distributions made by the
Portfolio.
Transactions in shares of each Portfolio were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
October 31, 1997 October 31, 1996
===============================================================================
<S> <C> <C>
Smith Barney High Income Portfolio
Shares sold 3,725,306 3,599,769
Shares issued on reinvestment 358,299 111,284
Shares redeemed (202,326) (70,401)
- -------------------------------------------------------------------------------
Net Increase 3,881,279 3,640,652
===============================================================================
Putnam Diversified Income Portfolio
Shares sold 2,882,116 3,899,802
Shares issued on reinvestment 403,976 163,407
Shares redeemed (165,387) (51,742)
- -------------------------------------------------------------------------------
Net Increase 3,120,705 4,011,467
===============================================================================
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================
Financial Highlights
===================================================================================================
For a share of each capital stock outstanding throughout each year:
Smith Barney High Income Portfolio 1997 1996 1995 1994(1)
===================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $12.09 $11.26 $10.07 $10.00
- ---------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(2) 0.88 1.14 0.93 0.29
Net realized and unrealized gain (loss) 1.00 0.19 0.48 (0.22)
- ---------------------------------------------------------------------------------------------------
Total Income From Operations 1.88 1.33 1.41 0.07
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.66) (0.50) (0.22) --
Net realized gains (0.06) -- -- --
- ---------------------------------------------------------------------------------------------------
Total Distributions (0.72) (0.50) (0.22) --
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $13.25 $12.09 $11.26 $10.07
- ---------------------------------------------------------------------------------------------------
Total Return 16.24% 12.17% 14.30% 0.70%++
- ---------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $123,726 $65,955 $20,450 $3,395
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(2) 0.70% 0.84% 0.70% 0.69%+
Net investment income 9.36 9.79 9.54 7.55+
- ---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 89% 104% 57% 15%
===================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) The Manager 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
reimbursed the Portfolio for $17,664 in expenses for the period ended
October 31, 1994. If such fees were not waived and expenses not reimbursed,
the per share effect on net investment income and the expense ratios would
have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Income Without Fee Waivers
Per Share Decreases and Reimbursement
--------------------- -------------------
1995 1994 1995 1994
----- ----- ----- -------
<S> <C> <C> <C>
$0.04 $0.07 1.07% 2.60%+
</TABLE>
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
54
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================================
Financial Highlights (continued)
==========================================================================================================
For a share of capital stock outstanding throughout each year:
Putnam Diversified Income Portfolio 1997 1996(1) 1995 1994(2)
==========================================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $11.99 $11.46 $10.18 $10.00
- ----------------------------------------------------------------------------------------------------------
Income From Operations:
Net investment income(3) 0.67 0.78 0.79 0.23
Net realized and unrealized gain (loss) 0.30 0.27 0.58 (0.05)
- ----------------------------------------------------------------------------------------------------------
Total Income From Operations 0.97 1.05 1.37 0.18
- ----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.56) (0.39) (0.09) --
Net realized gains (0.09) (0.13) -- --
- ----------------------------------------------------------------------------------------------------------
Total Distributions (0.65) (0.52) (0.09) --
- ----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $12.31 $11.99 $11.46 $10.18
- ----------------------------------------------------------------------------------------------------------
Total Return 8.44% 9.43% 13.55% 1.80%++
- ----------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $121,601 $81,076 $31,514 $6,763
- ----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses(3) 0.88% 0.96% 0.97% 0.98%+
Net investment income 6.99 7.57 7.53 6.14+
- ----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 253% 255% 276% 20%
==========================================================================================================
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(2) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(3) The Manager 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
reimbursed the Portfolio for $19,028 in expenses for the period ended
October 31, 1994. If such fees were not waived and expenses not reimbursed,
the per share effect on net investment income and the expense ratios would
have been as follows:
<TABLE>
<CAPTION>
Expense Ratios
Net Investment Income Without Fee Waivers
Per Share Decreases and Reimbursement
--------------------- --------------------
1995 1994 1995 1994
------ ----- ---- ----
<S> <C> <C> <C>
$0.04 $0.07 1.31% 2.92%+
</TABLE>
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
================================================================================
Tax Information (unaudited)
================================================================================
The following percentage of ordinary income distributions has been
designated as qualifying for the dividends received deduction available to
corporate shareholders:
o Smith Barney High Income Portfolio 8.60%
For Federal income tax purposes the Putnam Diversified Income Portfolio
hereby designates for the fiscal year ended October 31, 1997:
o long-term capital gain distributions paid of $110,871.
55
<PAGE>
================================================================================
Independent Auditor's Report
================================================================================
The Shareholders and Board of Directors of Travelers Series Fund Inc.:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of the Smith Barney High Income and
Putnam Diversified Income Portfolios of Travelers Series Fund Inc. as of October
31, 1997, and the related statements of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended and the financial highlights for each of the years in the three-year
period then ended and for the period from June 16, 1994 (commencement of
operations)to October 31, 1994. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
October 31, 1997, by correspondence with the custodian. As to securities
purchased or sold but not yet received or delivered, we performed other
appropriate auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Smith Barney High Income and Putnam Diversified Income Portfolios of Travelers
Series Fund Inc. as of October 31, 1997, and the results of their operations for
the year then ended, the changes in their net assets for each of the years in
the two-year period then ended and the financial highlights for each of the
years in the three-year period then ended and for the period from June 16, 1994
to October 31, 1994, in conformity with generally accepted accounting
principles.
/s/KPMG Peat Marwick LLP
- ---------------------------
New York, New York
December 18, 1997
56
<PAGE>
Travelers Series SMITH BARNEY
Fund Inc. ------------
A Member of TravelersGroup[LOGO]
Directors Investment Managers
Victor K. Atkins Smith Barney Mutual Funds
A.E. Cohen Management Inc.
Robert A. Frankel Travelers Investment Adviser, Inc.
Rainer Greeven
Susan M. Heilbron Distributor
Heath B. McLendon, Chairman
James M. Shuart Smith Barney Inc.
Officers Custodian
Heath B. McLendon PNC Bank, N.A.
President and Chief Executive Officer
Annuity Administration
Lewis E. Daidone
Senior Vice President and Treasurer Travelers Annuity Investor Services
5 State House Square
John C. Bianchi 1 Tower Square
Vice President Hartford, CT 06183
James B. Conheady
Vice President
Martin Hanley
Vice President
Jeffrey J. Russell
Vice President
This report is submitted for the general
Bruce D. Sargent information of the shareholders of
Vice President Travelers Series Fund Inc. -- Smith
Barney High Income and Putnam
Phyllis Zahorodny Diversified Income Portfolios. It is not
Vice President authorized for distribution to
prospective investors unless accompanied
Thomas M. Reynolds or preceded by a current Prospectus for
Controller the Portfolios, which contains
information concerning the Portfolios'
Christina T. Sydor investment policies and expenses as well
Secretary as other pertinent information.
Travelers Series Fund Inc.
388 Greenwich Street
New York, New York 10013
IN0254 12/97
