February 27, 1998
As Amended March 20, 1998 and
July 23, 1998
TRAVELERS SERIES FUND INC.
388 Greenwich Street
New York, New York 10013
STATEMENT OF ADDITIONAL INFORMATION
Shares of the Travelers Series Fund Inc. (the "Fund") are offered
with a choice of thirteen Portfolios:
The Smith Barney Large Cap Value Portfolio (formerly known as the
Smith Barney Income and Growth Portfolio) seeks current income and
long-term growth of income and capital. This Portfolio invests
primarily, but not exclusively, in common stocks.
The Alliance Growth Portfolio seeks long-term growth of capital.
Current income is only an incidental consideration.
The AIM Capital Appreciation Portfolio seeks capital appreciation
by investing principally in common stocks, with emphasis on
medium-sized and smaller emerging growth companies.
The Van Kampen American Capital Enterprise Portfolio seeks capital
appreciation through investment in securities believed by its
investment adviser to have above average potential for capital
appreciation.
The Smith Barney International Equity Portfolio seeks total return
on its assets from growth of capital and income and will invest at
least 65% of its assets in a diversified portfolio of equity
securities of established non-U.S. issuers.
The Smith Barney Pacific Basin Portfolio seeks long-term capital
appreciation through investment primarily in equity securities of
the Asian Pacific Countries.
The TBC Managed Income Portfolio seeks high current income
consistent with what its investment adviser believes to be prudent
risk of capital through investment in various types of debt
securities.
The Putnam Diversified Income Portfolio seeks high current income
consistent with preservation of capital.
The GT Global Strategic Income Portfolio primarily seeks high
current income and, secondarily, capital appreciation by investing
in the debt securities of issuers in the United States, developed
foreign countries and emerging markets.
The Smith Barney High Income Portfolio seeks high current income
by investing at least 65% of its assets in high-yielding corporate
debt obligations. Capital appreciation is a secondary objective.
The MFS Total Return Portfolio seeks above-average income
(compared to a portfolio invested entirely in equity securities)
consistent with prudent employment of capital. While current
income is the primary objective, the Portfolio believes that there
should be a reasonable opportunity for growth of capital and
income.
The Smith Barney Large Capitalization Growth Portfolio seeks long-
term growth of capital by investing in equity securities of
companies with large market capitalizations.
The Smith Barney Money Market Portfolio seeks maximum current
income and preservation of capital.
This Statement of Additional Information (the "SAI") is not
a Prospectus. It is intended to provide more detailed information
about Travelers Series Fund Inc. as well as matters already
discussed in the Prospectus and therefore should be read in
conjunction with the February 27, 1998 Prospectus which may be
obtained from the Fund or your Financial Consultant. Shares of
the Fund may only be purchased by insurance company separate
accounts.
TABLE OF CONTENTS
Directors and Officers 2
Investment Policies 5
Investment Restrictions 26
Performance Information 43
Determination of Net Asset Value 44
Redemption of Shares 44
Custodians 44
Independent Auditors 45
The Fund 45
Management Agreements 46
Voting Rights 52
Financial Statements 53
DIRECTORS AND OFFICERS
VICTOR K. ATKINS, Director (Age 75)
Retired; Former President of Lips Propellers, Inc. Director of
two investment companies associated with Smith Barney Inc. ("Smith
Barney"); His address is 120 Montgomery Street, Suite 1880, San
Francisco, California, 94104.
ABRAHAM E. COHEN, Director (Age 61)
Consultant to MeesPierson, Inc., a Dutch investment bank;
Consultant to and Board Member, Chugai Pharmaceutical Co. Ltd.;
Director of Agouron Pharmaceuticals, Inc., Akzo Nobel NV,
Vasomedical, Inc., Teva Pharmaceutical Ind., Ltd., Neurobiological
Technologies Inc., Vion Pharmaceuticals, Inc., BlueStone Capital
Partners, LP. and The Population Council, an international public
interest organization. His address is c/o Chugai Pharma USA, 444
Madison Ave., 12th Floor, New York, New York, 10022.
ROBERT A. FRANKEL, Director (Age 70)
Managing Partner of Robert A. Frankel Management Consultants;
former Corporate Vice President of The Reader's Digest
Association, Inc. Director of eight investment companies
associated with Smith Barney; His address is 102 Grand Street,
Croton-on-Hudson, New York, 10520.
RAINER GREEVEN, Director (Age 60)
Attorney, Greeven & Ercklentz; Director of two investment
companies associated with Smith Barney. His address is 630 Fifth
Avenue, Suite 1905, New York, New York, 10111.
SUSAN M. HEILBRON, Director (Age 52)
Attorney; Director of two investment companies associated with
Smith Barney. Her address is c/o Lacey & Heilbron, 3 East 54th
Street, 9th Floor, New York, New York, 10022.
*HEATH B. McLENDON, Chairman of the Board and Chief Executive
Officer (Age 64)
Managing Director of Smith Barney; President and Director of
Mutual Management Corp. ("MMC"), formerly known as Smith Barney
Mutual Funds Management Inc. and Travelers Investment Adviser,
Inc. ("TIA"); Chairman of Smith Barney Strategy Advisers Inc.,
prior to July 1993, Senior Executive Vice President of Shearson
Lehman Brothers, Inc.; Vice Chairman of Shearson Asset Management.
Director of forty-two investment companies associated with Smith
Barney.
JAMES M. SHUART, Director (Age 66)
President, Hofstra University; Director of European American Bank;
Director of Long Island Tourism and Convention Commission; and
Director of Association of Colleges and Universities of the State
of New York. Director of two investment companies associated with
Smith Barney. His address is c/o Hofstra University, 101 Hofstra
University, Hempstead, New York, 11550.
*BRUCE D. SARGENT, Vice President (Age 53)
Managing Director of Smith Barney and Vice President of MMC; Vice
President of three investment companies associated with Smith
Barney.
*LEWIS E. DAIDONE, Senior Vice President and Treasurer (Age 40)
Managing Director of Smith Barney and Director and Senior Vice
President of MMC and TIA; Senior Vice President and Treasurer of
forty-two investment companies associated with Smith Barney.
*JAMES B. CONHEADY, Vice President (Age 61)
Managing Director of Smith Barney; Vice President of Smith Barney
World Funds, Inc.
*JEFFREY RUSSELL, Vice President (Age 39)
Managing Director of Smith Barney; Vice President of Smith Barney
World Funds, Inc.
*JOHN C. BIANCHI, Vice President (Age 42)
Managing Director of Smith Barney; prior to July 1993, Managing
Director of Shearson Lehman Advisors ("SLA"); Vice President of
certain other investment companies associated with Smith Barney;
*MARTIN HANLEY, Vice President (Age 31)
Vice President of Smith Barney; Vice President of certain other
investment companies associated with Smith Barney.
*DAVID ISHIBASHI, Vice President (Age 42)
Vice President of Smith Barney; prior to 1993, Vice President of
S.G. Warburg.
*SCOTT KALB, Vice President (Age 41)
Managing Director of Smith Barney; prior to 1993, Managing
Director of SLA.
*PHYLLIS M. ZAHORODNY, Vice President (Age 39)
Managing Director of Smith Barney; prior to July 1993, Managing
Director of SLA; Vice President of certain other investment
companies associated with Smith Barney.
*IRVING DAVID, Controller and Assistant Secretary (Age 37)
Director of Smith Barney. Controller and Assistant Secretary of
certain other investment companies associated with Smith Barney.
Formerly Assistant of First Investment Management Company.
*THOMAS M. REYNOLDS, Controller and Assistant Secretary (Age 37)
Director of Smith Barney; Controller and Assistant Secretary.
Controller and Assistant Secretary of certain other investment
companies associated with Smith Barney.
*CHRISTINA T. SYDOR, Secretary (Age 45)
Managing Director of Smith Barney, General Counsel and Secretary
of MMC and TIA and Secretary of forty-two investment companies
associated with Smith Barney.
___________________
* Designates "interested persons" as defined in the Investment
Company Act of 1940, as amended (the "1940 Act") whose business
address is 388 Greenwich Street, New York, New York 10013 unless
otherwise noted. Such persons are not separately compensated
for their services as Fund officers or Directors.
Thomas M. Reynolds is the Controller and Assistant Secretary
for each of the following Portfolios: the Smith Barney Large Cap
Value Portfolio, the AIM Capital Appreciation Portfolio, the
Alliance Growth Portfolio, the MFS Total Return Portfolio, the
Putnam Diversified Income Portfolio, the Smith Barney High Income
Portfolio, the Smith Barney Large Capitalization Growth Portfolio,
the TBC Managed Income Portfolio and the Van Kampen American
Enterprise Portfolio.
Irving P. David is the Controller and Assistant Secretary
for each of the following Portfolios: the GT Global Strategic
Income Portfolio, the Smith Barney International Equity Portfolio,
the Smith Barney Pacific Basin Portfolio and the Smith Barney
Money Market Portfolio.
On February 12, 1998 Directors and officers owned in the
aggregate less than 1% of the outstanding securities of the Fund.
The following table shows the compensation paid by the Fund
to each director during the Fund's last fiscal year. None of the
officers of the Fund received any compensation from the Fund for
such period. Officers and interested directors of the Fund are
compensated by Smith Barney.
<TABLE>
<CAPTION>
Total
Number
Pension or of Funds
Retirement for Which
Benefits Director
Accrued as Total Serves
Aggregate Part of Compensation within
Compensation Fund's from Fund Fund
Director From the Fund Expenses Complex Complex
<S> <C> <C> <C> <C>
Victor K. Atkins $15,454 $0 $27,400 2
Abraham E. Cohen 13,700 0 13,700 1
Robert A. Frankel 15,454 0 65,900 8
Rainer Greeven 15,454 0 25,600 2
Susan M. Heilbron 15,454 0 27,400 2
Heath B. McLendon 0 0 0 42
James M. Shuart 15,454 0 25,600 2
</TABLE>
INVESTMENT POLICIES
Repurchase and Reverse Repurchase Agreements. Each
Portfolio may on occasion enter into repurchase agreements,
wherein the seller agrees to repurchase a security from the
Portfolio at an agreed-upon future date, normally the next
business day. The resale price is greater than the purchase
price, which reflects the agreed-upon rate of return for the
period the Portfolio holds the security and which is not related
to the coupon rate on the purchased security. Each Portfolio
requires continual maintenance of the market value of the
collateral in amounts at least equal to the repurchase price plus
accrued interest, thus risk is limited to the ability of the
seller to pay the agreed-upon amount on the delivery date;
however, if the seller defaults, realization upon the collateral
by the Portfolio may be delayed or limited or the Portfolio might
incur a loss if the value of the collateral securing the
repurchase agreement declines and might incur disposition costs in
connection with liquidating the collateral. A Portfolio will only
enter into repurchase agreements with broker/dealers or other
financial institutions that are deemed creditworthy by the Manager
under guidelines approved by the Board of Directors. It is the
policy of each Portfolio (except the Smith Barney Money Market
Portfolio) not to invest in repurchase agreements that do not
mature within seven days if any such investment together with any
other illiquid assets held by a Portfolio amount to more than 15%
of that Portfolio's net assets. The Smith Barney Money Market
Portfolio may not invest in such securities if, together with any
other illiquid assets held by it amount to more than 10% of its
total assets.
The Smith Barney International Equity Portfolio and the
Smith Barney Pacific Basin Portfolio may each enter into reverse
repurchase agreements with broker/dealers and other financial
institutions with up to 5% of its net assets. The GT Global
Strategic Income Portfolio may enter into such transactions with
up to 33-1/3% of its total assets, so long as the total amount of
that Portfolio's borrowings do not exceed 33-1/3% of its total
assets. Such agreements involve the sale of portfolio securities
with an agreement to repurchase the securities at an agreed-upon
price, date and interest payment and have the characteristics of
borrowing. Since the proceeds of borrowings under reverse
repurchase agreements are invested, this would introduce the
speculative factor known as "leverage." The securities purchased
with the funds obtained from the agreement and securities
collateralizing the agreement will have maturity dates no later
than the repayment date. Generally the effect of such a
transaction is that the Portfolio can recover all or most of the
cash invested in the portfolio securities involved during the term
of the reverse repurchase agreement, while in many cases it will
be able to keep some of the interest income associated with those
securities. Such transactions are only advantageous if the
Portfolio has an opportunity to earn a greater rate of interest on
the cash derived from the transaction than the interest cost of
obtaining that cash. Opportunities to realize earnings from the
use of the proceeds equal to or greater than the interest required
to be paid may not always be available, and the Portfolio intends
to use the reverse repurchase technique only when management
believes it will be advantageous to the Portfolio. The use of
reverse repurchase agreements may exaggerate any interim increase
or decrease in the value of the participating Portfolio's assets.
The Portfolio's custodian bank will maintain a separate account
for the Portfolio with securities having a value equal to or
greater than such commitments.
Securities Lending. Each Portfolio (except the Van Kampen
American Capital Enterprise Portfolio and the Smith Barney Money
Market Portfolio), may seek to increase its net investment income
by lending its securities provided such loans are callable at any
time and are continuously secured by cash or U.S. government
securities equal to no less than the market value, determined
daily, of the securities loaned. The Portfolio will receive
amounts equal to dividends or interest on the securities loaned.
It will also earn income for having made the loan because cash
collateral pursuant to these loans will be invested in short-term
money market instruments. In connection with lending of
securities the Portfolio may pay reasonable finders,
administrative and custodial fees. Management will limit such
lending to not more than: (a) 33 1/3% of the value of the total
assets of each of the TBC Managed Income Portfolio and the AIM
Capital Appreciation Portfolio; (b) 30% of the value of the total
assets of each of the GT Global Strategic Income Portfolio and the
MFS Total Return Portfolio; (c) 20% of the value of the total
assets of each of the Smith Barney Large Cap Value Portfolio and
the Smith Barney High Income Portfolio; (d) 25% of the value of
the total assets of each of the Alliance Growth Portfolio and the
Putnam Diversified Income Portfolio; and (e) 15% of the value of
the total assets of each of the Smith Barney International Equity
Portfolio and the Smith Barney Pacific Basin Portfolio. Where
voting or consent rights with respect to loaned securities pass to
the borrower, management will follow the policy of calling the
loan, in whole or in part as may be appropriate, to permit the
exercise of such voting or consent rights if the issues involved
have a material effect on the Portfolio's investment in the
securities loaned. Apart from lending its securities and
acquiring debt securities of a type customarily purchased by
financial institutions, none of the foregoing Portfolios will make
loans to other persons. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. Loans will only
be made to borrowers whom management deems to be of good standing
and will not be made unless, in the judgment of management, the
interest to be earned from such loans would justify the risk.
By lending its securities, a Portfolio can increase its
income by continuing to receive interest on the loaned securities,
by investing the cash collateral in short-term instruments or by
obtaining yield in the form of interest paid by the borrower when
U.S. government securities are used as collateral. Each Portfolio
will adhere to the following conditions whenever it lends its
securities: (1) the Portfolio must receive at least 100% cash
collateral or equivalent securities from the borrower, which
amount of collateral will be maintained by daily marking to
market; (2) the borrower must increase the collateral whenever the
market value of the securities loaned rises above the level of the
collateral; (3) the Portfolio must be able to terminate the loan
at any time; (4) the Portfolio must receive reasonable interest on
the loan, as well as any dividends, interest or other
distributions on the loaned securities, and any increase in market
value; (5) the Portfolio may pay only reasonable custodian fees in
connection with the loan; and (6) voting rights on the loaned
securities may pass to the borrower, except that, if a material
event adversely affecting the investment in the loaned securities
occurs, the Portfolio's Board of Directors must terminate the loan
and regain the Portfolio's right to vote the securities.
Foreign Investments. Each Portfolio may invest its assets
in the securities of foreign issuers as described in the
Prospectus. Investments in foreign securities involve certain
risks not ordinarily associated with investments in securities of
domestic issuers. Such risks include currency exchange control
regulations and costs, the possibility of expropriation, seizure,
or nationalization of foreign deposits, less liquidity and volume
and more volatility in foreign securities markets and the impact
of political, social, economic or diplomatic developments or the
adoption of other foreign government restrictions that might
adversely affect the payment of principal and interest on
securities in a Portfolio. If it should become necessary, a
Portfolio might encounter greater difficulties in invoking legal
processes abroad than would be the case in the United States.
Because a Portfolio may invest in securities denominated or quoted
in currencies other than the U.S. dollar, changes in foreign
currency exchange rates may adversely affect the value of
portfolio securities and the appreciation or depreciation of
investments. In addition, there may be less publicly available
information about a non-U.S. company, and non-U.S. companies are
not generally subject to uniform accounting and financial
reporting standards, practices and requirements comparable to
those applicable to U.S. companies. Investments in foreign
securities also may result in higher expenses due to the cost of
converting foreign currency to U.S. dollars, the payment of fixed
brokerage commission on foreign exchanges, the expense of
maintaining securities with foreign custodians, the imposition of
transfer taxes or transaction charges associated with foreign
exchanges or foreign withholding taxes.
For many foreign securities, there are U.S. dollar-
denominated American Depositary Receipts ("ADRs"), which are
traded in the United States on exchanges or over the counter and
are sponsored and issued by domestic banks. ADRs represent the
right to receive securities of foreign issuers deposited in a
domestic bank or a correspondent bank. Because ADRs trade on
United States securities exchanges, they are not generally treated
as foreign securities. Although investment in the form of ADRs or
EDRs (see definition below) facilitates trading in foreign
securities, it does not mitigate the risks associated with
investing in foreign securities. By investing in ADRs rather than
directly in foreign issuers' stock, a Portfolio can avoid currency
risks during the settlement period for either purchases or sales.
In general, there is a large, liquid market in the United States
for many ADRs. The information available for ADRs is subject to
the accounting, auditing and financial reporting standards of the
domestic market or exchange on which they are traded, which
standards are more uniform and more exacting that those to which
many foreign issuers may be subject.
The AIM Capital Appreciation Portfolio, which may not invest
more than 20% of its total assets in foreign securities, includes
ADRs as well as European Depositary Receipts ("EDRs") and other
securities representing underlying securities of foreign issuers
as foreign securities for purposes of this limitation. EDRs,
which sometimes are referred to as Continental Depositary Receipts
("CDRs") are receipts issued in Europe typically by foreign banks
and trust companies that evidence ownership of either foreign or
domestic securities. Generally, ADRs, in registered form, are
designed for use in the United States securities markets, and
EDRs, in bearer form, are designed for use in European securities
markets.
The Smith Barney Large Capitalization Growth Portfolio may
invest in securities of non-U.S. issuers in the form of ADRs,
EDRs, CDRs or similar securities representing interests in the
common stock of foreign issuers. Management intends to limit the
Portfolio's investment in these types of securities to 10% of the
Portfolio's net assets.
Emerging Markets. The Putnam Diversified Income Portfolio,
the GT Global Strategic Income Portfolio, the MFS Total Return
Portfolio and the Smith Barney High Income Portfolio may invest in
debt securities in emerging markets. Investing in securities in
emerging countries may entail greater risks than investing in debt
securities in developed countries. These risks include: (i) less
social, political and economic stability; (ii) the small current
size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity
and in greater price volatility; (iii) certain national policies
which may restrict the each such Portfolio's investment
opportunities, including restrictions on investment in issuers or
industries deemed sensitive to national interests; (iv) foreign
taxation; and (v) the absence of developed structures governing
private or foreign investment or allowing for judicial redress for
injury to private property.
Investors should note that upon the accession to power of
authoritarian regimes, the governments of a number of emerging
market countries previously expropriated large quantities of real
and personal property similar to the property which maybe
represented by the securities purchased by the Portfolios. The
claims of property owners against those governments were never
finally settled. There can be no assurance that any property
represented by securities purchased by Portfolios will not also be
expropriated, nationalized, or otherwise confiscated. If such
confiscation were to occur, the Portfolios could lose a
substantial portion of their investments in such countries. Each
Portfolio's investments would similarly be adversely affected by
exchange control regulation in any of those countries.
Certain countries in which the Portfolios may invest may
have vocal minorities that advocate radical religious or
revolutionary philosophies or support ethnic independence. Any
disturbance on the part of such individuals could carry the
potential for wide-spread destruction or confiscation of property
owned by individuals and entities foreign to such country and
could cause the loss of the Portfolios' investment in those
countries.
Settlement mechanisms in emerging market securities may be
less efficient and reliable than in more developed markets. In
such emerging securities markets there may be share registration
and delivery delays and failures.
U.S. Government Securities. Each Portfolio may invest in
direct obligations of the United States and obligations issued by
U.S. government agencies and instrumentalities. Included among
direct obligations of the United States are Treasury Bills,
Treasury Notes and Treasury Bonds, which differ principally in
terms of their maturities. Included among the securities issued
by U.S. government agencies and instrumentalities are: Securities
that are supported by the full faith and credit of the United
States (such as Government National Mortgage Association
certificates); securities that are supported by the right of the
issuer to borrow from the U.S. Treasury (such as securities of
Federal Home Loan Banks); and securities that are supported by the
credit of the instrumentality (such as Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation bonds).
Zero Coupon, Pay-In-Kind and Delayed Interest Securities.
The Alliance Growth Portfolio, the TBC Managed Income Portfolio,
the Putnam Diversified Income Portfolio, the GT Global Strategic
Income Portfolio and the MFS Total Return Portfolio may invest in
zero coupon, pay-in-kind and delayed interest securities as well
as custodial receipts or certificates underwritten by securities
dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain U.S. government
securities. Zero coupon securities pay no cash income to their
holders until they mature and are issued at substantial discounts
from their value at maturity. When held to maturity, their entire
return comes from the difference between their purchase price and
their maturity value. Pay-in-kind securities pay interest through
the issuance to the holders of additional securities, and delayed
interest securities are securities which do not pay interest for a
specified period. Because interest on zero coupon, pay-in-kind
and delayed interest securities is not paid on a current basis,
the values of securities of this type are subject to greater
fluctuations than are the values of securities that distribute
income regularly and may be more speculative than such securities.
Accordingly, the values of these securities may be highly
volatile as interest rates rise or fall. In addition, the
Portfolio's investments in zero coupon, pay-in-kind and delayed
interest securities will result in special tax consequences.
Although zero coupon securities do not make interest payments, for
tax purposes a portion of the difference between a zero coupon
security's maturity value and its purchase price is taxable income
of the Portfolio each year.
Custodial receipts evidencing specific coupon or principal
payments have the same general attributes as zero coupon U.S.
government securities but are not considered to be U.S. government
securities. Although under the terms of a custodial receipt a
Portfolio is typically authorized to assert its rights directly
against the issuer of the underlying obligation, the Portfolio may
be required to assert through the custodian bank such rights as
may exist against the underlying issuer. Thus, in the event the
underlying issuer fails to pay principal and/or interest when due,
a Portfolio may be subject to delays, expenses and risks that are
greater than those that would have been involved if the Portfolio
had purchased a direct obligation of the issuer. In addition, in
the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an
association taxable as a corporation, instead of a non-taxable
entity, the yield on the underlying security would be reduced in
respect of any taxes paid.
Loan Participations and Other Direct Indebtedness. The
Putnam Diversified Income Portfolio, the GT Global Strategic
Income Portfolio and the MFS Total Return Portfolio may purchase
loan participations and other direct claims against a borrower. In
purchasing a loan participation, a Portfolio acquires some or all
of the interest of a bank or other lending institution in a loan
to a corporate borrower. Many such loans are secured, although
some may be unsecured. Such loans may be in default at the time of
purchase. Loans that are fully secured offer a Portfolio more
protection than an unsecured loan in the event of non-payment of
scheduled interest or principal. However, there is no assurance
that the liquidation of collateral from a secured loan would
satisfy the corporate borrower's obligation, or that the
collateral can be liquidated.
These loans are made generally to finance internal growth,
mergers, acquisitions, stock repurchases, leveraged buy-outs and
other corporate activities. Such loans are typically made by a
syndicate of lending institutions, represented by an agent lending
institution which has negotiated and structured the loan and is
responsible for collecting interest, principal and other amounts
due on its own behalf and on behalf of the others in the
syndicate, and for enforcing its and their other rights against
the borrower. Alternatively, such loans may be structured as a
novation, pursuant to which a Portfolio would assume all of the
rights of the lending institution in a loan, or as an assignment,
pursuant to which the Portfolio would purchase an assignment of a
portion of a lender's interest in a loan either directly from the
lender or through an intermediary. A Portfolio may also purchase
trade or other claims against companies, which generally represent
money owed by the company to a supplier of goods or services.
These claims may also be purchased at a time when the company is
in default.
Certain of the loan participations acquired by a Portfolio
may involve revolving credit facilities or other standby financing
commitments which obligate the Portfolio to pay additional cash on
a certain date or on demand. These commitments may have the effect
of requiring a Portfolio to increase its investment in a company
at a time when it might not otherwise decide to do so (including
at a time when the company's financial condition makes it unlikely
that such amounts will be repaid). To the extent that a Portfolio
is committed to advance additional funds, it will at all times
hold and maintain in a segregated account cash or other high grade
debt obligations in an amount sufficient to meet such commitments.
A Portfolio's ability to receive payments of principal, interest
and other amounts due in connection with these investments will
depend primarily on the financial condition of the borrower. In
selecting the loan participations and other direct investments
which a Portfolio will purchase, management will rely upon its
(and not that of the original lending institution's) own credit
analysis of the borrower. As a Portfolio may be required to rely
upon another lending institution to collect and pass on to it
amounts payable with respect to the loan and to enforce its rights
under the loan, an insolvency, bankruptcy or reorganization of the
lending institution may delay or prevent a Portfolio from
receiving such amounts. In such cases, a Portfolio will evaluate
as well the creditworthiness of the lending institution and will
treat both the borrower and the lending institution as an "issuer"
of the loan participation for purposes of certain investment
restrictions pertaining to the diversification of the Portfolio's
portfolio investments. The highly leveraged nature of many such
loans may make such loans especially vulnerable to adverse changes
in economic or market conditions. Investments in such loans may
involve additional risks to a Portfolio. For example, if a loan is
foreclosed, a Portfolio could become part owner of any collateral,
and would bear the costs and liabilities associated with owning
and disposing of the collateral. In addition, it is conceivable
that under emerging legal theories of lender liability, a
Portfolio could be held liable as a co-lender. It is unclear
whether loans and other forms of direct indebtedness offer
securities law protection against fraud and misrepresentation. In
the absence of definitive regulatory guidance, a Portfolio relies
on management's research in an attempt to avoid situations where
fraud or misrepresentation could adversely affect the Portfolio.
In addition, loan participations and other direct investments may
not be in the form of securities or may be subject to restrictions
on transfer, and only limited opportunities may exist to resell
such instruments. As a result, a Portfolio may be unable to sell
such investments at an opportune time or may have to resell them
at less than fair market value. To the extent that management
determines that any such investments are illiquid, a Portfolio
will include them in the investment limitations described below.
Mortgage-Backed Securities. The TBC Managed Income
Portfolio, the Putnam Diversified Income Portfolio, the Smith
Barney High Income Portfolio and the MFS Total Return Portfolio
may invest in mortgage backed securities, which are securities
representing interests in "pools" of mortgage loans. Monthly
payments of interest and principal by the individual borrowers on
mortgages are "passed through" to the holders of the securities
(net of fees paid to the issuer or guarantor of the securities) as
the mortgages in the underlying mortgage pools are paid off. The
average lives of mortgage pass-throughs are variable when issued
because their average lives depend on prepayment rates. The
average life of these securities is likely to be substantially
shorter than their stated final maturity as a result of
unscheduled principal prepayment. Prepayments on underlying
mortgages result in a loss of anticipated interest, and all or
part of a premium if any has been paid, and the actual yield (or
total return) to a Portfolio may be different than the quoted
yield on the securities. Mortgage prepayments generally increase
with falling interest rates and decrease with rising interest
rates. Like other fixed income securities, when interest rates
rise the value of a mortgage pass-through security generally will
decline; however, when interest rates are declining, the value of
mortgage pass-through securities with prepayment features may not
increase as much as that of other fixed-income securities.
Payment of principal and interest on some mortgage pass-
through securities (but not the market value of the securities
themselves) may be guaranteed by the full faith and credit of the
U.S. government (in the case of securities guaranteed by the
Government National Mortgage Association ("GNMA"); or guaranteed
by agencies or instrumentalities of the U.S. government (such as
the Federal National Mortgage Association ("FNMA") or the Federal
Home Loan Mortgage Corporation, ("FHLMC") which are supported only
by the discretionary authority of the U.S. government to purchase
the agency's obligations). Mortgage pass-through securities may
also be issued by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers).
Some of these mortgage pass-through securities may be supported by
various forms of insurance or guarantees.
Interests in pools of mortgage-related securities differ
from other forms of debt securities, which normally provide for
periodic payment of interest in fixed amounts with principal
payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual
borrowers on their mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are
caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees
or costs which may be incurred. Some mortgage pass-through
securities (such as securities issued by the GNMA) are described
as "modified pass-through." These securities entitle the holder to
receive all interests and principal payments owed on the mortgages
in the mortgage pool, net of certain fees, at the scheduled
payment dates regardless of whether the mortgagor actually makes
the payment.
The principal governmental guarantor of mortgage pass-
through securities is the GNMA. GNMA is a wholly owned U.S.
government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith
and credit of the U.S. government, the timely payment of principal
and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and
mortgage bankers) and backed by pools of FHA-insured or VA-
guaranteed mortgages. These guarantees, however, do not apply to
the market value or yield of mortgage pass-through securities.
GNMA securities are often purchased at a premium over the maturity
value of the underlying mortgages. This premium is not guaranteed
and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are
not backed by the full faith and credit of the U.S. government)
include the FNMA and the FHLMC. FNMA is a government-sponsored
corporation owned entirely by private stockholders. It is subject
to general regulation by the Secretary of Housing and Urban
Development. FNMA purchases conventional residential mortgages
(i.e., mortgages not insured or guaranteed by any governmental
agency) from a list of approved seller/servicers which include
state and federally-chartered savings and loan associations,
mutual savings banks, commercial banks, credit unions and mortgage
bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment by FNMA of principal and interest.
FHLMC is also a government-sponsored corporation owned by
private stockholders. FHLMC issues Participation Certificates
("PCs") which represent interests in conventional mortgages (i.e.,
not federally insured or guaranteed) from FHLMC's national
portfolio. FHLMC guarantees timely payment of interest and
ultimate collection of principal regardless of the status of the
underlying mortgage loans. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers also create pass-
through pools of mortgage loans. Such issuers may also be the
originators and/or servicers of the underlying mortgage-related
securities. Pools created by such non-governmental issuers
generally offer a higher rate of interest than government and
government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools.
However, timely payment of interest and principal of mortgage
loans in these pools may be supported by various forms of
insurance or guarantees, including individual loan, title, pool
and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers
and the mortgage poolers. There can be no assurance that the
private insurers or guarantors can meet their obligations under
the insurance policies or guarantee arrangements. A Portfolio may
also buy mortgage-related securities without insurance or
guarantees.
Other Asset-Backed Securities: The TBC Managed Income
Portfolio, the Putnam Diversified Income Portfolio, the Smith
Barney High Income Portfolio and the MFS Total Return Portfolio
may invest in other asset-backed securities. These securities,
issued by trusts and special purpose corporations, are backed by a
pool of assets, such as credit card and automobile loan
receivables, representing the obligations of a number of different
parties.
Corporate asset-backed securities present certain risks. For
instance, in the case of credit card receivables, these securities
may not have the benefit of any security interest in the related
collateral. Credit card receivables are generally unsecured and
the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such debtors
the right to set off certain amounts owed on the credit cards,
thereby reducing the balance due. Most issuers of automobile
receivables permit the servicers to retain possession of the
underlying obligations. If the servicer were to sell these
obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large
number of vehicles involved in a typical issuance and technical
requirements under state laws, the trustee for the holders of the
automobile receivables may not have a proper security interest in
all of the obligations backing such receivables. Therefore, there
is the possibility that recoveries on repossessed collateral may
not, in some cases, be available to support payments on these
securities.
Corporate asset-backed securities are often backed by a pool
of assets representing the obligations of a number of different
parties. To lessen the effect of failures by obligors to make
payments on underlying assets, the securities may contain elements
of credit support which fall into two categories: (i) liquidity
protection and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the
receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses resulting from ultimate default
ensures payment through insurance policies or letters of credit
obtained by the issuer or sponsor from third parties. A Portfolio
will not pay any additional or separate fees for credit support.
The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit
risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated or failure of the credit support could
adversely affect the return on an instrument in such a security.
Real Estate Investment Trusts ("REITs"). The Alliance
Growth Portfolio may invest without limitations in shares of
REITs. REITs are pooled investment vehicles which invest
primarily in income producing real estate or real estate related
loans or interests. REITs are generally classified as equity
REITs, mortgage REITs or a combination of equity and mortgage
REITs. Equity REITs invest the majority of their assets directly
in real property and derive income primarily from the collection
or rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs invest
the majority of their assets in real estate mortgages and derive
income from the collection of interest payments. REITs are not
taxed on income distributed to shareholders provided they comply
with several requirements of the Internal Revenue Code of 1986, as
amended (the "Code"). Also, the Portfolio will indirectly bear
its proportionate share of expenses incurred by REITs in which the
Portfolio invests. REITs are sensitive to factors such as changes
in real estate values and property taxes, interest rates, cash
flow of underlying real estate assets, overbuilding, and the
management skill and credit worthiness of the issuer. REITs may
also be affected by tax and regulatory requirements.
"Dollar Roll" Transactions. As described in the Prospectus,
the TBC Managed Income Portfolio, the Putnam Diversified Income
Portfolio and the GT Global Strategic Income Portfolio may enter
into "dollar roll" transactions pursuant to which they sell fixed
income securities for delivery in the current month and
simultaneously contract to repurchase substantially similar
securities on a specified future date. The MFS Total Return
Portfolio may enter in similar transactions pursuant to which the
Portfolio sells mortgage-backed securities for delivery in the
future and simultaneously contracts to repurchase substantially
similar securities on a specified future date. During the roll
period, a Portfolio forgoes principal and interest paid on the
securities. The Portfolio is compensated for the lost interest by
the difference between the current sales price and the lower price
for the future purchase (often referred to as the "drop") as well
as by the interest earned on the cash proceeds of the initial
sale. A Portfolio may also be compensated by receipt of a
commitment fee.
Convertible Securities and Synthetic Convertible Securities.
The Smith Barney Large Cap Value Portfolio, the Alliance Growth
Portfolio, the AIM Capital Appreciation Portfolio, the Van Kampen
American Capital Enterprise Portfolio, the Smith Barney
International Equity Portfolio, the Smith Barney Pacific Basin
Portfolio, the TBC Managed Income Portfolio, the Putnam
Diversified Income Portfolio, the GT Global Strategic Income
Portfolio, the Smith Barney High Income Portfolio, the MFS Total
Return Portfolio and the Smith Barney Large Capitalization Growth
Portfolio may invest in convertible securities and synthetic
convertible securities. Convertible securities are fixed-income
securities that may be converted at either a stated price or
stated rate into underlying shares of common stock. Convertible
securities have general characteristics similar to both fixed-
income and equity securities. Although to a lesser extent than
with fixed-income securities generally, the market value of
convertible securities tends to decline as interest rates increase
and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the
market value of the underlying common stocks and, therefore, also
will react to variations in the general market for equity
securities.
Like fixed-income securities, convertible securities are
investments which provide for a stable stream of income with
generally higher yields than common stocks. Of course, like all
fixed-income securities, there can be no assurance of current
income because the issuers of the convertible securities may
default on their obligations. Convertible securities, however,
generally offer lower interest or dividend yields than non-
convertible securities of similar quality because of the potential
for capital appreciation. A convertible security, in addition to
providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the
holder to benefit from increases in the market price of the
underlying common stock. However, there can be no assurance of
capital appreciation because securities prices fluctuate.
Convertible securities generally are subordinated to other
similar but non-convertible securities of the same issuer,
although convertible bonds enjoy seniority in right of payment to
all equity securities, and convertible preferred stock is senior
to common stock of the same issuer. Because of the subordination
feature, however, convertible securities typically have lower
ratings than similar non-convertible securities.
Unlike a convertible security, which is a single security, a
synthetic convertible security is comprised of distinct securities
that together resemble convertible securities in certain respects.
Synthetic convertible securities are typically created by
combining non-convertible bonds or preferred stocks with warrants
or stock call options. The options that will form elements of
synthetic convertible securities may be listed on a securities
exchange or on the National Association of Securities Dealers
Automated Quotation System or may be privately traded. The
components of a synthetic convertible security generally are not
offered as a unit and may be purchased and sold by the Portfolio
at different times. Synthetic convertible securities differ from
convertible securities in certain respects, including that each
component of a synthetic convertible security has a separate
market value and responds differently to market fluctuations.
Investing in synthetic convertible securities involves the
risk normally involved in holding the securities comprising the
synthetic convertible security.
When-Issued, Delayed-delivery and Forward Commitment
Securities. The Smith Barney Large Cap Value Portfolio, the
Alliance Growth Portfolio, the TBC Managed Income Portfolio, the
Putnam Diversified Income Portfolio, the GT Global Strategic
Income Portfolio, the Smith Barney High Income Portfolio, the MFS
Total Return Portfolio and the Smith Barney Large Capitalization
Growth Portfolio may purchase securities on a when-issued basis,
or may purchase or sell securities for delayed delivery. In when-
issued or delayed-delivery transactions, delivery of the
securities occurs beyond normal settlement periods, but no payment
or delivery will be made by a Portfolio prior to the actual
delivery or payment by the other party to the transaction. A
Portfolio will not accrue income with respect to a when-issued or
delayed-delivery security prior to its stated delivery date. A
Portfolio will establish with its custodian a segregated account
consisting of cash, U.S. government securities or other liquid
securities, in an amount equal to the amount of the Portfolio's
when-issued and delayed-delivery purchase commitments. Placing
securities rather than cash in the segregated account may have a
leveraging effect on the Portfolio's net asset value per share;
that is, to the extent that the Portfolio remains substantially
fully invested in securities at the same time that it has
committed to purchase securities on a when-issued or delayed-
delivery basis, greater fluctuations in its net asset value per
share may occur than if it had set aside cash to satisfy its
purchase commitments. Securities purchased on a when-issued or
delayed-delivery basis may expose a Portfolio to risk because the
securities may experience fluctuations in value prior to their
delivery. Purchasing securities on a when-issued or delayed-
delivery basis can involve the additional risk that the yield
available in the market when the delivery takes place may be
higher than that obtained in the transaction itself.
Short Sales Against the Box. The Van Kampen American
Capital Enterprise Portfolio, the GT Global Strategic Income
Portfolio, the AIM Capital Appreciation Portfolio and the Smith
Barney High Income Portfolio may each make short sales of
securities in order to reduce market exposure and/or to increase
its income if, at all times when a short position is open, (the
"AIM Capital Appreciation Portfolio will limit investments such
that nor more than 10% of the value of its nets assets will be
deposited as collateral for such sales at any time) the Portfolio
owns an equal or greater amount of such securities or owns
preferred stock, debt or warrants convertible or exchangeable into
an equal or greater number of the shares of the securities sold
short. Short sales of this kind are referred to as short sales
"against the box." The broker-dealer that executes a short sale
generally invests the cash proceeds of the sale until they are
paid to the Portfolio. Arrangements may be made with the broker-
dealer to obtain a portion of the interest earned by the broker on
the investment of short sale proceeds. The Portfolio will
segregate the securities against which short sales against the box
have been made in a special account with its custodian.
Commercial Bank Obligations. For the purposes of each
Portfolio's investment policies with respect to bank obligations
(such as certificates of deposit ("CDs"), time deposits ("TDs")
and bankers' acceptances), obligations of foreign branches of U.S.
banks and of foreign banks may be general obligations of the
parent bank in addition to the issuing bank, or may be limited by
the terms of a specific obligation and by government regulation.
As with investment in non-U.S. securities in general, investments
in the obligations of foreign branches of U.S. banks and of
foreign banks may subject the Portfolio to investment risks that
are different in some respects from those of investments in
obligations of domestic issuers. Although a Portfolio will
typically acquire obligations issued and supported by the credit
of U.S. or foreign banks having total assets at the time of
purchase in excess of U.S. $1 billion (or the equivalent thereof),
this U.S. $1 billion figure is not a fundamental investment policy
or restriction of the Portfolio. For calculation purposes with
respect to the U.S. $1 billion figure, the assets of a bank will
be deemed to include the assets of its U.S. and non-U.S. branches.
Commercial Paper. With respect to each Portfolio's
investment policies with respect to commercial paper, such
security consists of short-term (usually from 1 to 270 days)
unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand
note (which is a type of commercial paper) represents a direct
borrowing arrangement involving periodically fluctuating rates of
interest under a letter agreement between a commercial paper
issuer and an institutional lender, pursuant to which the lender
may determine to invest varying amounts. Transfer of such notes
is usually restricted by the issuer, and there is no secondary
trading market for such notes. Each Portfolio (except the Smith
Barney Money Market Portfolio), therefore, may not invest in a
master demand note, if as a result more than 15% of the value of
each such Portfolio's total assets would be invested in such notes
and other illiquid securities. The Smith Barney Money Market
Portfolio may not invest in such notes if more than 10% of the
value of its total assets would be invested in such notes and
other illiquid securities.
Options, Futures Contracts and Related Options. The
following information on options, futures contracts and related
options applies to the Portfolios as described in the Prospectus.
In addition, new options and futures contracts and various
combinations thereof continue to be developed and the Portfolios
may invest in any such options and contracts as may be developed
to the extent consistent with its investment objective and
regulatory requirements applicable to investment companies.
Writing Covered Call Options. The Smith Barney Large Cap
Value Portfolio, the Alliance Growth Portfolio, the AIM Capital
Appreciation Portfolio, the Van Kampen American Capital Enterprise
Portfolio, the Smith Barney International Equity Portfolio, the
Smith Barney Pacific Basin Portfolio, the Putnam Diversified
Income Portfolio, the GT Global Strategic Income Portfolio, the
Smith Barney High Income Portfolio and the MFS Total Return
Portfolio may write (sell) covered call options. A Portfolio may
write (sell) covered call options for hedging purposes or to
increase its portfolio return. Covered call options will
generally be written on securities and currencies which, in the
opinion of management, are not expected to make any major price
moves in the near future but which, over the long term, are deemed
to be attractive investments for the Portfolio. (the "AIM Capital
Appreciation Portfolio" will not write covered call options for
speculative purposes).
A call option gives the holder (buyer) the right to purchase
a security or currency at a specified price (the exercise price)
at any time until a certain date (the expiration date). So long
as the obligation of the writer of a call option continues, he may
be assigned an exercise notice by the broker-dealer through whom
such option was sold, requiring him to deliver the underlying
security or currency against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or
such earlier time at which the writer effects a closing purchase
transaction by purchasing an option identical to that previously
sold. Management believes that the writing of covered call
options is less risky than writing uncovered or "naked" options,
which the Portfolios will not do.
Portfolio securities or currencies on which call options may
be written will be purchased solely on the basis of investment
considerations consistent with each Portfolio's investment
objective. When writing a covered call option, the Portfolio, in
return for the premium, gives up the opportunity for profit from a
price increase in the underlying security or currency above the
exercise price and retains the risk of loss should the price of
the security or currency decline. Unlike one who owns securities
or currencies not subject to an option, the Portfolio has no
control over when it may be required to sell the underlying
securities or currencies, since the option may be exercised at any
time prior to the option's expiration. If a call option which the
Portfolio has written expires, the Portfolio will realize a gain
in the amount of the premium; however, such gain may be offset by
a decline in the market value of the underlying security or
currency during the option period. If the call option is
exercised, the Portfolio will realize a gain or loss from the sale
of the underlying security or currency. The security or currency
covering the call option will be maintained in a segregated
account of the Portfolio's custodian. The Portfolio does not
consider a security or currency covered by a call option to be
"pledged" as that term is used in the Portfolio's policy which
limits the pledging or mortgaging of its assets.
The premium the Portfolio receives for writing a call option
is deemed to constitute the market value of an option. The
premium the Portfolio will receive from writing a call option will
reflect, among other things, the current market price of the
underlying security or currency, the relationship of the exercise
price to such market price, the historical price volatility of the
underlying security or currency, and the length of the option
period. In determining whether a particular call option should be
written on a particular security or currency, management will
consider the reasonableness of the anticipated premium and the
likelihood that a liquid secondary market will exist for those
options. The premium received by the Portfolio for writing
covered call options will be recorded as a liability in the
Portfolio's statement of assets and liabilities. This liability
will be adjusted daily to the option's current market value, which
will be calculated as described in "Determination of Net Asset
Value" in the Prospectus. The liability will be extinguished upon
expiration of the option or delivery of the underlying security or
currency upon the exercise of the option. The liability with
respect to a listed option will also be extinguished upon the
purchase of an identical option in a closing transaction.
Closing transactions will be effected in order to realize a
profit on an outstanding call option, to prevent an underlying
security or currency from being called, or to permit the sale of
the underlying security or currency. Furthermore, effecting a
closing transaction will permit the Portfolio to write another
call option on the underlying security or currency with either a
different exercise price, expiration date or both. If the
Portfolio desires to sell a particular security or currency from
its portfolio on which it has written a call option or purchases a
put option, it will seek to effect a closing transaction prior to,
or concurrently with, the sale of the security or currency. There
is no assurance that the Portfolio will be able to effect such
closing transactions at a favorable price. If the Portfolio
cannot enter into such a transaction, it may be required to hold a
security or currency that it might otherwise have sold, in which
case it would continue to be a market risk with respect to the
security or currency.
Each Portfolio will pay transaction costs in connection with
the writing of options and in entering into closing purchase
contracts. Transaction costs relating to options activity are
normally higher than those applicable to purchases and sales of
portfolio securities.
Call options written by each Portfolio will normally have
expiration dates of less than nine months from the date written.
The exercise price of the options may be below, equal to or above
the current market values of the underlying securities or
currencies at the time the options are written. From time to
time, the Portfolio may purchase an underlying security or
currency for delivery in accordance with the exercise of an
option, rather than delivering such security or currency from its
portfolio. In such cases, additional costs will be incurred.
Each Portfolio will realize a profit or loss from a closing
purchase transaction if the cost of the transaction is less or
more, respectively, than the premium received from the writing of
the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the
underlying security or currency, any loss resulting from the
repurchase of a call option is likely to be offset in whole or in
part by appreciation of the underlying security or currency owned
by the Portfolio.
Purchasing Put Options. The Smith Barney Large Cap Value
Portfolio, the Alliance Growth Portfolio, the Van Kampen American
Capital Enterprise Portfolio, the Smith Barney International
Equity Portfolio, the Smith Barney Pacific Basin Portfolio, the
Putnam Diversified Income Portfolio, the GT Global Strategic
Income Portfolio, the Smith Barney High Income Portfolio and the
MFS Total Return Portfolio may purchase put options. As the
holder of a put option, the Portfolio has the right to sell the
underlying security or currency at the exercise price at any time
during the option period. The Portfolio may enter into closing
sale transactions with respect to such options, exercise them or
permit them to expire.
Each Portfolio may purchase a put option on an underlying
security or currency (a "protective put") owned by the Portfolio
as a hedging technique in order to protect against an anticipated
decline in the value of the security or currency. Such hedge
protection is provided only during the life of the put option when
the Portfolio, as the holder of the put option, is able to sell
the underlying security or currency at the put exercise price
regardless of any decline in the underlying security's market
price or currency's exchange value. For example, a put option may
be purchased in order to protect unrealized appreciation of a
security or currency when management deems it desirable to
continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any
transaction costs would reduce any capital gain otherwise
available for distribution when the security or currency is
eventually sold.
Each Portfolio may also purchase put options at a time when
the Portfolio does not own the underlying security or currency.
By purchasing put options on a security or currency it does not
own, the Portfolio seeks to benefit from a decline in the market
price of the underlying security or currency. If the put option
is not sold when it has remaining value, and if the market price
of the underlying security or currency remains equal to or greater
than the exercise price during the life of the put option, the
Portfolio will lose its entire investment in the put option. In
order for the purchase of a put option to be profitable, the
market price of the underlying security or currency must decline
sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.
The premium paid by a Portfolio when purchasing a put option
will be recorded as an asset in the Portfolio's statement of
assets and liabilities. This asset will be adjusted daily to the
option's current market value, which will be calculated as
described in "Determination of Net Asset Value" in the Prospectus.
The asset will be extinguished upon expiration of the option or
the delivery of the underlying security or currency upon the
exercise of the option. The asset with respect to a listed option
will also be extinguished upon the writing of an identical option
in a closing transaction.
Purchasing Call Options. The Smith Barney Large Cap Value
Portfolio, the Alliance Growth Portfolio, the Van Kampen American
Capital Enterprise Portfolio, the Smith Barney International
Equity Portfolio, the Smith Barney Pacific Basin Portfolio, the
Putnam Diversified Income Portfolio, the GT Global Strategic
Income Portfolio, the Smith Barney High Income Portfolio and the
MFS Total Return Portfolio may purchase call options. As the
holder of a call option, a Portfolio has the right to purchase the
underlying security or currency at the exercise price at any time
during the option period. The Portfolio may enter into closing
sale transactions with respect to such options, exercise them or
permit them to expire. Call options may be purchased by the
Portfolio for the purpose of acquiring the underlying security or
currency for its portfolio. Utilized in this fashion, the
purchase of call options enables the Portfolio to acquire the
security or currency at the exercise price of the call option plus
the premium paid. At times the net cost of acquiring the security
or currency in this manner may be less than the cost of acquiring
the security or currency directly. This technique may also be
useful to the Portfolio in purchasing a large block of securities
that would be more difficult to acquire by direct market
purchases. So long as it holds such a call option rather than the
underlying security or currency itself, the Portfolio is partially
protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the
call option to expire, incurring a loss only to the extent of the
premium paid for the option.
A Portfolio may also purchase call options on underlying
securities or currencies it owns in order to protect unrealized
gains on call options previously written by it. A call option
would be purchased for this purpose where tax considerations make
it inadvisable to realize such gains through a closing purchase
transaction. Call options may also be purchased at times to avoid
realizing losses that would result in a reduction of the
Portfolio's current return. It is a policy of the GT Global
Strategic Income Portfolio that aggregate premiums paid for put
and call options will not exceed 5% of the Portfolio's total
assets at the time of purchase.
Interest Rate, Securities Index, Financial Futures and
Currency Futures Contracts. The Alliance Growth Portfolio, the
Smith Barney International Equity Portfolio, the Smith Barney
Pacific Basin Portfolio, the Putnam Diversified Income Portfolio,
the GT Global Strategic Income Portfolio, the Smith Barney High
Income Portfolio and the MFS Total Return Portfolio may enter into
interest rate, securities index, financial futures and currency
futures contracts ("Futures" or "Futures Contracts"). The AIM
Capital Appreciation Portfolio may enter into stock index futures
contracts and the Van Kampen American Capital Enterprise Portfolio
may enter in stock index and interest rate futures contracts. A
Portfolio may enter into Futures Contracts as a hedge against
changes in prevailing levels of interest rates or currency
exchange rates in order to establish more definitely the effective
return on securities or currencies held or committed to be
acquired by the Portfolio. A Portfolio's hedging may include
holding Futures as an offset against anticipated changes in
interest or currency exchange rates. A Portfolio may also enter
into Futures Contracts based on financial indices including any
index of U.S. government securities, foreign government securities
or corporate debt securities.
A Futures Contract provides for the future sale by one party
and purchase by another party of a specified amount of a specific
financial instrument or currency for a specified price at a
designated date, time and place. The purchaser of a Futures
Contract on an index agrees to take or make delivery of an amount
of cash equal to the difference between a specified dollar
multiple of the value of the index on the expiration date of the
contract ("current contract value") and the price at which the
contract was originally struck. No physical delivery of the debt
securities underlying the index is made. Brokerage fees are
incurred when a Futures Contract is bought or sold, and margin
deposits must be maintained at all times that the Futures Contract
is outstanding.
The principal interest rate and currency Futures exchanges
in the United States are the Board of Trade of the City of Chicago
and the Chicago Mercantile Exchange. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the
Commodity Futures Trading Commission. Futures are traded in
London at the London International Financial Futures Exchange.
Although techniques other than sales and purchases of
Futures Contracts could be used to reduce the Portfolio's exposure
to interest rate and currency exchange rate fluctuations, the
Portfolio may be able to hedge its exposure more effectively and
at a lower cost through using Futures Contracts.
Although Futures Contracts typically require future delivery
of and payment for financial instruments or currencies, Futures
Contracts are usually closed out before the delivery date.
Closing out an open Futures Contract sale or purchase is effected
by entering into an offsetting Futures Contract purchase or sale,
respectively, for the same aggregate amount of the identical
financial instrument or currency and the same delivery date. If
the offsetting purchase price is less than the original sale
price, the Portfolio realizes a gain; if it is more, the Portfolio
realizes a loss. Conversely, if the offsetting sale price is more
than the original purchase price, the Portfolio realizes a gain;
if it is less, the Portfolio realizes a loss. The transaction
costs must also be included in these calculations. There can be
no assurance, however, that the Portfolio will be able to enter
into an offsetting transaction with respect to a particular
Futures Contract at a particular time. If the Portfolio is not
able to enter into an offsetting transaction, the Portfolio will
continue to be required to maintain the margin deposits of the
underlying financial instrument or currency on the relevant
delivery date.
As an example of an offsetting transaction, the contractual
obligations arising from the sale of one Futures Contract of
September Treasury Bills on an exchange may be fulfilled at any
time before delivery under the Futures Contract is required (i.e.,
on a specific date in September, the "delivery month") by the
purchase of another Futures Contract of September Treasury Bills
on the same exchange. In such instance the difference between the
price at which the Futures Contract was sold and the price paid
for the offsetting purchase, after allowance for transaction
costs, represents the profit or loss to the Portfolio.
Persons who trade in Futures Contracts may be broadly
classified as "hedgers" and "speculators." Hedgers, whose
business activity involves investment or other commitment in
securities or other obligations, use the Futures markets to offset
unfavorable changes in value that may occur because of
fluctuations in the value of the securities and obligations held
or committed to be acquired by them or fluctuations in the value
of the currency in which the securities or obligations are
denominated. Debtors and other obligors may also hedge the
interest cost of their obligations. The speculator, like the
hedger, generally expects neither to deliver nor to receive the
financial instrument underlying the Futures Contract, but, unlike
the hedger, hopes to profit from fluctuations in prevailing
interest rates or currency exchange rates.
Each Portfolio's Futures transactions will be entered into
for traditional hedging purposes; that is, Futures Contracts will
be sold to protect against a decline in the price of securities or
currencies that the Portfolio owns, or Futures Contracts will be
purchased to protect a Portfolio against an increase in the price
of securities or currencies it has committed to purchase or
expects to purchase. The Smith Barney International Equity
Portfolio, the Smith Barney Pacific Basin Portfolio, the MFS Total
Return Portfolio and the Smith Barney High Income Portfolio may
each also enter into Futures transactions for non-hedging
purposes, provided that the aggregate initial margin and premiums
on such non-hedging positions does not exceed 5% of the
liquidation value of a Portfolio's assets.
"Margin" with respect to Futures Contracts is the amount of
funds that must be deposited by the Portfolio with a broker in
order to initiate Futures trading and to maintain the Portfolio's
open positions in Futures Contracts. A margin deposit made when
the Futures Contract is entered into ("initial margin") is
intended to assure the Portfolio's performance of the Futures
Contract. The margin required for a particular Futures Contract
is set by the exchange on which the Futures Contract is traded,
and may be significantly modified from time to time by the
exchange during the term of the Futures Contract. Futures
Contracts are customarily purchased and sold on margins, which may
be 5% or less of the value of the Futures Contract being traded.
If the price of an open Futures Contract changes (by
increase in the case of a sale or by decrease in the case of a
purchase) so that the loss on the Futures Contract reaches a point
at which the margin on deposit does not satisfy margin
requirements, the broker will require an increase in the margin
deposit ("variation margin"). If, however, the value of a
position increases because of favorable price changes in the
Futures Contract so that the margin deposit exceeds the required
margin, it is anticipated that the broker will pay the excess to
the Portfolio. In computing daily net asset values, the Portfolio
will mark to market the current value of its open Futures
Contracts. Each Portfolio expects to earn interest income on its
margin deposits.
Risks of Using Futures Contracts. The prices of Futures
Contracts are volatile and are influenced, among other things, by
actual and anticipated changes in interest rates, which in turn
are affected by fiscal and monetary policies and national and
international political and economic events.
At best, the correlation between changes in prices of
Futures Contracts and of the securities or currencies being hedged
can be only approximate. The degree of imperfection of
correlation depends upon circumstances such as: variations in
speculative market demand for Futures and for debt securities or
currencies, including technical influences in Futures trading; and
differences between the financial instruments being hedged and the
instruments underlying the standard Futures Contracts available
for trading, with respect to interest rate levels, maturities, and
creditworthiness of issuers. A decision of whether, when, and how
to hedge involves skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of unexpected
market behavior or interest rate trends.
Because of the low margin deposits required, Futures trading
involves an extremely high degree of leverage. As a result, a
relatively small price movement in a Futures Contract may result
in immediate and substantial loss, as well as gain, to the
investor. For example, if at the time of purchase, 10% of the
value of the Futures Contract is deposited as margin, a subsequent
10% decrease in the value of the Futures Contract would result in
a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15%
decrease would result in a loss equal to 150% of the original
margin deposit, if the Futures Contract were closed out. Thus, a
purchase or sale of a Futures Contract may result in losses in
excess of the amount invested in the Futures Contract. The
Portfolio, however, would presumably have sustained comparable
losses if, instead of the Futures Contract, it had invested in the
underlying financial instrument and sold it after the decline.
Where the International Equity Portfolio enters into Futures
transactions for non-hedging purposes, it will be subject to
greater risks and could sustain losses which are net offset by
gains on other portfolio assets.
Furthermore, in the case of a Futures Contract purchase, in
order to be certain that the Portfolio has sufficient assets to
satisfy its obligations under a Futures Contract, the Portfolio
sets aside and commits to back the Futures Contract an amount of
cash, U.S. government securities and other liquid, high-grade debt
securities equal in value to the current value of the underlying
instrument less the margin deposit. In the case of a Futures
Contract sale, a Portfolio will either set aside amounts as in the
case of a Futures Contract purchase, own the security underlying
the Contract, or hold a call option permitting the Portfolio to
purchase the same Futures Contract at a price no higher than the
Contract price. Assets used as cover cannot be sold while the
position in the corresponding Futures Contract is open, unless
they are replaced with similar assets. As a result, the
commitment of a significant portion of the Portfolio's assets to
cover could impede portfolio management or the Portfolio's ability
to meet redemption requests or other current obligations.
Most United States Futures exchanges limit the amount of
fluctuation permitted in Futures Contract prices during a single
trading day. The daily limit establishes the maximum amount that
the price of a Futures Contract may vary either up or down from
the previous day's settlement price at the end of a trading
session. Once the daily limit has been reached in a particular
type of Futures Contract, no trades may be made on that day at a
price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures Contract prices
have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby
preventing prompt liquidation of Futures positions and subjecting
some Futures traders to substantial losses.
Options on Futures Contracts. The Alliance Growth
Portfolio, the Van Kampen American Capital Enterprise Portfolio,
the Smith Barney International Equity Portfolio, the Smith Barney
Pacific Basin Portfolio, the Putnam Diversified Income Portfolio,
the GT Global Strategic Income Portfolio, the Smith Barney High
Income Portfolio and the MFS Total Return Portfolio may enter into
options on Futures Contracts. Options on Futures Contracts are
similar to options on securities or currencies except that options
on Futures Contracts give the purchaser the right, in return for
the premium paid, to assume a position in a Futures Contract (a
long position if the option is a call and a short position if the
option is a put), rather than to purchase or sell the Futures
Contract, at a specified exercise price at any time during the
period of the option. Upon exercise of the option, the delivery
of the Futures position by the writer of the option to the holder
of the option will be accompanied by delivery of the accumulated
balance in the writer's Futures margin account which represents
the amount by which the market price of the Futures Contract, at
exercise, exceeds (in the case of a call) or is less than (in the
case of a put) the exercise price of the option on the Futures
Contract. If an option is exercised on the last trading day prior
to the expiration date of the option, the settlement will be made
entirely in cash equal to the difference between the exercise
price of the option and the closing level of the securities or
currencies upon which the Futures Contracts are based on the
expiration date. Purchasers of options who fail to exercise their
options prior to the exercise date suffer a loss of the premium
paid.
As an alternative to purchasing call and put options on
Futures, each Portfolio may purchase call and put options on the
underlying securities or currencies themselves (see "Purchasing
Put Options" and "Purchasing Call Options" above). Such options
would be used in a manner identical to the use of options on
Futures Contracts.
To reduce or eliminate the leverage then employed by the
Portfolio or to reduce or eliminate the hedge position then
currently held by the Portfolio, the Portfolio may seek to close
out an option position by selling an option covering the same
securities or currency and having the same exercise price and
expiration date. The ability to establish and close out positions
on options on Futures Contracts is subject to the existence of a
liquid market. It is not certain that this market will exist at
any specific time.
In order to assure that the Portfolios will not be deemed to
be "commodity pools" for purposes of the Commodity Exchange Act,
regulations of the Commodity Futures Trading Commission ("CFTC")
require that each Portfolio enter into transactions in Futures
Contracts and options on Futures Contracts only (i) for bona fide
hedging purposes (as defined in CFTC regulations), or (ii) for
non-hedging purposes, provided that the aggregate initial margin
and premiums on such non-hedging positions does not exceed 5% of
the liquidation value of the Portfolio's assets.
Forward Currency Contracts and Options on Currency. The
Alliance Growth Portfolio, the Smith Barney International Equity
Portfolio, the Smith Barney Pacific Basin Portfolio, the Putnam
Diversified Income Portfolio, the GT Global Strategic Income
Portfolio, the Smith Barney High Income Portfolio and the MFS
Total Return Portfolio may enter into forward currency contracts
and options on currency. A forward currency contract is an
obligation to purchase or sell a currency against another currency
at a future date and price as agreed upon by the parties. A
Portfolio may either accept or make delivery of the currency at
the maturity of the forward contract or, prior to maturity, enter
into a closing transaction involving the purchase or sale of an
offsetting contract. A Portfolio engages in forward currency
transactions in anticipation of, or to protect itself against,
fluctuations in exchange rates. The Portfolio might sell a
particular foreign currency forward, for example, when it holds
bonds denominated in that currency but anticipates, and seeks to
be protected against, decline in the currency against the U.S.
dollar. Similarly, the Portfolio might sell the U.S. dollar
forward when it holds bonds denominated in U.S. dollars but
anticipates, and seeks to be protected against, a decline in the
U.S. dollar relative to other currencies. Further, the Portfolio
might purchase a currency forward to "lock in" the price of
securities denominated in that currency which it anticipates
purchasing.
The matching of the increase in value of a forward contract
and the decline in the U.S. dollar equivalent value of the foreign
currency denominated asset that is the subject of the hedge
generally will not be precise. In addition, the Portfolio may not
always be able to enter into foreign currency forward contracts at
attractive prices and this will limit the Portfolio's ability to
use such contract to hedge or cross-hedge its assets. Also, with
regard to the Portfolio's use of cross-hedges, there can be no
assurance that historical correlations between the movement of
certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies
underlying the Portfolio's cross-hedges and the movements in the
exchange rates of the foreign currencies in which the Portfolio's
assets that are the subject of such cross-hedges are denominated.
The MFS Total Return Portfolio may also enter into forward
currency contracts for non-hedging purposes, subject to applicable
law.
Forward contracts are traded in an interbank market
conducted directly between currency traders (usually large
commercial banks) and their customers. A forward contract
generally has no deposit requirement and is consummated without
payment of any commission. A Portfolio, however, may enter into
forward contracts with deposit requirements or commissions.
A put option on currency gives the Portfolio, as purchaser,
the right (but not the obligation) to sell a specified amount of
currency at the exercise price until the expiration of the option.
A call option gives the Portfolio, as purchaser, the right (but
not the obligation) to purchase a specified amount of currency at
the exercise price until its expiration. The Portfolio might
purchase a currency put option, for example, to protect itself
during the contract period against a decline in the value of a
currency in which it holds or anticipates holding securities. If
the currency's value should decline, the loss in currency value
should be offset, in whole or in part, by an increase in the value
of the put. If the value of the currency instead should rise, any
gain to the Portfolio would be reduced by the premium it had paid
for the put option. A currency call option might be purchased,
for example, in anticipation of, or to protect against, a rise in
the value of a currency in which the Portfolio anticipates
purchasing securities.
A Portfolio's ability to establish and close out positions
in foreign currency options is subject to the existence of a
liquid market. There can be no assurance that a liquid market
will exist for a particular option at any specific time. In
addition, options on foreign currencies are affected by all of
those factors that influence foreign exchange rates and
investments generally.
A position in an exchange-listed option may be closed out
only on an exchange that provides a secondary market for identical
options. Exchange markets for options on foreign currencies exist
but are relatively new, and the ability to establish and close out
positions on the exchanges is subject to maintenance of a liquid
secondary market. Closing transactions may be effected with
respect to options traded in the over-the-counter ("OTC") markets
(currently the primary markets for options on foreign currencies)
only by negotiating directly with the other party to the option
contract or in a secondary market for the option if such market
exists. Although the Portfolio intends to purchase only those
options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market will exist
for any particular option at any specific time. In such event, it
may not be possible to effect closing transactions with respect to
certain options, with the result that the Portfolio would have to
exercise those options which it has purchased in order to realize
any profit. Any OTC options acquired by each Portfolio and assets
used as "cover" for OTC options written by the Portfolio would be
considered illiquid and subject to each Portfolio's limitation on
investing in such securities.
Options on Securities Indices. The Alliance Growth
Portfolio, the Van Kampen American Capital Enterprise Portfolio,
the Smith Barney International Equity Portfolio, the Smith Barney
Pacific Basin Portfolio, the Putnam Diversified Income Portfolio,
the GT Global Strategic Income Portfolio, the Smith Barney High
Income Portfolio and the MFS Total Return Portfolio may enter into
options on securities indices. Through the writing or purchase of
index options, a Portfolio can achieve many of the same objectives
as through the use of options on individual securities. Options
on securities indices are similar to options on a security except
that, rather than the right to take or make delivery of a security
at a specified price, an option on a securities index gives the
holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call,
or less than, in the case of a put, the exercise price of the
option. This amount of cash is equal to the difference between
the closing price of the index and the exercise price of the
option. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Unlike options
on securities (which require, upon exercise, delivery of the
underlying security), settlements of options on securities
indices, upon exercise thereof, are in cash, and the gain or loss
of an option on an index depends on price movements in the market
generally (or in a particular industry or segment of the market on
which the underlying index base) rather than price movements in
individual securities, as is the case with respect to options on
securities.
When the Portfolio writes an option on a securities index,
it will be required to deposit with its custodian eligible
securities equal in value to 100% of the exercise price in the
case of a put, or the contract's value in the case of a call. In
addition, where the Portfolio writes a call option on a securities
index at a time when the contract value exceeds the exercise
price, the Portfolio will segregate, until the option expires or
is closed out, cash or cash equivalents equal in value to such
excess.
Options on securities and index options involve risks
similar to those risks relating to transactions in financial
futures described above. Also, an option purchased by the
Portfolio may expire worthless, in which case the Portfolio would
lose the premium paid therefor.
The staff of the Securities and Exchange Commission ("SEC")
has taken the position that purchased over-the-counter options and
assets used to cover written over-the-counter options are illiquid
and, therefore, together with other illiquid securities cannot,
exceed a certain percentage of a Portfolio's assets (the "SEC
illiquidity ceiling"). Although management disagrees with this
position, it intends to limit each Portfolio's writing of over-
the-counter options in accordance with the following procedure.
Except as provided below, each Portfolio intends to write over-
the-counter options only with primary U.S. government securities
dealers recognized by the Federal Reserve Bank of New York. Also,
the contracts which each Portfolio has in place with such primary
dealers will provide that each Portfolio has the absolute right to
repurchase an option it writes at any time at a price which
represents the fair market value, as determined in good faith
through negotiation between the parties, but which in no event
will exceed a price determined pursuant to a formula in the
contract. Although the specific formula may vary between
contracts with different primary dealers, the formula will
generally be based on a multiple of the premium received by a
Portfolio for writing the option, plus the amount, if any, of the
option's intrinsic value (i.e., the amount that the option is in-
the-money). The formula may also include a factor to account for
the difference between the price of the security and the strike
price of the option if the option is written out-of-money. Each
Portfolio will treat all or a part of the formula price as
illiquid for purposes of the SEC illiquidity ceiling. Each
Portfolio may also write over-the-counter options with non-primary
dealers, including foreign dealers, and will treat the assets used
to cover these options as illiquid for purposes of such SEC
illiquidity ceiling.
Yield Curve Options. The MFS Total Return Portfolio may
also enter into options on the "spread," or yield differential,
between two fixed income securities, in transactions referred to
as "yield curve" options. In contrast to other types of options,
a yield curve option is based on the difference between the yields
of designated securities, rather than the prices of the individual
securities, and is settled through cash payments. Accordingly, a
yield curve option is profitable to the holder if this
differential widens (in the case of a call) or narrows (in the
case of a put), regardless of whether the yields of the underlying
securities increase or decrease.
Yield curve options may be used for the same purposes as
other options on securities. Specifically, the Portfolio may
purchase or write such options for hedging purposes. For example,
the Portfolio may purchase a call option on the yield spread
between two securities, if it owns one of the securities and
anticipates purchasing the other security and wants to hedge
against an adverse change in the yield spread between the two
securities. The Portfolio may also purchase or write yield curve
options for other than hedging purposes (i.e., in an effort to
increase its current income) if, in the judgment of management,
the Portfolio will be able to profit from movements in the spread
between the yields of the underlying securities. The trading of
yield curve options is subject to all of the risks associated with
the trading of other types of options. In addition, however, such
options present risk of loss even if the yield of one of the
underlying securities remains constant, if the spread moves in a
direction or to an extent which was not anticipated. Yield curve
options written by the Portfolio will be "covered". A call (or
put) option is covered if the Portfolio holds another call (or
put) option on the spread between the same two securities and
maintains in a segregated account with its custodian cash or cash
equivalents sufficient to cover the Portfolio's net liability
under the two options. Therefore, the Portfolio's liability for
such a covered option is generally limited to the difference
between the amount of the Portfolio's liability under the option
written by the Portfolio less the value of the option held by the
Portfolio. Yield curve options may also be covered in such other
manner as may be in accordance with the requirements of the
counterparty with which the option is traded and applicable laws
and regulations. Yield curve options are traded over-the-counter
and because they have been only recently introduced, established
trading markets for these securities have not yet developed.
Swaps and Swap Related Products. Among the hedging
transactions into which the Smith Barney International Equity
Portfolio, the Smith Barney Pacific Basin Portfolio, the GT Global
Strategic Income Portfolio, the Smith Barney High Income Portfolio
and the MFS Total Return Portfolio may enter are interest rate
swaps, currency swaps and other types of swap agreements such as
caps, collars and floors. Each Portfolio expects to enter into
these transactions primarily to preserve a return or spread on a
particular investment or portion of its portfolio or to protect
against any increase in the price of securities the Portfolio
anticipates purchasing at a later date. Each Portfolio intends to
use these transactions as a hedge and not as a speculative
investment. Swap agreements may be individually negotiated and
structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap
agreements may increase or decrease a Portfolio's exposure to long
or short-term interest rates (in the U.S. or abroad), foreign
currency values, mortgage securities, corporate borrowing rates,
or other factors such as securities prices or inflation rates.
Swap agreements can take many different forms and are known by a
variety of names. A Portfolio is not limited to any particular
form or variety of swap agreement if management determines it is
consistent with the Portfolio's investment objective and policies.
A Portfolio may enter into swaps, caps and floors on either
an asset-based or liability-based basis, depending on whether it
is hedging its assets or its liabilities, and will usually enter
into interest rate swaps on a net basis, i.e., the two payment
streams are netted but, with the Portfolio receiving or paying, as
the case may be, only the net amount of the two payments.
Inasmuch as these hedging transactions are entered into for good
faith hedging purposes, management and the Portfolios believe such
obligations do not constitute senior securities and, accordingly
will not treat them as being subject to its borrowing
restrictions. The net amount of the excess, if any, of a
Portfolio's obligations over its entitlements with respect to each
interest rate swap will be accrued on a daily basis and an amount
of cash or liquid securities having an aggregate net asset value
at least equal to the accrued excess will be maintained in a
segregated account by its custodian. If a Portfolio enters into a
swap agreement on other than a net basis, it will maintain cash or
liquid assets with a value equal to the full amount of such
Portfolio's accrued obligations under the agreement. The
Portfolios will not enter into any swap, cap, floor or collar
transaction unless the unsecured senior debt or the claims-paying
ability of the other party thereto is rated in the highest rating
category of at least one nationally recognized rating organization
at the time of entering into such transaction. The most
significant factor in the performance of swaps, caps, floors and
collars is the change in specific interest rate, currency or other
factor that determines the amount of payments to be made under the
arrangement. If management is incorrect in its forecasts of such
factors, the investment performance of the Portfolio would be less
than what it would have been if these investment techniques had
not been used. If a swap agreement calls for payments by the
Portfolio the Portfolio must be prepared to make such payments
when due. In addition, if the counterparty's creditworthiness
declined, the value of the swap agreement would be likely to
decline, potentially resulting in losses. If the counterparty
defaults, the Portfolio's risk of loss consists of the net amount
of payments that the Portfolio is contractually entitled to
receive. The Portfolio anticipates that it will be able to
eliminate or reduce its exposure under these arrangements by
assignment or other disposition or by entering into an offsetting
agreement with the same or another counterparty. The swap market
has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and
as agents utilizing swap documentation. As a result, the swap
market has become relatively liquid. Caps and floors are more
recent innovations for which standardized documentation has not
yet been developed and, accordingly, they are less liquid than
swaps.
Additional Policies
Options (Smith Barney Large Cap Value Portfolio). Although
the Smith Barney Large Cap Value Portfolio may buy or sell covered
put and covered call options up to 15% of its net assets, provided
such options are listed on a national securities exchange, the
Portfolio does not currently intend to commit more than 5% of its
assets to be invested in or subject to put and call options.
Selection of Debt Investments (GT Global Strategic Income
Portfolio). In determining the appropriate distribution of
investments among various countries and geographic regions for the
Portfolio, management ordinarily considers the following factors:
prospects for relative economic growth among the different
countries in which the Portfolio may invest; expected levels of
inflation; government policies influencing business conditions;
the outlook for currency relationships; and the range of the
individual investment opportunities available to international
investors.
Although the Portfolio values assets daily in terms of U.S.
dollars, the Portfolio does not intend to convert holdings of
foreign currencies into U.S. dollars on a daily basis. The
Portfolio will do so from time to time, and investors should be
aware of the costs of currency conversion. Although foreign
exchange dealers do not charge a fee for conversion, they do
realize a profit based on the difference ("spread") between the
prices at which they are buying and selling various currencies.
Thus, a dealer may offer to sell a foreign currency to the
Portfolio at one rate, while offering a lesser rate of exchange
should the Portfolio desire to sell that currency to the dealer.
The Portfolio may invest in the following types of money
market instruments (i.e., debt instruments with less than
12 months remaining until maturity) denominated in U.S. dollars or
other currencies: (a) obligations issued or guaranteed by the U.S.
or foreign governments, their agencies, instrumentalities or
municipalities; (b) obligations of international organizations
designed or supported by multiple foreign governmental entities to
promote economic reconstruction or development; (c) finance
company obligations, corporate commercial paper and other short-
term commercial obligations: (d) bank obligations (including CDs,
TDs, demand deposits and bankers' acceptances) subject to the
restriction that the Portfolio may not invest more than 25% of its
total assets in bank securities; (e) repurchase agreements with
respect to all the foregoing; and (f) other substantially similar
short-term debt securities with comparable characteristics.
Investments in Other Investment Companies (GT Global
Strategic Income Portfolio). With respect to certain countries,
investments by the Portfolio presently may be made only by
acquiring shares of other investment companies with local
governmental approval to invest in those countries. The Portfolio
may invest in the securities of closed-end investment companies
within the limits of the 1940 Act. These limitations currently
provide that, in general, the Portfolio may purchase shares of a
closed-end investment company unless (a) such a purchase would
cause the Portfolio to own in the aggregate more than 3 percent of
the total outstanding voting securities of the investment company
or (b) such a purchase would cause the Portfolio to have more than
5 percent of its total assets invested in the investment company
or more than 10 percent of its aggregate assets invested in an
aggregate of all such investment companies. Investment in such
investment companies may also involve the payment of substantial
premiums above the value of such companies' portfolio securities.
The Portfolio does not intend to invest in such vehicles or funds
unless, in the judgment of management, the potential benefits of
such investments justify the payment of any applicable premiums.
The yield of such securities will be reduced by operating expenses
of such companies including payments to the investment managers of
those investment companies. At such time as direct investment in
these countries is allowed, the Portfolio will anticipate
investing directly in these markets.
Samurai and Yankee Bonds (GT Global Strategic Income
Portfolio and Putnam Diversified Income Portfolio). Subject to
their fundamental investment restrictions, these Portfolios may
invest in yen-denominated bonds sold in Japan by non-Japanese
issuers ("Samurai bonds"), and may invest in dollar-denominated
bonds sold in the United States by non-U.S. issuers ("Yankee
bonds"). It is the policy of the Portfolios to invest in Samurai
or Yankee bond issues only after taking into account
considerations of quality and liquidity, as well as yield.
Warrants or Rights (GT Global Strategic Income Portfolio,
AIM Capital Appreciation Portfolio and the Smith Barney Large
Capitalization Growth Portfolio). Warrants or rights may be
acquired by each Portfolio in connection with other securities or
separately and provide the Portfolio with the right to purchase at
a later date other securities of the issuer. Each Portfolio has
undertaken that its investment in warrants or rights, valued at
the lower of cost or market, will not exceed 5% of the value of
its net assets and not more than 2% of such assets will be
invested in warrants and rights which are not listed on the
American or New York Stock Exchange. Warrants or rights acquired
by a Portfolio in units or attached to securities will be deemed
to be without value for purposes of this restriction.
Special Situations (AIM Capital Appreciation Portfolio).
Although AIM Capital Appreciation Portfolio does not currently
intend to do so, it may invest in "special situations." A special
situation arises when, in the opinion of management, the
securities of a particular company will, within a reasonably
estimable period of time, be accorded market recognition at an
appreciated value solely by reason of a development applicable to
that company, and regardless of general business conditions or
movements of the market as a whole. Developments creating special
situations might include, among others: liquidations,
reorganizations, recapitalizations, mergers, material litigation,
technical breakthroughs and new management or management policies.
Although large and well known companies may be involved, special
situations more often involve comparatively small or unseasoned
companies. Investments in unseasoned companies and special
situations often involve much greater risk than is inherent in
ordinary investments securities. The Portfolio will not, however,
purchase securities of any company with a record of less than
three year's continuous operation (including that of predecessors)
if such purchase cause the Portfolio's investment in all such
companies, taken at cost, to exceed 5% of the value of its total
assets.
INVESTMENT RESTRICTIONS
The Portfolios have adopted the following restrictions and
fundamental policies that cannot be changed unless Sections
8(b)(1) and 13(a) of the 1940 Act or any SEC or SEC staff
interpretations thereof are amended or modified or unless approved
by a "vote of a majority of the outstanding voting securities" of
each Portfolio affected by the change as defined in the 1940 Act
and Rule 18f-2 thereunder (see "Voting"). If a Portfolio adheres
to a percentage restriction at the time of investment, a later
increase or decrease in percentage resulting from a change in
values of portfolio securities or amount of total or net assets
will not be considered a violation of any of the following
policies.
Each of the Smith Barney Large Cap Value, Smith Barney
International Equity and Smith Barney Pacific Basin Portfolios may
not:
1. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
2. Invest more than 25% of its total assets in securities,
the issuers of which conduct their principal business activities
in the same industry. For purposes of this limitation,
securities of the U.S. government (including its agencies and
instrumentalities) and securities of state or municipal
governments and their political subdivisions are not considered to
be issued by members of any industry.
3. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall
not prevent the Portfolio from (a) investing in securities of
issuers engaged in the real estate business or the business of
investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and
securities which are secured by real estate or interests therein;
(b) holding or selling real estate received in connection with
securities it holds or held; (c) trading in futures contracts
and options on futures contracts (including options on currencies
to the extent consistent with the Portfolios' investment objective
and policies); or (d) investing in real estate investment trust
securities.
4. With respect to the Smith Barney Large Cap Value, borrow
money, except that (a) the Portfolio may borrow from banks for
temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests which might otherwise require the
untimely disposition of securities, and (b) the Portfolio may,
to the extent consistent with its investment policies, enter into
reverse repurchase agreements, forward roll transactions and
similar investment strategies and techniques. To the extent that
it engages in transactions described in (a) and (b), the
Portfolio will be limited so that no more than 33 1/3% of the
value of its total assets (including the amount borrowed), valued
at the lesser of cost or market, less liabilities (not including
the amount borrowed) valued at the time the borrowing is made,
is derived from such transactions.
5. With respect to both the Smith Barney International
Equity and Smith Barney Pacific Basin Portfolios, borrow money,
except that (a) the Portfolio may borrow from banks under certain
circumstances where the Portfolio's Manager reasonably believes
that (i) the cost of borrowing and related expenses will be
exceeded by the Portfolio's return from investments of the
proceeds of the borrowing in portfolio securities, or (ii) the
meeting of redemption requests might otherwise require the
untimely disposition of securities, in an amount not exceeding 33
1/3% of the value of the Portfolio's total assets (including the
amount borrowed), valued at the lesser of cost or market, less
liabilities (not including the amount borrowed) valued at the time
the borrowing is made and (b) the Portfolio may, to the extent
consistent with its investment policies, enter into reverse
repurchase agreements, forward roll transactions and similar
investment strategies and techniques.
6. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio securities,
to the fullest extent permitted under the 1940 Act.
7. Engage in the business of underwriting securities issued
by other persons, except to the extent that the Portfolio may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
8. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
Notwithstanding any other investment restriction of the
Smith Barney Large Cap Value Portfolio, the Smith Barney
International Equity Portfolio or the Smith Barney Pacific Basin
Portfolio, each such Portfolio may invest all of its investable
assets in an open-end management investment company having its
same investment objective and restrictions.
In addition, the following policies have also been adopted
by the Smith Barney Large Cap Value Portfolio, the Smith Barney
International Equity Portfolio and the Smith Barney Pacific Basin
Portfolio, but are not fundamental and accordingly may be changed
by approval of the Board of Directors. The Portfolios' may not:
1. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the Portfolio of underlying securities
and other assets in escrow and collateral agreements with respect
to initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.
2. Have more than 15% of its net assets invested in puts,
calls, straddles, spreads or combinations thereof.
3. Purchase oil, gas or other mineral leases, rights or
royalty contracts or exploration or development programs, except
that the Portfolio may invest in the securities of companies which
operate, invest in, or sponsor such programs.
4. Invest more than 5% of its total assets in any issuer
with less than three years of continuous operation (including that
of predecessors) or so-called "unseasoned" equity securities that
are not either admitted for trading on a national stock exchange
or regularly quoted in the over-the-counter market.
5. Invest in any company for the purpose of exercising
control of management.
6. Acquire securities subject to restrictions on
disposition or securities for which there is no readily available
market, enter into repurchase agreements or purchase time deposits
or variable amount master demand notes, if any of the foregoing
have a term or demand feature of more than seven days, or purchase
OTC options or set aside assets to cover OTC options written by
the Portfolio if, immediately after and as a result, the value of
such securities would exceed, in the aggregate, 15% of the
Portfolio's net assets. Subject to this limitation, the Fund's
Board of Directors has authorized the Portfolio to invest in
restricted securities if such investment is consistent with the
Portfolio's investment objective and has authorized such
securities to be considered to be liquid to the extent the Manager
determines on a daily basis that there is a liquid institutional
market for such securities. The Board of Directors retains
ultimate ongoing responsibility for the determination that a
restricted security is liquid.
7. Invest in securities of another investment company
except as permitted by Section 12(d)(1)(a) of the 1940 Act, or as
part of a merger, consolidation, or acquisition.
The Smith Barney Money Market Portfolio may not:
1. Borrow money, except that (a) the Portfolio may borrow
from banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, and (b) the
Portfolio may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques. To
the extent that it engages in transactions described in (a) and
(b), the Portfolio will be limited so that no more than 33 1/3%
of the value of its total assets (including the amount borrowed),
valued at the lesser of cost or market, less liabilities (not
including the amount borrowed) valued at the time the borrowing
is made, is derived from such transactions.
2. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
3. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall
not prevent the Portfolio from (a) investing in securities of
issuers engaged in the real estate business or the business of
investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and
securities which are secured by real estate or interests therein;
(b) holding or selling real estate received in connection with
securities it holds or held; (c) trading in futures contracts
and options on futures contracts (including options on currencies
to the extent consistent with the Portfolios' investment objective
and policies); or (d) investing in real estate investment trust
securities.
4. Invest more than 25% of its assets in the securities of
issuers in any industry, except it may not invest less than 25% of
its assets in bank obligations (including both domestic and
foreign bank obligations) and it reserves freedom of action to
concentrate in securities issued or guaranteed as to principal and
interest by the U.S. Government, its agencies or
instrumentalities.
5. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio securities,
to the fullest extent permitted under the 1940 Act.
6. Engage in the business of underwriting securities issued
by other persons, except to the extent that the Portfolio may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
7. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
Notwithstanding any other investment restriction of the
Smith Barney Money Market Portfolio, the Portfolio may invest all
of its investable assets in an open-end management investment
company having the same investment objective and restrictions as
the Portfolio.
In addition, the following policies have also been adopted
by the Smith Barney Money Market Portfolio but are not fundamental
and accordingly may be changed by approval of the Board of
Directors. The Portfolio may not:
1. Acquire securities subject to restrictions on
disposition or securities for which there is no readily available
market, enter into repurchase agreements or purchase time deposits
or variable amount master demand notes, if any of the foregoing
have a term or demand feature of more than seven days if,
immediately after and as a result, the value of such securities
would exceed, in the aggregate, 10% of the Portfolio's total
assets. Subject to this limitation, the Portfolio's Board of
Directors has authorized the Portfolio to invest in restricted
securities if such investment is consistent with the Portfolio's
investment objective and has authorized such securities to be
considered to be liquid to the extent the Manager determines on a
daily basis that there is a liquid institutional market for such
securities. The Board of Directors retains ultimate ongoing
responsibility for the determination that a restricted security is
liquid.
2. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the Portfolio of underlying securities
and other assets in escrow and collateral agreements with respect
to initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.
3. Write or purchase put or call options.
4. Purchase or otherwise acquire any security if, as a
result, more than 10% of its net assets would be invested in
securities that are illiquid.
5. Purchase or sell oil and gas interests.
6. Invest in companies for the purposes of exercising
control.
7. Invest in securities of another investment company
except as permitted by Section 12(d)(1) of the 1940 Act, or as
part of a merger, consolidation, or acquisition.
The Alliance Growth Portfolio may not:
1. Borrow money, except that (a) the Portfolio may borrow
from banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, and (b) the
Portfolio may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques. To
the extent that it engages in transactions described in (a) and
(b), the Portfolio will be limited so that no more than 33 1/3%
of the value of its total assets (including the amount borrowed),
valued at the lesser of cost or market, less liabilities (not
including the amount borrowed) valued at the time the borrowing
is made, is derived from such transactions.
2. Engage in the business of underwriting securities issued
by other persons, except to the extent that the Portfolio may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
3. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall
not prevent the Portfolio from (a) investing in securities of
issuers engaged in the real estate business or the business of
investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and
securities which are secured by real estate or interests therein;
(b) holding or selling real estate received in connection with
securities it holds or held; (c) trading in futures contracts
and options on futures contracts (including options on currencies
to the extent consistent with the Portfolios' investment objective
and policies); or (d) investing in real estate investment trust
securities.
4. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio securities,
to the fullest extent permitted under the 1940 Act.
5. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
6. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
7. Invest more than 25% of its total assets in securities
of any one industry. (Obligations of a foreign government and its
agencies or instrumentalities constitute a separate "industry"
from those of another foreign government.
Notwithstanding any other investment restriction of the
Alliance Growth Portfolio, the Portfolio may invest all of its
investable assets in an open-end management investment company
having the same investment objective and restrictions as the
Portfolio.
In addition, the following policies have also been adopted
by the Alliance Growth Portfolio, but are not fundamental and
accordingly may be changed by approval of the Board of Directors.
The Portfolio may not:
1. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the Portfolio of underlying securities
and other assets in escrow and collateral agreements with respect
to initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.
2. Purchase securities issued by any other registered
investment company or investment trust except (a) by purchase in
the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary
broker's commission, or (b) where no commission or profit to a
sponsor or dealer results from such purchase, or (c) when such
purchase, though not in the open market, is part of a plan of
merger or consolidation; provided, however, that the Portfolio
will not purchase such securities if such purchase at the time
thereof would cause more than 5% of its total assets (taken at
market value) to be invested in the securities of such issuers;
and, provided further, that the Portfolio's purchases of
securities issued by an open-end investment company will be
consistent with the provisions of the 1940 Act.
3. Make investments for the purpose of exercising control
or management.
4. Invest in interests in oil, gas, or other mineral
exploration or development programs, although the Portfolio may
purchase securities which are secured by such interests and may
purchase securities of issuers which invest in or deal in oil, gas
or other mineral exploration or development programs.
5. Purchase warrants, if, as a result, the Portfolio would
have more than 5% of its total assets invested in warrants or more
than 2% of its total assets invested in warrants which are not
listed on the New York Stock Exchange or the American Stock
Exchange.
The AIM Capital Appreciation Portfolio may not:
1. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
2. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
3. Engage in the business of underwriting securities issued
by other persons, except to the extent that the Portfolio may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
4. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall not
prevent the Portfolio from (a) investing in securities of issuers
engaged in the real estate business or the business of investing
in real estate (including interests in limited partnerships owning
or otherwise engaging in the real estate business or the business
of investing in real estate) and securities which are secured by
real estate or interests therein; (b) holding or selling real
estate received in connection with securities it holds or held;
(c) trading in futures contracts and options on futures contracts
(including options on currencies to the extent consistent with the
Portfolios' investment objective and policies); or (d) investing
in real estate investment trust securities.
5. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio securities,
to the fullest extent permitted under the 1940 Act.
6. Invest more than 25% of its total assets in securities,
the issuers of which conduct their principal business activities
in the same industry. For purposes of this limitation,
securities of the U.S. government (including its agencies and
instrumentalities) and securities of state or municipal
governments and their political subdivisions are not considered to
be issued by members of any industry.
In addition, the AIM Capital Appreciation Portfolio treats
as fundamental its policy concerning borrowing. In accordance
with this policy, the Portfolio may borrow funds from a bank
(including its custodian bank) to purchase or carry securities
only if, immediately after such borrowing, the value of the
Portfolio's assets, including the amount borrowed, less its
liabilities, is equal to at least 300% of the amount borrowed,
plus all outstanding borrowings. For the purpose of determining
this 300% asset coverage requirement, the Portfolio's liabilities
will not include the amount borrowed but will include the market
value, at the time of computation, of all securities borrowed by
the Portfolio in connection with short sales. The amount of
borrowing will also be limited by the applicable margin
limitations imposed by the Federal Reserve Board. If at any time
the value of the Portfolio's assets should fail to meet the 300%
asset coverage requirement, the Portfolio will, within three days,
reduce its borrowings to the extent necessary. The Portfolio may
be required to eliminate partially or totally its outstanding
borrowings at times when it may not be desirable for it to do so.
In addition, the following policies have also been adopted
by the AIM Capital Appreciation Portfolio, but are not fundamental
and accordingly may be changed by approval of the Board of
Directors. The Portfolio may not:
1. Purchase warrants, valued at the lower of cost or
market, in excess of 5% of the value of the Fund's net assets, and
no more than 2% of such value may be warrants which are not listed
on the New York or American Stock Exchanges.
2. Invest for the purpose of exercising control over or
management of any company, except to the extent that in Portfolio
may purchase securities of other investment companies.
3. Invest in interests in oil, gas or other mineral
exploration or development programs.
The Van Kampen American Capital Enterprise Portfolio may
not:
1. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio securities,
to the fullest extent permitted under the 1940 Act.
2. Engage in the business of underwriting securities issued
by other persons, except to the extent that the Portfolio may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
3. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall
not prevent the Portfolio from (a) investing in securities of
issuers engaged in the real estate business or the business of
investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and
securities which are secured by real estate or interests therein;
(b) holding or selling real estate received in connection with
securities it holds or held; (c) trading in futures contracts
and options on futures contracts (including options on currencies
to the extent consistent with the Portfolios' investment objective
and policies); or (d) investing in real estate investment trust
securities.
4. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder taking into account any rule or
order of the SEC exempting the Portfolio from the limitation
imposed by Section 12(d)(1) of the 1940 Act.
5. Invest more than 25% of its total assets in securities
issued by companies in any one industry, provided, however,
that this limitation excludes shares of other open-end investment
companies owned by the Portfolio but includes the Portfolio's pro
rata portion of the securities and other assets owned by any such
company.
6. Borrow money, except that (a) the Portfolio may borrow
from banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, and (b) the
Portfolio may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques. To
the extent that it engages in transactions described in (a) and
(b), the Portfolio will be limited so that no more than 33 1/3%
of the value of its total assets (including the amount borrowed),
valued at the lesser of cost or market, less liabilities (not
including the amount borrowed) valued at the time the borrowing
is made, is derived from such transactions.
7. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
Notwithstanding any other investment restriction of the Van
Kampen American Capital Enterprise Portfolio, the Portfolio may
invest all of its investable assets in an open-end management
investment company having the same investment objective and
restrictions as the Portfolio.
In addition, the following policies have also been adopted
by the Van Kampen American Capital Enterprise Portfolio, but are
not fundamental and accordingly may be changed by approval of the
Board of Directors. The Portfolio may not:
1. Invest more than 5% of the value of its total assets in
securities of companies which (including predecessor companies or
operations) have been in business less than three years, provided,
however, that this limitation excludes shares of other open-end
investment companies owned by the Portfolio but includes the
Portfolio's pro rata portion of the securities and other assets
owned by any such company.
2. Acquire any private placement if it would cause more
than 2% of the net assets of the Portfolio, as determined at the
time the Portfolio agrees to any such acquisition, to be invested
in private placements and other assets not having readily
available market quotations, provided, however, that this
limitation excludes shares of other open-end investment companies
owned by the Portfolio but includes the Portfolio's pro rata
portion of the securities and other assets owned by any such
company; and, provided further, that this limitation excludes
securities that have been issued pursuant to Rule 144A under the
1933 Act ("Rule 144A securities").
3. Invest more than 5% of its net assets in warrants or
rights valued at the lower of cost or market, not more than 2% of
its net assets in warrants or rights (valued on such basis) which
are not listed on the New York or American Stock Exchanges.
Warrants or rights acquired in units or attached to other
securities are not subject to the foregoing limitations.
5. Purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets would be invested in
securities that are illiquid.
6. Invest in interests in oil, gas, or other mineral
exploration or developmental programs.
7. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the Portfolio of underlying securities
and other assets in escrow and collateral agreements with respect
to initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.
8. Make any investment in any security about which
information is not available with respect to history, management,
assets, earnings, and income of the issuer except to acquire
shares of other open-end investment companies to the extent
permitted by rule or order of the SEC exempting the Portfolio from
the limitations imposed by Section 12(d)(1) of the 1940 Act.
9. Make any investment which involves promotion or business
management by the Portfolio or which would subject the Portfolio
to unlimited liability.
10. Invest in companies for the purpose of exercising
control.
11. Acquire securities of any other domestic or foreign
investment company or investment fund except in connection with a
plan of merger or consolidation with or acquisition of
substantially all the assets of such other investment company or
to acquire shares of other open-end investment companies to the
extent permitted by rule or order of the SEC exempting the
Portfolio from the limitations imposed by Section 12(d)(1) of the
1940 Act.
The TBC Managed Income Portfolio may not:
1. Concentrate the portfolio investments in any industry by
investing more than 25% of its gross assets in any one industry.
There shall be no limitation on the purchase of U.S. Government
securities by the Portfolio when it adopts a defensive position.
2. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall
not prevent the Portfolio from (a) investing in securities of
issuers engaged in the real estate business or the business of
investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and
securities which are secured by real estate or interests therein;
(b) holding or selling real estate received in connection with
securities it holds or held; (c) trading in futures contracts
and options on futures contracts (including options on currencies
to the extent consistent with the Portfolios' investment objective
and policies); or (d) investing in real estate investment trust
securities.
3. Engage in the business of underwriting securities issued
by other persons, except to the extent that the Portfolio may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
4. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio securities,
to the fullest extent permitted under the 1940 Act.
5. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
6. Borrow money, except that (a) the Portfolio may borrow
from banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, and (b) the
Portfolio may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques. To
the extent that it engages in transactions described in (a) and
(b), the Portfolio will be limited so that no more than 33 1/3% of
the value of its total assets (including the amount borrowed),
valued at the lesser of cost or market, less liabilities (not
including the amount borrowed) valued at the time the borrowing
is made, is derived from such transactions.
7. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
8. Purchase securities from or sell securities to any of
its officers or Directors, except with respect to its own shares
and as is permissible under applicable statues, rules and
regulations.
Notwithstanding any other investment restriction of the TBC
Managed Income Portfolio, the Portfolio may invest all of its
investable assets in an open-end management investment company
having the same investment objective and restrictions as the
Portfolio.
In addition, the following policies have also been adopted by the
TBC Managed Income Portfolio, but are not fundamental and
accordingly may be changed by approval of the Board of Directors.
The Portfolio may not:
1. Purchase securities of any other investment company
except as part of a plan of merger or consolidation.
2. Purchase securities of companies which together with
predecessors have a record of less than three years' continuous
operation, if, as a result, more than 5% of the Portfolio's net
assets would then be invested in such securities.
3. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the Portfolio of underlying securities
and other assets in escrow and collateral agreements with respect
to initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.
4. Invest in puts, calls, straddles, spreads and any
combination thereof.
5. Invest in oil, gas or other mineral exploration or
development programs, provided, however, this shall not prohibit
the Portfolio from purchasing publicly traded securities of
companies engaging in whole or in part in such activities.
6. Purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets would be invested in
securities that are illiquid.
7. Purchase securities of companies for the purpose of
exercising control.
The Putnam Diversified Income Portfolio may not:
1. Borrow money, except that (a) the Portfolio may borrow
from banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, and (b) the
Portfolio may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques. To
the extent that it engages in transactions described in (a) and
(b), the Portfolio will be limited so that no more than 33 1/3% of
the value of its total assets (including the amount borrowed),
valued at the lesser of cost or market, less liabilities (not
including the amount borrowed) valued at the time the borrowing
is made, is derived from such transactions.
2. Engage in the business of underwriting securities issued
by other persons, except to the extent that the Fund may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
3. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall
not prevent the Portfolio from (a) investing in securities of
issuers engaged in the real estate business or the business of
investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and
securities which are secured by real estate or interests therein;
(b) holding or selling real estate received in connection with
securities it holds or held; (c) trading in futures contracts
and options on futures contracts (including options on currencies
to the extent consistent with the Portfolios' investment objective
and policies); or (d) investing in real estate investment trust
securities.
4. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio securities,
to the fullest extent permitted under the 1940 Act.
5. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
6. Invest more than 25% of its total assets in any one
industry. (U.S. Government securities and securities of any
foreign government, it agencies or instrumentalities, securities
of supranational entities, and securities backed by the credit of
a governmental entity are not considered to represent an industry.
7. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
In addition, the following policy has also been adopted by
the Putnam Diversified Income Portfolio, but is not fundamental
and accordingly may be changed by approval of the Board of
Directors. The Portfolio may not:
1. Invest in securities of other registered open-end
investment companies except as they may be acquired as part of a
merger or consolidation or acquisition of assets.
2. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the Portfolio of underlying securities
and other assets in escrow and collateral agreements with respect
to initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.
3. Purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets would be invested in
securities that are illiquid.
4. Buy or sell oil, gas or other mineral leases, rights or
royalty contracts.
5. Make investments for the purpose of gaining control of a
company's management.
Notwithstanding any other investment restriction of the
Putnam Diversified Income Portfolio, the Portfolio may invest all
of its investable assets in an open-end management investment
company having the same investment objective and restrictions as
the Portfolio.
The GT Global Strategic Income Portfolio may not:
1. Invest 25% or more of the value of its total assets in
the securities of issuers conducting their principal business
activities in the same industry, (provided, however, that the
Portfolio may invest all of its investable assets in an open-end
management investment company with substantially the same
investment objectives, policies and limitations as the Portfolio)
except that this limitation shall not apply to securities issued
or guaranteed as to principal and interest by the U.S. government
or any of its agencies or instrumentalities.
2. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall
not prevent the Portfolio from (a) investing in securities of
issuers engaged in the real estate business or the business of
investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and
securities which are secured by real estate or interests therein;
(b) holding or selling real estate received in connection with
securities it holds or held; (c) trading in futures contracts
and options on futures contracts (including options on currencies
to the extent consistent with the Portfolios' investment objective
and policies); or (d) investing in real estate investment trust
securities.
3. Engage in the business of underwriting securities issued
by other persons, except to the extent that the Fund may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
4. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio securities,
to the fullest extent permitted under the 1940 Act.
5. Borrow money in excess of 33 1/3% of its total assets
(including the amount borrowed), less all liabilities and
indebtedness (other than borrowing). This restriction shall not
prevent the Portfolio from entering into reverse repurchase
agreements and engaging in "roll" transactions, provided that
reverse repurchase agreements, "roll" transactions and any other
transactions constituting borrowing by the Portfolio may not
exceed 1/3 of its total assets. In the event that the asset
coverage for the Portfolio's borrowings falls below 300%, the
Portfolio will reduce, within three days (excluding Sundays and
holidays), the amount of its borrowings in order to provide for
300% asset coverage. Transactions involving options, futures
contracts, options on futures contracts and forward currency
contracts, and collateral arrangements relating thereto will not
be deemed to be borrowings.
6. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
For purposes of the GT Global Strategic Income Portfolio's
concentration policy contained in limitation (1) above, the
Portfolio intends to comply with the SEC staff positions that
securities issued or guaranteed as to principal and interest by
any single foreign government or any supranational organizations
in the aggregate are considered to be securities of issuers in the
same industry.
In addition, the following investment policies are not
fundamental investment policies and may be changed by the approval
of the Fund's Board of Directors without shareholder approval.
The Portfolio may not:
1. Purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets would be invested in
securities that are illiquid.
2. Invest in securities of an issuer if the investment would
cause the Portfolio to own more than 10% of any class of
securities of any one issuer (provided, however, that the
Portfolio may invest all of its investable assets in an open-end
management investment company with substantially the same
investment objectives, policies, and limitations as the
Portfolio).
3. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the Fund of underlying securities and
other assets in escrow and collateral agreements with respect to
initial or maintenance margin in connection with futures contracts
and related options and options on securities, indexes or similar
items is not considered to be the purchase of a security on
margin.
4. Invest more than 10% of its total assets in shares of
other investment companies and invest more than 5% of its total
assets in any one investment company or acquire more than 3% of
the outstanding voting securities of any one investment company
(provided, however, that the Portfolio may invest all of its
investable assets in an open-end management investment company
with substantially the same investment objectives, policies, and
limitations as the Portfolio).
5. Invest in companies for the purpose of exercising
control or management (provided, however, that the Portfolio may
invest all of its investable assets in an open-end management
investment company with substantially the same investment
objectives, policies and limitations as the Portfolio).
6. Invest in interests in oil, gas, or other mineral
exploration or development programs.
7. Invest more than 5% of its total assets in securities of
companies having, together with their predecessors, a record of
less than three years of continuous operation (provided, however,
that the Portfolio may invest all of its investable assets in an
open-end management investment company with substantially the same
investment objectives, policies, and limitations as the
Portfolio).
The Smith Barney High Income Portfolio may not:
1. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
2. Borrow money, except that (a) the Portfolio may borrow
from banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, and (b) the
Portfolio may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques. To
the extent that it engages in transactions described in (a) and
(b), the Portfolio will be limited so that no more than 33 1/3% of
the value of its total assets (including the amount borrowed),
valued at the lesser of cost or market, less liabilities (not
including the amount borrowed) valued at the time the borrowing
is made, is derived from such transactions.
3. Engage in the business of underwriting securities issued
by other persons, except to the extent that the Portfolio may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
4. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder.
5. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall
not prevent the Portfolio from (a) investing in securities of
issuers engaged in the real estate business or the business of
investing in real estate (including interests in limited
partnerships owning or otherwise engaging in the real estate
business or the business of investing in real estate) and
securities which are secured by real estate or interests therein;
(b) holding or selling real estate received in connection with
securities it holds or held; (c) trading in futures contracts
and options on futures contracts (including options on currencies
to the extent consistent with the Portfolios' investment objective
and policies); or (d) investing in real estate investment trust
securities.
6. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio securities,
to the fullest extent permitted under the 1940 Act.
7. Invest more than 25% of its total assets in securities,
the issuers of which conduct their principal business activities
in the same industry. For purposes of this limitation,
securities of the U.S. government (including its agencies and
instrumentalities) and securities of state an municipal
governments and their political subdivisions are not considered to
be issued by members of any industry.
Notwithstanding any other investment restriction of the
Smith Barney High Income Portfolio, the Portfolio may invest all
of its investable assets in an open-end management investment
company having the same investment objective and restrictions as
the Portfolio.
In addition, the following policies have also been adopted
by the Smith Barney High Income Portfolio, but are not fundamental
and accordingly may be changed by the approval of the Board of
Directors. The Portfolio may not:
1. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the Portfolio of underlying securities
and other assets in escrow and collateral agreements with respect
to initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.
2. Invest in securities of other investment companies
registered or required to be registered under the 1940 Act, except
as they may be acquired as part of a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange, or
to the extent permitted by the 1940 Act.
The MFS Total Return Portfolio may not:
1. Borrow money, except that (a) the Portfolio may borrow
from banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, and (b) the
Portfolio may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques. To
the extent that it engages in transactions described in (a) and
(b), the Portfolio will be limited so that no more than 33 1/3% of
the value of its total assets (including the amount borrowed),
valued at the lesser of cost or market, less liabilities (not
including the amount borrowed) valued at the time the borrowing
is made, is derived from such transactions.
2. Engage in the business of underwriting securities issued
by other persons, except to the extent that the Portfolio may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
3. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder
4. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall not
prevent the Portfolio from (a) investing in securities of issuers
engaged in the real estate business or the business of investing
in real estate (including interests in limited partnerships owning
or otherwise engaging in the real estate business or the business
of investing in real estate) and securities which are secured by
real estate or interests therein; (b) holding or selling real
estate received in connection with securities it holds or held;
(c) trading in futures contracts and options on futures contracts
(including options on currencies to the extent consistent with the
Portfolios' investment objective and policies); or (d) investing
in real estate investment trust securities.
5. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio securities,
to the fullest extent permitted under the 1940 Act.
6. Purchase any securities of an issuer of a particular
industry, if as a result, more than 25% of its gross assets would
be invested in securities of issuers whose principal business
activities are in the same industry except (i) there is no
limitation with respect to obligations issued or guaranteed by the
U.S. government or its agencies and instrumentalities and
repurchase agreements collateralized by such obligations.
Notwithstanding any other investment restriction of the MFS
Total Return Portfolio, the Portfolio may invest all of its
investable assets in an open-end management investment company
having the same investment objective and restrictions as the
Portfolio.
In addition, the following policies have also been adopted
by the MFS Total Return Portfolio, but are not fundamental and
accordingly may be changed by approval of the Board of Directors.
The Portfolio may not:
1. Purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets would be invested in
securities that are illiquid.
2. Purchase securities issued by any other investment
company in excess of the amount permitted by the 1940 Act, except
when such purchase is part of a plan of merger or consolidation.
3. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the Portfolio of underlying securities
and other assets in escrow and collateral agreements with respect
to initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.
4. Purchase or sell any put or call options or any
combination thereof, provided, that this shall not prevent (a) the
purchase, ownership, holding or sale of (i) warrants where the
grantor of the warrants is the issuer of the underlying securities
or (ii) put or call options or combinations thereof with respect
to securities, foreign currencies, indexes of securities, any type
of swap or any type of futures contract or (b) the purchase,
ownership, holding or sale of contracts for the future delivery of
securities or currencies.
5. Purchase or sell interests in oil, gas or mineral
leases.
The Smith Barney Large Capitalization Growth Portfolio may
not:
1. Invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder.
2. Invest more than 25% of its total assets in securities,
the issuers of which conduct their principal business activities
in the same industry. For purposes of this limitation,
securities of the U.S. government (including its agencies and
instrumentalities) and securities of state or municipal
governments and their political subdivisions are not considered to
be issued by members of any industry.
3. Borrow money, except that (a) the Portfolio may borrow
from banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, and (b) the
Portfolio may, to the extent consistent with its investment
policies, enter into reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques. To
the extent that it engages in transactions described in (a) and
(b), the Portfolio will be limited so that no more than 33 1/3%
of the value of its total assets (including the amount borrowed),
valued at the lesser of cost or market, less liabilities (not
including the amount borrowed) valued at the time the borrowing
is made, is derived from such transactions.
4. Make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio securities,
to the fullest extent permitted under the 1940 Act.
5. Purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction shall not
prevent the Portfolio from (a) investing in securities of issuers
engaged in the real estate business or the business of investing
in real estate (including interests in limited partnerships owning
or otherwise engaging in the real estate business or the business
of investing in real estate) and securities which are secured by
real estate or interests therein; (b) holding or selling real
estate received in connection with securities it holds or held;
(c) trading in futures contracts and options on futures contracts
(including options on currencies to the extent consistent with the
Portfolios' investment objective and policies); or (d) investing
in real estate investment trust securities.
6. Engage in the business of underwriting securities issued
by other persons, except to the extent that the Portfolio may
technically be deemed to be an underwriter under the Securities
Act of 1933, as amended, in disposing of portfolio securities.
7. Issue "senior securities" as defined in the 1940 Act and
the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders
thereunder
In addition, the following policies have also been adopted
by the Smith Barney Large Capitalization Growth Portfolio, but are
not fundamental and accordingly may be changed by approval of the
Board of Directors. The Portfolio may not:
1. Purchase any securities on margin (except for such
short-term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities short
(except "against the box"). For purposes of this restriction,
the deposit or payment by the Portfolio of underlying securities
and other assets in escrow and collateral agreements with respect
to initial or maintenance margin in connection with futures
contracts and related options and options on securities, indexes
or similar items is not considered to be the purchase of a
security on margin.
2. Invest in oil, gas or other mineral leases or
exploration or development programs.
3. Write or sell puts, calls, straddles, spreads or
combinations of those transactions, except as permitted under the
Portfolio's investment objective and policies.
4. Invest in securities of another investment company
except as permitted by Section 12(d)(1)(a) of the 1940 Act, or as
part of a merger, consolidation or acquisition
5. Purchase a security if, as a result, the Portfolio would
then have more than 5% of its total assets invested in securities
of issuers (including predecessors) that have been in continuous
operation for fewer than three years, except that this limitation
will be deemed to apply to the entity supplying the revenues from
which the issue is to be paid, in the case of private activity
bonds purchased.
6. Make investments for the purpose of exercising control
of management.
PERFORMANCE INFORMATION
From time to time the Fund may advertise a Portfolio's total
return, average annual total return, yield and current
distribution return in advertisements and other types of sales
literature. These figures are based on historical earnings and
are not intended to indicate future performance. In addition,
these figures will not reflect the deduction of the charges that
are imposed on a Contract by an insurance company separate account
(see Contract prospectus) which, if reflected, would reduce the
performance quoted. The total return shows what an investment in
the Portfolio would have earned over a specified period of time
(one, five or ten years) assuming that all distributions and
dividends by the Portfolio were invested on the reinvestment dates
during the period less all recurring fees.
Each Portfolio's yield is computed by dividing the net
investment income per share earned during a specified thirty day
period by the net asset value per share on the last day of such
period and annualizing the result. For purposes of the yield
calculation, interest income is determined based on a yield to
maturity percentage for each long-term fixed income obligation in
the portfolio; income on short-term obligations is based on
current payment rate.
The Fund calculates current distribution return for each
Portfolio by dividing the distributions from investment income
declared during the most recent period by the net asset value on
the last day of the period for which current distribution return
is presented. From time to time, a Portfolio may include its
current distribution return in information furnished to present or
prospective shareowners.
A Portfolio's current distribution return may vary from time
to time depending on market conditions, the composition of its
investment portfolio and operating expenses. These factors and
possible differences in the methods used in calculating current
distribution return, and the charges that are imposed on a
Contracts by a separate account, should be considered when
comparing a Portfolio's current distribution return to yields
published for other investment companies and other investment
vehicles. Current distribution return should also be considered
relative to changes in the value of the Portfolio's shares and to
the risks associated with the Portfolio's investment objective and
policies. For example, in comparing current distribution returns
with those offered by Certificates of Deposit ("CDs"), it should
be noted that CDs are insured (up to $100,000) and offer a fixed
rate of return.
Performance information may be useful in evaluating a
Portfolio and for providing a basis for comparison with other
financial alternatives. Since the performance of each Portfolio
changes in response to fluctuations in market conditions, interest
rate and Portfolio expenses, no performance quotation should be
considered a representation as to the Portfolio's performance for
any future period.
DETERMINATION OF NET ASSET VALUE
The net asset value of each Portfolio's share will be
determined on any day that the New York Stock Exchange is open.
The New York Stock Exchange is closed on the following holidays:
New Year's Day, President's Day, Martin Luther King, Jr., Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
REDEMPTION OF SHARES
Redemption payments shall be made wholly in cash unless the
Directors believe that economic conditions exist that would make
such a practice detrimental to the best interests of a Portfolio
and its remaining shareowners. If a redemption is paid in
portfolio securities, such securities will be valued in accordance
with the procedures described under "Determination of Net Asset
Value" in the Prospectus and a shareholder would incur brokerage
expenses if these securities were then converted to cash.
CUSTODIANS
Portfolio securities and cash owned by the Fund on behalf of
the Smith Barney Large Cap Value Portfolio, the Alliance Growth
Portfolio, the AIM Capital Appreciation Portfolio, the Van Kampen
American Capital Enterprise Portfolio, the TBC Managed Income
Portfolio, the Putnam Diversified Income Portfolio, the Smith
Barney High Income Portfolio, the MFS Total Return Portfolio, the
Smith Barney Money Market Portfolio and the Smith Barney Large
Capitalization Growth Portfolio are held in the custody of PNC
Bank, National Association, 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103 (foreign securities, if any, will
be held in the custody of The Barclays Bank, PLC).
Portfolio securities and cash owned by the Fund on behalf of
the Smith Barney International Equity Portfolio, the Smith Barney
Pacific Basin Portfolio and the GT Global Strategic Income
Portfolio are held in the custody of Chase Manhattan Bank, Chase
MetroTech Center, Brooklyn, New York 11245
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York
10154, has been selected as the Fund's independent auditors for
its fiscal year ending October 31, 1998, to examine and report on
the financial statements and financial highlights of the Fund.
THE FUND
Pursuant to the Articles of Incorporation, the Directors
have authorized the issuance of thirteen series of shares, each
representing shares in one of thirteen separate Portfolios - the
Smith Barney Large Cap Value Portfolio, the Alliance Growth
Portfolio, the AIM Capital Appreciation Portfolio, the Van Kampen
American Capital Enterprise Portfolio, the Smith Barney
International Equity Portfolio, the Smith Barney Pacific Basin
Portfolio, the TBC Managed Income Portfolio, the Putnam
Diversified Income Portfolio, the GT Global Strategic Income
Portfolio, the Smith Barney High Income Portfolio, the MFS Total
Return Portfolio, the Smith Barney Money Market Portfolio and the
Smith Barney Large Capitalization Growth Portfolio. Pursuant to
such authority, the Directors may also authorize the creation of
additional series of shares and additional classes of shares
within any series (which would be used to distinguish among the
rights of different categories of shareholders, as might be
required by future regulations or other unforeseen circumstances).
The investment objectives, policies and restrictions applicable
to additional Portfolios would be established by the Directors at
the time such Portfolios were established and may differ from
those set forth in the Prospectus and this Statement of Additional
Information. In the event of liquidation or dissolution of a
Portfolio or of the Fund, shares of a Portfolio are entitled to
receive the assets belonging to that Portfolio and a proportionate
distribution, based on the relative net assets of the respective
Portfolios, of any general assets not belonging to any particular
Portfolio that are available for distribution.
The Articles of Incorporation may be amended only upon the
vote of a majority of the shares of capital stock of the Fund
outstanding and entitled to vote, and in accordance with
applicable law, except for certain amendments that may be made by
the Directors.
The Articles of Incorporation further provide that the Fund
shall indemnify its directors, officers and employees against any
liability to the Fund or to a shareowner, except as such liability
may arise from his or its own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his or its duties.
With the exceptions stated, the Articles of Incorporation provide
that a Director, officer or employee is entitled to be indemnified
against all liability in connection with the affairs of the Fund.
The Fund shall continue without limitation of time subject
to the provisions in the Articles of Incorporation concerning
termination of the corporation or any of the series of the
corporation by action of the shareowners or by action of the
Directors upon notice to the shareowners.
MANAGEMENT AGREEMENTS
The Directors are responsible for the direction and
supervision of the Fund's business and operations. Mutual
Management Corp. ("MMC" or the "Manager") manages the investment
operations of the Smith Barney Large Cap Value Portfolio, the
Smith Barney International Equity Portfolio, the Smith Barney
Pacific Basin Portfolio, the Smith Barney High Income Portfolio,
Smith Barney Money Market Portfolio and the Smith Barney Large
Capitalization Growth Portfolio pursuant to Management Agreements
entered into by the Fund on behalf of each such Portfolio.
Travelers Investment Adviser, Inc. ("TIA" or the "Manager"), an
affiliate of MMC, manages the investment operations of the
Alliance Growth Portfolio, the AIM Capital Appreciation Portfolio,
the Putnam Diversified Income Portfolio, the MFS Total Return
Portfolio, the GT Global Strategic Income Portfolio, the Van
Kampen American Capital Enterprise Portfolio and the TBC Managed
Income Portfolios (each, a "TIA Portfolio") pursuant to management
agreements entered into by the Fund on behalf of each TIA
Portfolio. Under each management agreement MMC or TIA, as the
case may be, is responsible for furnishing or causing to be
furnished to each Portfolio advice and assistance with respect to
the acquisition, holding or disposal of investments and
recommendations with respect and affairs of each Portfolio,
bookkeeping, accounting and administrative services, office space
and equipment, and the services of the officers and employees of
the Fund. Each Portfolio receives discretionary advisory services
provided by the Manager or by a Sub-Adviser (pursuant to a
Subadvisory Agreement) who is identified, retained, supervised and
compensated by the Manager. MMC and TIA are each located at 388
Greenwich Street, New York, New York 10013. MMC is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. Salomon Smith
Barney Holdings Inc., which is a wholly owned subsidiary of
Travelers Group Inc. ("Travelers"), is also the parent company of
Smith Barney Inc. ("Smith Barney"), the Fund's distributor. TIA
is a wholly owned subsidiary of The Plaza Corporation, a wholly
owned subsidiary of the Travelers Insurance Company ("TIC"). TIC
is a wholly owned subsidiary of Travelers.
Each Management Agreement provides that the Manager will
administer the Portfolio's corporate affairs and, in connection
therewith, shall furnish the Portfolio with office facilities and
with clerical, bookkeeping and recordkeeping services at such
office facilities. Subject to the provisions of any applicable
Subadvisory Agreement, the Manager will also manage the investment
operations of each Portfolio and will be responsible for
furnishing or causing to be furnished to each Portfolio advice and
assistance with respect to the purchase, retention and disposition
of investments, in accordance with each Portfolio's investment
objectives, policies and restrictions as stated in the Prospectus
and Statement of Additional Information.
By written agreement, research and other departments and
staff of Smith Barney will furnish MMC with information, advice
and assistance and will be available for consultation on the
Fund's Portfolios. Thus, Smith Barney may also be considered an
investment adviser to the Fund. Smith Barney's services are paid
for by MMC; there is no charge to the Fund for such services.
The Manager has agreed to waive its fee to the extent that
the aggregate expenses of any of the Smith Barney Large Cap Value
Portfolio, the Alliance Growth Portfolio, the AIM Capital
Appreciation Portfolio, the Van Kampen American Capital Enterprise
Portfolio, the TBC Managed Income Portfolio, the Putnam
Diversified Income Portfolio, the Smith Barney High Income
Portfolio, the MFS Total Return Portfolio and the Smith Barney
Money Market Portfolio, exclusive of taxes, brokerage, interest
and extraordinary expenses, such as litigation and indemnification
expenses, exceed 1.25% of the average daily net assets for any
fiscal year of each such Portfolio. The Manager has agreed to
waive its fee to the extent that the aggregate expenses of each of
the Smith Barney International Equity Portfolio, the Smith Barney
Pacific Basin Portfolio and the GT Global Strategic Income
Portfolio exclusive of taxes, brokerage, interest and
extraordinary expenses, exceed 1.50% of the average daily net
assets for any fiscal year of each such Portfolio. Each of these
voluntary expense limitations shall be in effect until it is
terminated by notice to shareowners and by supplement to the then
current SAI.
Each Management and Subadvisory Agreement (collectively, the
"Investment Agreements") provides further that if in any fiscal
year the aggregate expenses of a Portfolio (including fees
pursuant to such agreements, but excluding interest, taxes,
brokerage and extraordinary expenses) exceed the expense
limitation of any state having jurisdiction over such Portfolio,
MMC, TIA or Sub-Adviser, as the case may be, will reduce its fee
by the proportion of such excess expenses equal to the proportion
that its fee thereunder bears to the aggregate of fees paid by the
Portfolio for investment advice or management and any
administration in that year, to the extent required by state law.
Each Management Agreement also provides that MMC or TIA shall not
be liable to the Fund for any error of judgment or mistake of law
or for any loss suffered by the Fund so long as it acted in good
faith without willful misfeasance, bad faith or gross negligence
in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under the Management
Agreement. Each Subadvisory Agreement also provides that the Sub-
Advisor shall not be liable to MMC, TIA or the Portfolio for any
error of judgment or mistake of law or for any loss suffered by
MMC, TIA, or the Portfolio so long as it acted in good faith
without willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard
of its obligations and duties under the Subadvisory Agreement.
Each Investment Agreement shall continue for an initial two-
year term and shall be continued from year to year if specifically
approved at least annually as required by the 1940 Act. Each
Investment Agreement further provides that it shall terminate
automatically in the event of its assignment (as defined in the
1940 Act) and that it may be terminated without penalty by either
party on not less than 60 days' written notice.
For the periods shown, each Portfolio paid the following
management fee:
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
Year Year Year
Ended Ended Ended
October 31, October 31, October 31,
Fund 1995 1996 1997
<S> <C> <C> <C>
Smith Barney Large Cap Value Portfolio $116,605 $564,232 $1,399,650
Alliance Growth Portfolio 421,756 1,624,602 3,268,019
AIM Capital Appreciation Portfolio 2,595* 503,898 1,294,096
Van Kampen American Capital Enterprise Portfolio 93,346 482,803 1,045,925
Smith Barney International Equity Portfolio 263,820 887,397 1,692,179
Smith Barney Pacific Basin Portfolio+ 47,987 117,581 175,112
TBC Managed Income Portfolio 47,986 123,774 176,499
Putnam Diversified Income Portfolio 122,559 428,803 753,736
GT Global Strategic Income Portfolio++ 40,549 109,949 201,225
Smith Barney High Income Portfolio 53,173 262,657 558,996
MFS Total Return Portfolio 187,388 744,834 1,556,167
Smith Barney Money Market Portfolio+++ 100,040 425,361 650,916
Smith Barney Large Capitalization Growth Portfolio --- --- ---
</TABLE>
* From October 10, 1995 (commencement of operations) through
October 31, 1995.
+ The Manager waived $21,803 in 1995 and $30,849 in 1996 of the
management fees shown.
++ The Manager waived $23,349 in 1995 and $20,036 in 1996 of the
management fees shown.
+++ The Manager waived $60,833 in 1996 and $24,546 in 1997 of
the management fees shown.
The Management Agreement for each Portfolio that does not
have a Sub-Adviser provides that MMC will (a) manage the
Portfolio's assets in accordance with the Portfolio's investment
objectives and policies as stated in the Prospectus and the SAI,
(b) make investment decisions for the Portfolio; (c) place
purchase and sale orders for portfolio transactions on behalf of
the Portfolio; (d) employ professional portfolio managers and
securities analysts who provide research services to the
Portfolio; and (e) administer the Portfolio's corporate affairs
and, in connection therewith, furnish the Portfolio with office
facilities and with clerical, bookkeeping and recordkeeping
services at such office facilities.
The Fund has entered into a Subadvisory Agreement on behalf
of each of the AIM Capital Appreciation Portfolio, Alliance Growth
Portfolio, the Van Kampen American Capital Enterprise Portfolio,
the TBC Managed Income Portfolio, the Putnam Diversified Income
Portfolio, the GT Global Strategic Income Portfolio and the MFS
Total Return Portfolio. Pursuant to each Subadvisory Agreement
among TIA, the Fund on behalf of the applicable Portfolio and the
applicable Sub-Adviser, the Sub-Adviser is authorized, in its
discretion and without prior consultation with TIA to: (a) manage
the Portfolio's assets in accordance with the Portfolio's
investment objectives and policies as stated in the Prospectus and
the Statement of Additional Information, (b) make investment
decisions for the Portfolio; (c) place purchase and sale orders
for portfolio transactions on behalf of the Portfolio; and (d)
employ professional portfolio managers and securities analysts who
provide research services to the Portfolio.
TIA has also entered into a Sub-Administrative Services
Agreement with MMC pursuant to which MMC will: (a) assist TIA in
supervising all aspects of each Portfolio's operations; (b) supply
each Portfolio with office facilities, statistical and research
services, data processing services, clerical, accounting and
bookkeeping services; and (c) prepare reports to each TIA
Portfolio's shareholders and prepare reports to and filings with
the SEC and state blue sky authorities, if applicable. TIA pays
MMC, as Sub-Administrator, a fee in an amount equal to an annual
rate of 0.10% of each TIA Portfolio's average daily net assets.
The Alliance Growth Portfolio is advised by Alliance Capital
Management L.P. ("Alliance Capital"). Alliance Capital is a
Delaware limited partnership with principal offices at 1345 Avenue
of the Americas, New York, New York 10105. For the services
provided by Alliance Capital, the Manager pays Alliance Capital an
annual fee calculated at a rate of 0.375% of the Portfolio's
average daily net assets,
paid monthly.
The Alliance Capital is a leading international investment
manager supervising client accounts with assets as of December 31,
1997 of more than $218.7 billion (of which more than $80 billion
represented the assets of investment companies). The Adviser's
clients are primarily major corporate employee benefit funds,
public employee retirement systems, investment companies,
foundations and endowment funds and included employee benefit
plans, as of December 31, 1997, 31 of the Fortune 100 Companies.
As of that date, Alliance Capital and its subsidiaries employed
more than 1, 450 employees who operated out of domestic offices
and the overseas offices of subsidiaries in Boston, Chennai,
Istanbul, London, Mumbai, Sydney, Tokyo, Toronto, Bahrain,
Luxembourg and Singapore as well as affiliate offices in Vienna,
Warsaw, Hong Kong, Sao Paulo, Seoul and Moscow. The 58 registered
investment companies comprising more than 70 separate investment
portfolios managed by Alliance Capital currently having over more
than three million shareholders.
Alliance Capital Management Corporation ("ACMC"), sole
general partner of, and the owner of a 1% general partnership
interest in, the Adviser, is an indirect wholly owned subsidiary
of The Equitable Life Assurance Society of the United States
("Equitable"), one of the largest life insurance companies in the
United States and a wholly owned subsidiary of The Equitable
Companies Incorporated ("ECI"), a holding company controlled by
AXA, a French insurance holding company which at September 30,
1997, beneficially owned approximately 59% of the outstanding
voting shares of ECI. As of June 30, 1997, ACMC and Equitable
Capital Management Corporation, each a wholly owned direct or
indirect subsidiary of Equitable, together with Equitable, owned
in the aggregate approximately 57% of the issued and outstanding
units representing assignments of beneficial ownership of limited
partnership interests in the Adviser ("Units").
AXA-UAP is a holding company for an international group of
insurance and related financial services companies. AXA-UAP's
insurance operations include activities in life insurance,
property and casualty insurance and reinsurance. The insurance
operations are diverse geographically, with activities principally
in Western Europe, North America and the Asia/Pacific area. AXA-
UAP is also engaged in asset management, investment banking,
securities trading, brokerage, real estate and other financial
services activities principally in the United States, as well as
Western Europe and the Asia/Pacific area.
Based on information provided by AXA-UAP, as of September
30, 1997 more than 25% of the voting power of AXA-UAP was
controlled directly and indirectly by FINAXA, a French holding
company. As of September 30, 1997 more than 25% of the voting
power of FINAXA was controlled directly and indirectly by four
French Mutual insurance companies (the "Mutuelles AXA"), one of
which, AXA Assurances I.A.R.D. Mutuelle, itself controlled
directly and indirectly more than 25% of the voting power of
FINAXA. Acting as a group, Mutuelles AXA control AXA-UAP and
FINAXA.
The AIM Capital Appreciation Portfolio is advised by A I M
Capital Management, Inc. ("AIM Capital"). AIM Capital is located
at 11 Greenway Plaza, Suite 100, Houston, Texas 77046 and is a
wholly owned subsidiary of A I M Advisors, Inc., which is a wholly
owned subsidiary of A I M Management Group Inc. A I M Management
Group Inc. is a holding company engaged in the financial serviced
business and is an indirect wholly owned subsidiary of AMVESCAP
PLC. For services provided by AIM Capital, the Manager pays to
AIM Capital an annual fee calculated at the rate of 0.375% of the
Portfolio's average daily net assets, paid monthly.
The Van Kampen American Capital Enterprise Portfolio is
advised by Van Kampen American Capital Asset Management, Inc.
("VKAC"). VKAC is located at One Parkview Plaza, Oakbrook Terrace,
IL 60181 and is a wholly owned subsidiary of Van Kampen American
Capital, Inc., which is a wholly owned subsidiary of VK/AC
Holding, Inc. VC/AC Holding, Inc., is a wholly owned subsidiary
of MSAM Holdings II, Inc. which in turn, is a wholly owned
subsidiary of Morgan Stanley, Dean Witter Discover & Co. For the
services provided by VKAC, the Manager pays to VKAC an annual fee
calculated at the rate of 0.325% of the Portfolio's average daily
net assets, paid monthly.
The TBC Managed Income Portfolio is advised by The Boston
Company Asset Management, Inc. ("TBCAM"). TBCAM is located at One
Boston Place, Boston, Massachusetts 02108, and is a wholly owned
subsidiary of The Boston Company, Inc., which is an indirect
wholly owned subsidiary of Mellon Bank Corporation. For the
services provided by TBCAM, the Manager pays to TBCAM an annual
fee calculated at the rate of 0.30% of the Portfolio's average
daily net assets, paid monthly.
The Putnam Diversified Income Portfolio is advised by Putnam
Investment Management, Inc. ("Putnam Management"). Putnam
Management is located at One Post Office Square, Boston,
Massachusetts 02109. Putnam Management is a subsidiary of Putnam
Investments, Inc., which, other than shares held by employees, is
a wholly owned subsidiary of Marsh & McLennan Companies, Inc. For
the services provided by Putnam Management, the Manager pays
Putnam Management an annual fee calculated at the rate of 0.35% of
the Portfolio's average daily net assets, paid monthly.
The GT Global Strategic Income Portfolio is advised by
Chancellor LGT Asset Management, Inc. ("Chancellor LGT"). The
U.S. offices of Chancellor LGT are located at 50 California
Street, San Francisco, California 94111 and 1166 Avenue of the
Americas, New York, New York 11036. Chancellor LGT is a member of
Liechtenstein Global Trust, formerly BIL GT Group. Other
worldwide affiliates of Liechtenstein Global Trust include LGT
Bank in Liechtenstein formerly Bank in Liechtenstein, an
international financial services institution founded in 1920. LGT
Bank in Liechtenstein has principal offices in Vaduz,
Liechtenstein. Its subsidiaries currently include LGT Bank in
Liechtenstein (Deutschland) GmbH, formerly Bank in Liechtenstein
(Frankfurt) GmbH, and LGT Asset Management AG, formerly Bilfinanz
and Verwaltung AG, located in Zurich, Switzerland.
Worldwide asset management affiliates also currently include
Chancellor LGT Trust Company, Chancellor LGT Senior Secured
Management, Inc., Chancellor LGT Venture Partners, Inc., LGT Asset
Management PLC, formerly G.T. Management PLC in London, England;
LGT Asset Management Ltd., formerly G.T. Management (Asia) Ltd. in
Hong Kong; LGT Investment Trust Management Ltd., formerly G.T.
Management (Japan) in Tokyo; LGT Asset Management Pte. Ltd.,
formerly G.T. Management (Singapore) PTE Ltd. located in
Singapore; LGT Asset Management Ltd., formerly G.T. Management
(Australia) Ltd., located in Sydney; and LGT Asset Management
GmbH, formerly BIL Asset Management GmbH, located in Frankfurt,
Germany.
For the services provided by Chancellor LGT, the Manager
pays to Chancellor LGT an annual fee calculated at the rate of
0.375% of the Portfolio's average daily net assets, paid monthly.
The MFS Total Return Portfolio is advised by Massachusetts
Financial Services Company ("MFS"). MFS is located at 500
Boylston Street, Boston, Massachusetts 02116 and is a subsidiary
of Sun Life of Canada (U.S.) Financial Services Holdings, Inc.,
which is an indirect wholly owned subsidiary of Sun Life Assurance
Company of Canada. For services provided by MFS, the Manager pays
MFS an annual fee calculated a rate equal to 0.375% of the
Portfolio's average daily net assets, paid monthly.
Portfolio Transactions and Distribution
Smith Barney distributes shares of the Fund as principal
underwriter. In addition, the Fund's Board of Directors has
determined that transactions for the Fund may be executed through
Smith Barney or any broker-dealer affiliate of Smith Barney (each,
an "Affiliated Broker") if, in the judgment of management, the use
of an Affiliated Broker is likely to result in price and execution
at least as favorable to the Fund as those obtainable through
other qualified broker-dealers, and if, in the transaction, the
Affiliated Broker charges the Fund a fair and reasonable rate
consistent with that charged to comparable unaffiliated customers
in similar transactions. The Fund will not deal with Smith Barney
in any transactions in which Smith Barney acts as principal. In
addition, the Alliance Growth Portfolio will not deal with
Donaldson, Lufkin & Jenrette ("DLJ") (an affiliate of Alliance
Capital) in any transactions in which DLJ acts as principal. In
addition, the Van Kampen American Capital Enterprise Portfolio may
not deal with Morgan Stanley & Co., Inc. ("Morgan Stanley") (an
affiliate of VK/AC Holding, Inc.) in any transaction in which
Morgan Stanley acts as principal.
Shown below are the total brokerage fees paid by the Fund
for the fiscal years ended October 31, 1995, October 31, 1996 and
October 31, 1997 on behalf of the Portfolios, the portion paid to
Smith Barney and the portion paid to other brokers for the
execution of orders allocated in consideration of research and
statistical services or solely for their ability to execute the
order. During the fiscal year ended October 31, 1995 the total
amount of commissionable transactions was $340,500,090;
$21,792,006 (6.4%) of which was directed to Smith Barney and
executed by unaffiliated brokers and $318,708,084 (93.6%) of which
was directed to other brokers. During the fiscal year ended
October 31, 1996 the total amount of commissionable transactions
was $948,677,922, $86,585,294 (9.13%) of which was directed to
Smith Barney and executed by unaffiliated brokers and $862,093,228
(90.87%) of which was directed to other brokers. During the fiscal
year ended October 31, 1997 the total amount of commissionable
transactions was $1,618,030,296, $115,051,655 (7.11%) of which was
directed to Smith Barney and executed by unaffiliated brokers and
$1,502,978,641 (92.89%) of which was directed to other brokers.
Commissions:
<TABLE>
<CAPTION>
Fiscal To Smith To Others (for
Year Ended Total Barney execution only)
<S> <C> <C> <C>
October 31, 1995 $ 684,356 $43,728 (6.4%) $640,628
(93.6%)
October 31, 1996 1,862,443 142,038 (7.63%) 1,720,405
(92.37%)
October 31, 1997 2,325,295 163,142 (7.02%) 2,162,153
(92.98%)
</TABLE>
The Fund attempts to obtain the most favorable execution of
each portfolio transaction that is, the best combination of net
price and prompt reliable execution. In making its decision as to
which broker or brokers are most likely to provide the most
favorable execution, the management of the Fund takes into account
the relevant circumstances. These include, in varying degrees,
the size of the order, the importance of prompt execution, the
breadth and trends of the market in the particular security,
anticipated commission rates, the broker's familiarity with such
security including its contacts with possible buyers and sellers
and its level of activity in the security, the possibility of a
block transaction and the general record of the broker for prompt,
competent and reliable service in all aspects of order processing,
execution and settlement.
Commissions are negotiated and take into account the
difficulty involved in execution of a transaction, the time it
took to conclude, the extent of the broker's commitment of its own
capital, if any, and the price received. Anticipated commission
rates are an important consideration in all trades and are weighed
along with the other relevant factors affecting order execution
set forth above. In allocating brokerage among those brokers who
are believed to be capable of providing equally favorable
execution, the Fund takes into consideration the fact that a
particular broker may, in addition to execution capability,
provide other services to the Fund such as research and
statistical information. It is not possible to place a dollar
value on such services nor does their availability reduce the
Manager's expenses in a determinable amount. These various
services may, however, be useful to the Manager or Smith Barney in
connection with its services rendered to other advisory clients
and not all such services may be used in connection with the Fund.
The Board of Directors of the Fund has adopted certain
policies and procedures incorporating the standard of Rule l7e-l
issued by the Securities and Exchange Commission under the 1940
Act which requires that the commissions paid to any Affiliated
Broker must be "reasonable and fair compared to the commission,
fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving
similar securities during a comparable period of time." The Rule
and the policy and procedures also contain review requirements and
require management to furnish reports to the Board of Directors
and to maintain records in connection with such reviews.
VOTING RIGHTS
The Directors themselves have the power to alter the number
and the terms of office of the directors, and they may at any time
lengthen their own terms or make their terms of unlimited duration
(subject to certain removal procedures) and appoint their own
successors, provided that in accordance with the 1940 Act always
at least a majority, but in most instances, at least two-thirds of
the Directors have been elected by the shareowners of the Fund.
Shares do not have cumulative voting rights and therefore the
owners of more than 50% of the outstanding shares of the Fund may
elect all of the Directors irrespective of the votes of other
shareowners.
The Fund offers its shares only for purchase by insurance
company separate accounts. With respect to any Fund shareholder
meeting, the insurance company will solicit and accept timely
voting instructions from its contract owners who own units in a
separate account investment division which corresponds to shares
in the Fund in accordance with the procedures set forth in the
section entitled "Voting Rights" in the accompanying prospectus
for the applicable contract and to the extent required by law.
Shares of the Fund attributable to contract owner interests for
which no voting instructions are received will be voted by the
insurance company in proportion to the shares for which voting
instructions are received.
Shares of the Fund entitle their owners to one vote per
share; however, on any matter submitted to a vote of the
shareowners, all shares then entitled to vote will be voted by
individual Portfolio unless otherwise required by the 1940 Act (in
which case all shares will be voted in the aggregate). For
example, a change in investment policy for a Portfolio would be
voted upon only by shareowners of the Portfolio involved.
Additionally, approval of an amendment to a Portfolio's advisory
or subadvisory agreement is a matter to be determined separately
by that Portfolio. Approval of a proposal by the shareowners of
one Portfolio is effective as to that Portfolio whether or not
enough votes are received from the shareowners of the other
Portfolios to approve the proposal as to that Portfolio.
FINANCIAL STATEMENTS
The financial information contained under the following
headings is hereby incorporated by reference to the Fund's 1997
Annual Reports to Shareholders:
<TABLE>
<CAPTION>
Annual Report of: Pages(s)in:
<S> <C>
Smith Barney Large Cap Value Portfolio
Alliance Growth Portfolio
Van Kampen American Capital Enterprise Portfolio
Schedule of Investments 11-24
Statements of Assets and Liabilities 25
Statements of Operations 26
Statements of Changes in Net Assets 27-29
Notes to Financial Statements 30-35
Financial Highlights (for a share of capital stock of each series
outstanding through each year)
36-38
Independent Auditors' Report 39
MFS Total Return Portfolio
TBC Managed Income Portfolio
Smith Barney Money Market Portfolio
Schedule of Investments 9-28
Statements of Assets and Liabilities 30
Statements of Operations 31
Statements of Changes in Net Assets 32-34
Notes to Financial Statements 35-40
Financial Highlights (for a share of capital stock of each series
outstanding through each year)
41-43
Independent Auditors' Report 44
Smith Barney High Income Portfolio
Putnam Diversified Income Portfolio
Schedule of Investments 10-39
Statements of Assets and Liabilities 41
Statements of Operations 42
Statements of Changes in Net Assets 43-44
Notes to Financial Statements 45-53
Financial Highlights (for a share of capital stock of each series
outstanding through each year)
54-55
Independent Auditors' Report 56
Smith Barney International Equity Portfolio
Smith Barney Pacific Basin Portfolio
GT Global Strategic Income Portfolio
Schedule of Investments 12-22
Statements of Assets and Liabilities 23
Statements of Operations 24
Statements of Changes in Net Assets 25-27
Notes to Financial Statements 28-36
Financial Highlights (for a share of capital stock of each series
outstanding through each year)
37-39
Independent Auditors' Report 40
AIM Capital Appreciation Portfolio
Schedule of Investments 7-17
Statements of Assets and Liabilities 18
Statements of Operations 19
Statements of Changes in Net Assets 20
Notes to Financial Statements 21-25
Financial Highlights (for a share of capital stock of each series
outstanding through each year)
26
Independent Auditors' Report 27
</TABLE>
