As filed with the Securities and Exchange Commission on December
23, 1998
Securities Act Registration No. 33-75644
Investment Company Act Registration No. 811-8372
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 10
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
__________________
Travelers Series Fund Inc.
(a Maryland Corporation)
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)
(212) 816-6474
(Registrant's Telephone Number, including Area Code)
Christina T. Sydor, Secretary
Travelers Series Fund Inc.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
__________________
Approximate Date of Proposed Public Offering: Continuous.
It is proposed that this filing will become effective (check
appropriate box):
[ ] Immediately upon filing pursuant to paragraph 485(b)
[ ] On (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] On February 28, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2) of rule
485
[ ] On (date) pursuant to paragraph (a)(2)
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective
date
for a previously filed post-effective amendment.
This Registration Statement contains thirteen portfolios of
Travelers Series Fund Inc. (the "Fund"). Numerous other versions
of prospectuses will be created from this Registration Statement.
The distribution system for each version of the prospectus is
different. These prospectuses will be filed with the Commission
pursuant to Rule 497.
PART A
Prospectus
<PAGE>
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TRAVELERS SERIES FUND INC.
PROSPECTUS
February 26, 1999
Smith Barney Pacific Basin Portfolio
Smith Barney International Equity Portfolio
Smith Barney Large Cap Value Portfolio
Smith Barney Large Capitalization Growth Portfolio EQUITY FUNDS
Alliance Growth Portfolio
AIM Capital Appreciation Portfolio
Van Kampen American Capital Enterprise Portfolio
MFS Total Return Portfolio
GT Global Strategic Income Portfolio
Travelers Managed Income Portfolio
FIXED INCOME FUNDS Putnam Diversified Income Portfolio
Smith Barney High Income Portfolio
Smith Barney Money Market Portfolio
Shares of each fund are offered only to insurance company Separate Accounts
which fund certain variable annuity and variable life insurance contracts. This
prospectus should be read together with the prospectus for those contracts.
The Securities and Exchange Commission has not approved the funds' shares as an
investment or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
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<PAGE>
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Contents
<TABLE>
<CAPTION>
Fund goal and strategies Page
<S> <C> <C>
Travelers Series Fund * Smith Barney Pacific Basin Portfolio 1
Inc. consists of 13
separate investment funds, * Smith Barney International Equity Portfolio 3
each with its own
investment objective and * Smith Barney Large Cap Value Portfolio 5
policies. Each fund
offers different levels * Smith Barney Large Capitalization Growth Portfolio 7
of potential return and
involves different * Alliance Growth Portfolio 8
levels of risk.
* AIM Capital Appreciation Portfolio 10
* Van Kampen American Capital Enterprise Portfolio 12
* MFS Total Return Portfolio 14
* GT Global Strategic Income Portfolio 15
* Travelers Managed Income Portfolio 18
* Putnam Diversified Income Portfolio 20
* Smith Barney High Income Portfolio 22
* Smith Barney Money Market Portfolio 24
More on the funds' investments 26
Management 31
Share transactions 36
Share price 36
Dividends, distributions and taxes 37
Financial highlights 38
</TABLE>
The managers:
Mutual Management Corp. (MMC), Travelers Investment Adviser Inc. (TIA) or
Travelers Asset Management International Corporation (TAMIC) is each fund's
manager. MMC, TIA and TAMIC are affiliates of Salomon Smith Barney Inc. and
subsidiaries of Citigroup Inc. Citigroup businesses produce a broad range of
financial services -- asset management, banking and consumer finance, credit and
charge cards, insurance, investments, investment banking and trading -- and use
diverse channels to make them available to consumer an corporate customers
around the world. Among these businesses are Citibank, Commercial Credit,
Primerica Financial Services, Salomon Smith Barney, SSBC Asset Management,
Travelers Life & Annuity, and Travelers Property Casualty. MMC and TAMIC select
investments for the funds for which they serve as managers. TIA has engaged
subadvisers to select investments for funds for which TIA serves as manager.
You should know:
An investment in the fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government agency.
Travelers Series Fund - i
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<PAGE>
The Fund's Goal and Investments Smith Barney Pacific Basin Portfolio
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- -------------------
Manager Investment goal Long-term capital appreciation.
MMC is the manager
--------------------------------------------------------
Portfolio Managers Key investments
David S. Ishibashi
Scott Kalb The fund invests primarily in equity securities of
companies in the Asia Pacific region. Equity securities
include exchange traded and over-the-counter common
stocks, preferred shares, debt securities convertible
into equity securities, depository receipts and warrants
and rights relating to equity securities.
- --------------------------------------------------------------------------------
Selection process
The manager emphasizes individual security selection while allocating the fund's
investments among companies in the Asia Pacific region. Companies in which the
fund invests may have large, mid or small size market capitalizations and may
operate in any market sector. Depending on the manager's assessment of long-term
growth potential, the fund's emphasis among Asia Pacific region markets and
issuers may vary.
In selecting individual companies for investment, the manager looks for:
. Above average earnings growth
. High relative return on invested capital
. Experienced and effective management
. Competitive advantages, such as high market share or special licenses and
patents
. Strong financial condition
The economic and political factors that the manager evaluates include:
. Economic stability and favorable prospects for economic growth
. Inflationary trends which create a favorable environment for securities
markets
. Government policies toward business affecting economic growth and securities
markets
. Currency stability
. Monetary and fiscal trends
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Fund performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the MSCI All Country Asia Pacific Index ("MSCI Index"). Past performance does
not necessarily indicate how the fund will perform in the future. Performance
figures do not reflect expenses incurred from investing through a Separate
Account. Please refer to the Separate Account prospectus for more information on
expenses.
[GRAPH APPEARS HERE]
The bar chart shows the performance of the fund's shares since its inception on
June 16, 1994.
Quarterly returns:
Highest: xx% in ___ quarter 199X
Lowest: xx% in ___ quarter 199X
Average Annual Total Returns
(for the periods ended December 31, 1998)
------------------------------------------------
One Five Since
year years inception
------------------------------------------------
Fund
MSCI Index
------------------------------------------------
Travelers Series Fund - 1
<PAGE>
Principal risks of investing in the fund
While investing in Asia Pacific region securities can bring added benefits, it
may also involve risks. Investors could lose money on their investment in the
fund, or the fund may not perform as well as other investments, if any of the
following occurs:
[_] Stock prices of securities in the Asia Pacific region decline
[_] Economic, political or social instabilities significantly disrupt the
principal financial markets in the Asia Pacific region
[_] Factors creating volatility in one Asia Pacific region country
negatively impact values or trading in other countries in the region
[_] Currency fluctuations negatively impact the fund's portfolio
[_] The government of one or more countries in the region imposes
restrictions on currency conversion or trading
[_] The economies in the Asia Pacific region grow at a slow rate or
experience a downturn or recession
[_] In changing markets the fund may not be able to sell securities in
desired amounts at prices it considers reasonable
[_] The manager's judgment about the attractiveness, value or potential
appreciation of a particular stock proves to be incorrect
Many Asia Pacific region countries in which the fund invests have markets that
are less liquid and more volatile than markets in the U.S. In some Asia Pacific
countries, there is also less information available about issuers and markets
because of less rigorous accounting and regulatory standards than in the U.S.
These risks are considered greater in the case of those Asia Pacific countries
that are emerging markets. To the extent the fund concentrates its investments
in one or more countries due to their large market capitalization in the Asia
Pacific region, such as Japan, the fund will be subject to greater risks than if
its assets were not so concentrated.
Travelers Series Fund - 2
<PAGE>
The Fund's Goal and Investments Smith Barney International Equity
Portfolio
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- --------------------
Manager Investment goal
MMC is the manager
Total return on its assets from growth of capital and
income.
--------------------------------------------------------
Portfolio Managers Key investments
James Conheady
Jeffrey Russell The fund invests primarily in equity securities of
foreign companies. Equity securities include exchange
traded and over-the-counter common stocks and preferred
shares, debt securities convertible into equity
securities, and warrants and rights.
- --------------------------------------------------------------------------------
Selection process
The manager emphasizes individual security selection while diversifying the
fund's investments across regions and countries which can help to reduce risk.
While the manager selects investments primarily for their capital appreciation
potential, some investments have an income component as well. Companies in which
the fund invests may have large, mid or small size market capitalizations and
may operate in any market sector. Market conditions around the world change
constantly as does the location of potential investment opportunities. Depending
on the manager's assessment of overseas potential for long-term growth, the
fund's emphasis among foreign markets and types of issuers may vary.
In selecting individual companies for investment, the manager looks for the
following:
. Above average earnings growth
. High relative return on invested capital
. Experienced and effective management
. Effective research, product development and marketing
. Competitive advantages
. Strong financial condition or stable or improving credit quality
. The range of individual investment opportunities
By spreading the fund's investments across many international markets, the
manager seeks to reduce volatility compared to an investment in a single region.
Unlike global mutual funds which may allocate a substantial portion of assets to
the U.S. markets, the fund invests substantially all of its assets in countries
outside of the U.S. In allocating assets among countries and regions, the
economic and political factors that the manager evaluates include:
. Low or decelerating inflation which creates a favorable environment for
securities markets
. Stable government with policies that encourage economic growth, equity
investment and development of securities markets
. Currency stability
Travelers Series Fund - 3
<PAGE>
Fund performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the MSCI EAFE-GDP Weighted Index ("MSCI Index"). Past performance does not
necessarily indicate how the fund will perform in the future. Performance
figures do not reflect expenses incurred from investing through a Separate
Account. Please refer to the Separate Account prospectus for more information on
expenses.
[GRAPH APPEARS HERE]
The bar chart show the performance of the fund's shares since its inception on
June 16, 1994.
Quarterly returns:
Highest: xx% in ___ quarter 199X
Lowest: xx% in ___ quarter 199X
Average Annual Total Returns
(for the periods ended December 31, 1998)
-------------------------------------------------
One Five Since
year years inception
-------------------------------------------------
Fund
MSCI Index
-------------------------------------------------
Principal risks of investing in the fund
While investing in foreign securities can bring added benefits, it may also
involve additional risks. Investors could lose money on their investment in the
fund, or the fund may not perform as well as other investments, if any of the
following occurs:
[_] Foreign stock prices decline
[_] Adverse governmental action or political, economic or market instability
occurs in a foreign country
[_] The currency in which a security is priced declines in value relative to
the U.S. dollar
[_] The manager's judgment about the attractiveness, value or potential
appreciation of a particular stock proves to be incorrect
Many foreign countries in which the fund invests have markets that are less
liquid and more volatile than markets in the U.S. In some foreign countries,
there is also less information available about foreign issuers and markets
because of less rigorous accounting and regulatory standards than in the U.S.
Currency fluctuations could erase investment gains or add to investment losses.
The risk of investing in foreign securities is greater in the case of emerging
markets.
In Europe, Economic and Monetary Union (EMU) and the introduction of a single
currency is scheduled to begin on January 1, 1999. There are significant
political and economic risks associated with EMU, which may increase the
volatility of European markets and present valuation problems for the fund.
Travelers Series Fund - 4
<PAGE>
The Fund's Goal and Investments Smith Barney Large Cap Value
Portfolio
- --------------------------------------------------------------------------------
- --------------------
Manager Investment goals
MMC is the manager
Current income and long-term growth of income and
capital.
-------------------------------------------------------
Portfolio Manager Key investments
Ellen Cardozo
Sonsino The fund invests primarily in common stocks of U.S.
companies having market capitalizations of at least $5
billion at the time of investment.
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Selection process
The manager employs a two-step selection process. First, the manager uses
proprietary models and fundamental research to try to find stocks that are
underpriced in the market relative to their fundamental value. Next, the manager
looks for a positive catalyst in the company's near term outlook which the
manager believes would accelerate earnings.
In selecting individual companies for investment, the manager looks for the
following:
. Low market valuations measured by the manager's valuation models
. Above average dividend yields and established dividend records
. Positive changes in earnings prospects because of
- New management
- Effective research, product development and marketing
- A business strategy not yet recognized by the marketplace
- Regulatory changes favoring the company
. High return on invested capital and strong cash flow
. Liquidity
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Fund performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the S&P 500 Index ("S&P 500 Index"). Past performance does not necessarily
indicate how the fund will perform in the future. Performance figures do not
reflect expenses incurred from investing through a Separate Account. Please
refer to the Separate Account prospectus for more information on expenses.
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
The bar chart shows the performance of the fund's shares since its inception on
June 16, 1994.
Quarterly returns:
Highest: xx% in ___ quarter 199X
Lowest: xx% in ___ quarter 199X
Average Annual Total Returns
(for the periods ended December 31, 1998)
-------------------------------------------------------
One Five Since
year years inception
-------------------------------------------------------
Fund
S&P 500 Index
-------------------------------------------------------
Travelers Series Fund - 5
<PAGE>
Principal risks of investing in the fund
While investing in large capitalization value securities can bring added
benefits, it may also involve additional risks. Investors could lose money on
their investment in the fund, or the fund may not perform as well as other
investments, if any of the following occurs:
[_] The U.S. stock market goes down.
[_] Value stocks or larger capitalization stocks are temporarily out of
favor.
[_] The manager's judgment about the attractiveness, value or potential
appreciation of a particular stock proves to be incorrect.
[_] An adverse event, such as negative press reports about a company in the
fund, depresses the value of the company's stock.
Travelers Series Fund - 6
<PAGE>
The Fund's Goal and Investments Smith Barney Large Capitalization Growth
Portfolio
- --------------------------------------------------------------------------------
- --------------------
Manager Investment goal Long-term growth of capital.
MMC is the manager
--------------------------------------------------------
Portfolio Manager Key investments
Alan Blake
The fund invests primarily in equity securities of U.S.
companies having market capitalization of at least $5
billion at the time of investment.
- --------------------------------------------------------------------------------
Selection process
The manager emphasizes individual security selection while diversifying the
fund's investments across industries which may help to reduce risk. The manager
attempts to identify established large capitalization companies with the highest
growth potential. The manager then analyzes each company in detail, ranking its
management, strategy and competitive market position. Finally, the manager
attempts to identify the best values available among the growth companies
identified.
In selecting individual companies for investment, the manager looks for:
. Favorable earnings prospects
. Technological innovation
. Industry dominance
. Competitive products and services
. Global scope
. Long term history of performance
. Consistent and sustainable long-term growth in dividends and earnings per
share
. Strong cash flow
. High return on equity
. Strong financial condition
. Experienced and effective management
- --------------------------------------------------------------------------------
Fund performance
As the fund has not been in operation for a full calendar year, no performance
information is included in this prospectus.
Principal risks of investing in the fund
While investing in large capitalization growth securities can bring added
benefits, it may also involve additional risks. Investors could lose money on
their investment in the fund, or the fund may not perform as well as other
investments, if any of the following occurs:
[_] The U.S. stock market goes down.
[_] Growth stocks or large capitalization stocks are temporarily out of favor.
[_] The manager's judgment about the attractiveness, value or potential
appreciation of a particular stock proves to be incorrect.
[_] An adverse event, such as negative press reports about a company in the
fund, depresses the value of the company's stock.
Travelers Series Fund - 7
<PAGE>
The Fund's Goal and Investments Alliance Growth Portfolio
- --------------------------------------------------------------------------------
- ----------------------------
Manager and subadviser Investment goal Long-term growth of capital.
TIA is the manager
--------------------------------------------------
Alliance Capital Key investments
Management is
the subadviser. The fund invests primarily in equity securities of
U.S. companies. Equity securities include exchange
Alliance is a global traded and over-the-counter common stocks and
investment adviser preferred stock, debt securities convertible
providing diversified into equity securities, and warrants and rights
services to institutions relating to equity securities.
and individuals through
a broad line of The fund may also invest in fixed income
investments including securities for capital appreciation, including
more than ___ mutual lower quality fixed income securities.
funds.
Alliance manages over ___
billion in assets.
Portfolio Manager
Tyler Smith
- --------------------------------------------------------------------------------
Selection process
The subadviser emphasizes individual security selection while spreading
investments among many industries and sectors. The subadviser identifies
individual companies that it believes offer exceptionally high prospects for
growth and uses qualitative analysis to control risk. The subadviser also over-
and underweights particular industry sectors depending on the subadviser's
outlook for each sector. In selecting individual companies and sectors for
investment the subadviser looks for the following:
. Favorable earnings outlook
. Above average growth rates at reasonable market valuations
. Experienced and effective management
. High relative return on invested capital
. Strong financial condition
. Effective research, product development and marketing
- --------------------------------------------------------------------------------
Fund performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the Russell 1000 Index. Past performance does not necessarily indicate how the
fund will perform in the future. Performance figures do not reflect expenses
incurred from investing through a Separate Account. Please refer to the
Separate Account prospectus for more information on expenses.
- --------------------------------------------------------------------------------
[GRAPH APPEARS HERE]
The bar chart shows the performance of the fund's shares since its inception on
June 16, 1994.
Quarterly returns:
Highest: xx% in ___ quarter 199X
Lowest: xx% in ___ quarter 199X
Average Annual Total Returns
(for the periods ended December 31, 1998)
--------------------------------------------------
One Five Since
year years inception
--------------------------------------------------
Fund
Russell 1000
Index
--------------------------------------------------
Travelers Series Fund - 8
<PAGE>
Principal risks of investing in the fund
While investing in growth securities can bring added benefits, it may also
involve additional risks. Investors could lose money on their investment in the
fund, or the fund may not perform as well as other investments, if any of the
following occurs:
[_] Stock markets decline.
[_] Growth stocks are temporarily out of favor.
[_] An adverse event, such as negative press reports about a company in the
fund, depresses the value of the company's stock.
[_] The subadviser's judgment about the attractiveness, value or potential
appreciation of a particular stock proves to be incorrect.
Travelers Series Fund - 9
<PAGE>
The Fund's Goal and Investments AIM Capital Appreciation Portfolio
- -------------------------------------------------------------------------------
- ------------------------
Manager and subadviser Investment Goal Capital Appreciation.
TIA is the manager
-----------------------------------------
A I M Capital Management, Key Investments
Inc. is the subadviser.
The fund invests primarily in common
stocks of U.S. companies with an emphasis
on medium-sized and smaller growth
companies.
-----------------------------------------
A I M is an indirect subsidiary Selection Process
of AMVESCAP PLC, an
independent investment The subadviser emphasizes individual
management firm engaged in security selection while diversifying the
institutional investment fund's investments across industries,
management and retail mutual which may help to reduce risk. The
fund businesses in the U.S., subadviser seeks to identify companies
Europe and the Pacific Region. having a consistent record of long-term
A I M manages over $__ above average growth in earnings as well
billion in assets. as companies that are only beginning to
experience significant and sustainable
earnings growth.
In selecting individual companies for
investment, the subadviser looks for the
following:
Portfolio Managers . New or innovative products, services
Kenneth A. Zschappel or processes that should enhance
Charles D. Scavone future earnings
David P. Barnard . Increasing market share
Robert M. Kippes . Experienced and effective management
. Competitive advantages
The subadviser then employs a disciplined
review process to identify and remove from
the fund's portfolio any investments that
are not achieving their expected growth
potential.
- --------------------------------------------------------------------------------
Fund Performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the Lipper Midcap Index. Past performance does not necessarily indicate how the
fund will perform in the future. Performance figures do not reflect expenses
incurred from investing through a Separate Account. Please refer to the Separate
Account prospectus for more information on expenses.
[GRAPH APPEARS HERE]
This bar chart shows the performance of the fund's shares since its inception
on October 10, 1995.
Quarterly Returns:
Highest: xx% in ___ quarter 199X
Lowest: xx% in ___ quarter 199X
Average Annual Total Returns
(for the periods ended December 31, 1998)
-------------------------------------------------
One Since
year inception
------------------------------------------------
Fund
Lipper Midcap Index
------------------------------------------------
Travelers Series Fund - 10
<PAGE>
Principal risks of investing in the fund
While investing in smaller growth securities can bring added benefits, it may
also involve risks. Investors could lose money on their investment in the fund,
or the fund may not perform as well as other investments, if any of the
following occurs:
[_] The U.S. stock market declines.
[_] Midcap and smallcap growth stocks are temporarily out of favor.
[_] An adverse event, such as negative press reports about a company in the
fund's portfolio, depresses the value of the company's stock.
[_] The subadviser's judgment about the attractiveness, value or potential
appreciation of a particular stock proves to be incorrect.
The fund may invest in relatively new or unseasoned companies that are in their
early stages of development. Smaller, unseasoned companies present greater risks
than securities of larger, more established companies because:
[_] They may be dependent on a small number of products or services for
their revenues
[_] They may lack substantial capital reserves to make needed capital
investments or absorb losses
[_] They may have less experienced management
[_] Their securities may be less widely traded, less liquid and more
volatile
[_] Recession or adverse economic trends are more likely to sharply and
negatively affect their earnings and financial condition
Travelers Series Fund - 11
<PAGE>
The Fund's Goal and Investments Van Kampen American Capital Enterprise
Portfolio
- --------------------------------------------------------------------------------
- ----------------------------
Manager and Subadviser Investment Goal Capital appreciation.
MMC is the manager
-----------------------------------------
Van Kampen Asset Key Investments
Management, Inc. is the
subadviser. The fund invests primarily in common
stocks of U.S. growth companies.
Van Kampen is a diversified
asset management company with
more than _____ billion
under management.
Portfolio Manager
Jeff New
- --------------------------------------------------------------------------------
Selection Process
The subadviser emphasizes individual security selection while diversifying the
fund's investments across industries, which can help reduce risk. The subadviser
seeks promising growth opportunities by investing primarily in large and mid-
capitalization companies. The subadviser emphasizes growth companies but may
also invest in companies in cyclical industries during periods when their
securities appear attractive to the subadviser for capital appreciation.
The subadviser looks for companies with a combination of positive future
fundamentals and an attractive current valuation. The subadviser frequently
meets with company managements to help assess individual companies for potential
investment. The subadviser looks for companies exhibiting one or more of the
following:
. Accelerating earnings growth
. Consistent earnings growth
. Better than expected earnings, often related to new products, processes or
services or cost reductions
. Positive changes in a company or its industry or regulatory environment
The subadviser also employs an active sell discipline and will generally sell
stock if it determines:
. the company's future fundamentals have deteriorated
. the company's stock has reached full or excessive valuation levels
Travelers Series Fund - 12
<PAGE>
Fund Performance
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the S&P 500 Index and the Lipper Growth Average Index ("Lipper Index"). Past
performance does not necessarily indicate how the fund will perform in the
future. Performance figures do not reflect expenses incurred from investing
through a Separate Account. Please refer to the Separate Account prospectus for
more information on expenses.
[GRAPH APPEARS HERE]
The bar chart shows the performance of the fund's shares since its inception on
June 16, 1994.
Quarterly Returns:
Highest: xx% in ___ quarter 199X
Lowest: xx% in ___ quarter 199X
Average Annual Total Returns
(for the periods ended December 31, 1998)
---------------------------------------------------
One Five Since
year years inception
---------------------------------------------------
Fund
S&P 500 Index
Lipper Index
---------------------------------------------------
Principal risks of investing in the fund
While investing in securities of large and medium capitalization companies can
bring added benefits, it may also involve risks. Investors could lose money on
their investment in the fund, or the fund may not perform as well as other
investments, if any of the following occurs:
[_] The U.S. stock market declines.
[_] Large and medium capitalization stocks or growth stocks are temporarily
out of favor.
[_] An adverse event, such as negative press reports about a company in the
fund's portfolio, depresses the value of the company's stock or industry.
[_] The subadviser's judgment about the attractiveness, value or potential
appreciation of a particular stock or industry proves to be incorrect.
Travelers Series Fund - 13
<PAGE>
The Fund's Goal and Investments MFS Total Return Portfolio
- --------------------------------------------------------------------------------
- ---------------------------------
Manager and subadviser Investment Goals
TIA is the manager
Primary: Above average income (compared
Massachusetts Financial to a portfolio invested entirely in
Services Company is the equity securities) consistent with the
Fund's subadviser. prudent employment of capital. Secondary:
Growth of capital and income.
-----------------------------------------
MFS and its predecessor Key Investments
organizations have a history of
money management dating The fund invests in a broad range of
from 1924. The MFS equity and fixed income securities of
organization manages both U.S. and foreign issuers.
approximately $___ billion on
behalf of __ million investor The fund's equity securities include
accounts. common and preferred stock; bonds,
warrants or rights convertible into stock
Portfolio Managers and depositary receipts for those
David M. Calabro securities.
Geoffrey L. Kurinsky
Constantinos Mokas The fund's fixed income securities
Lisa B. Nurme include corporate debt obligations of any
Maura A. Shaughnessy maturity, Brady bonds, U.S. Government
securities, mortgage-backed securities,
zero-coupon bonds, deferred interest
bonds and payment in kind bonds.
Credit quality: The fund's assets may
consist of both investment grade and
lower quality securities. The fund may
invest up to 20% of the fund's assets in
nonconvertible fixed income securities
rated below investment grade or unrated
securities of equivalent quality.
- --------------------------------------------------------------------------------
Selection process
Under normal market conditions and depending on the subadviser's view of
economic and money market conditions, fiscal and monetary policy and security
values, the fund's assets will be allocated among fixed income and equity
investments within the following ranges:
. between 40% and 75% in equity securities . at least 25% in non-convertible
fixed income securities
Equity investments
The subadviser uses a "bottom up" investment approach in selecting securities
based on its fundamental analysis of an individual security's value. In
selecting individual equity securities for investment, the subadviser seeks
companies:
. that are undervalued in the market relative to their long term potential
because the market has overlooked them or because they are temporarily out
of favor in the market due to market declines, poor economic conditions or
adverse regulatory or other changes
. that generally have low price to book, price to sales and/or price to
earnings ratios
. with relatively large market capitalizations (i.e., market capitalizations
of $5 billion or more).
The subadviser also invests in convertible securities that generally provide a
fixed income stream and an opportunity to participate in an increase in the
market price of the underlying common stock.
Fixed income investments
The subadviser periodically assesses the three month outlook for inflation rate
changes, economic growth and other fiscal measures and their effect on U.S.
treasury interest rates. Using that assessment, the subadviser determines a
probable difference between yields on U.S. treasury securities and on other
types of fixed income securities and selects those securities the subadviser
believes will deliver favorable returns.
In selecting individual fixed income investments for the fund, the subadviser
looks for:
. favorable yield, maturity and credit quality characteristics
. strong financial condition
Travelers Series Fund - 14
<PAGE>
FUND PERFORMANCE
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the S&P 500 Index and the Lehman Brothers Government Corporate Bond Index
("Lehman Brothers Index"). Past performance does not necessarily indicate how
the fund will perform in the future. Performance figures do not reflect
expenses incurred from investing through a Separate Account. Please refer to
the Separate Account prospectus for more information on expenses.
[GRAPH APPEARS HERE]
The bar chart shows the performance of the fund's shares since its inception
on June 16, 1994.
QUARTERLY RETURNS:
Highest: xx% in ___ quarter 199X
Lowest: xx% in ___ quarter 199X
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
------------------------------------------------------
One Five Since
year years inception
------------------------------------------------------
Fund
S&P 500 Index
Lehman Brothers Index
------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE FUND
While investing in a mix of equity and debt securities can bring added
benefits, it may also involve additional risks. Investors could lose money in
the fund or the fund's performance could fall below other possible investments
if any of the following occurs:
[_] The subadviser's allocation of investments between equity and fixed income
securities could cause the fund to miss attractive investment opportunities
by underweighting markets that generate significant returns or cause the
fund to incur losses by overweighting markets that experience significant
declines.
[_] The subadviser's judgment about the attractiveness, value or potential
appreciation of a particular security proves to be incorrect.
[_] Equity investments lose their value due to a decline in the U.S. stock
market.
[_] Value or large capitalization stocks are temporarily out of favor.
[_] An adverse event, such as negative press reports about a company in the
fund's portfolio, depresses the value of the company's stock.
[_] Fixed income investments lose their value due to an increase in interest
rates.
[_] The issuer of a debt security in the fund defaults on its obligation to pay
principal or interest, has its credit rating downgraded by a rating
organization or is perceived by the market to be less creditworthy.
[_] Mortgage and asset backed securities are subject to the same default risks
of other fixed income securities, but it may be more difficult to enforce
rights against the assets underlying these securities in case of default.
[_] As a result of declining interest rates, the issuer of a security exercises
its right to prepay principal earlier than scheduled, forcing the fund to
reinvest in lower yielding securities. This is known as call risk.
[_] As a result of rising interest rates, the issuer of a security exercises
its right to pay principal later than scheduled, which will lock in a
below-market interest rate and reduce the value of the security. This is
known as extension risk.
[_] Securities with longer maturities are more sensitive to interest rate
changes and may be more volatile.
The fund may invest in lower quality securities that are speculative and have
only an adequate capacity to pay principal and interest. These securities have
a higher risk of default, tend to be less liquid, and may be more difficult to
value. Changes in economic conditions or other circumstances are more likely
to lead issuers of these securities to have a weakened capacity to make
principal and interest payments.
Many foreign countries in which the fund invests have less liquid and more
volatile markets than in the U.S. In some of the foreign countries in which
the fund invests, there is also less information available about foreign
issuers and markets because of less rigorous accounting and regulatory
standards than in the U.S. Currency fluctuations could erase investment gains
or add to investment losses. The risk of investing in foreign securities is
greater in the case of less developed countries.
Travelers Series Fund - 15
<PAGE>
THE FUND'S GOAL AND INVESTMENTS GT GLOBAL STRATEGIC INCOME PORTFOLIO
- --------------------------------------------------------------------------------
- --------------------------------
MANAGER AND SUBADVISER INVESTMENT GOALS
TIA is the Manager.
Primary: High current Secondary: Capital
income appreciation
---------------------------------------------
INVESCO (NY), Inc. is the KEY INVESTMENTS
subadviser.
The fund invests primarily in debt
INVESCO and its affiliates securities of U.S. and foreign companies,
manage approximately banks and governments, including those in
$____ billion of assets. emerging markets.
PORTFOLIO MANAGERS CREDIT QUALITY: At least 50% of the fund's
Cheng-Hock Lau assets consist of debt securities that are
David Hughes investment grade at the time of purchase.
Craig Munro The remainder may consist of lower-quality
bonds whose credit quality is considered
the equivalent of U.S. corporate debt
securities commonly known as "junk bonds."
DURATION: The fund's average duration will
generally vary from 3 to 7 years depending
on the subadviser's outlook for interest
rates. Individual securities may be of any
maturity.
- --------------------------------------------------------------------------------
SELECTION PROCESS
The subadviser uses a combination of a "top-down" approach and quantitative
models to create an optimal risk/return allocation of the fund's assets among
debt securities of issuers in three separate investment areas: (1) the United
States, (2) developed foreign countries, and (3) emerging markets. The
subadviser then selects individual debt securities within each area on the
basis of its views as to the values available in the marketplace.
In allocating investments among countries and asset classes, the Subadviser
evaluates the following:
. Currency, inflation and interest rate trends . Growth rate forecasts
. Proprietary risk measures . Fiscal policies
. Balance of payments status . Political outlook
In selecting individual debt securities, the subadviser evaluates the
following:
. Yield . Issue classification
. Maturity . Credit quality
. Call or prepayment risk
- --------------------------------------------------------------------------------
FUND PERFORMANCE
This bar chart indicates the risks of investing in the fund by showing
changes in the fund's performance from year to year. The table shows how the
fund's average annual returns for different calendar periods compare to the
return of the J.P. Morgan Global Bond Index ("Morgan Index"). Past
performance does not necessarily indicate how the fund will perform in the
future. Performance figures do not reflect expenses incurred from investing
through a Separate Account. Please refer to the Separate Account prospectus
for more information on expenses.
[GRAPH APPEARS HERE]
The bar chart shows the performance of the fund's shares since its inception
on June 16, 1994.
QUARTERLY RETURNS:
Highest: xx% in ___ quarter 199X
Lowest: xx% in ___ quarter 199X
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
--------------------------------------------------
One Five Since
year years inception
--------------------------------------------------
Fund
Morgan Index
--------------------------------------------------
Travelers Series Fund - 16
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
While investing in global debt securities can bring added benefits, it may
also involve risks. Investors could lose money in the fund or the fund's
performance could fall below other possible investments if any of the
following occurs:
[_] Debt securities lose their value due to an increase in market interest
rates in one or more regions, a decline in an issuer's credit rating or
financial condition or a default by an issuer.
[_] As a result of declining interest rates, the issuer of a security exercises
its right to prepay principal earlier than scheduled, forcing the fund to
reinvest in lower yielding securities. This is known as call or prepayment
risk.
[_] As a result of rising interest rates, the issuer of a security exercises
its right to pay principal later than scheduled, which will lock in a
below-market interest rate and reduce the value of the security. This is
known as extension risk.
[_] The manager's judgment about the attractiveness, value or potential
appreciation of a particular security proves to be incorrect.
[_] An unhedged currency in which a security is priced declines in value
relative to the U.S. dollar
[_] The subadviser's judgment about the attractiveness, relative yield, value
or potential appreciation of a particular security, or the stability of a
particular government proves to be incorrect.
The fund may invest in lower quality securities that are speculative and have
only an adequate capacity to pay principal and interest. These securities have a
higher risk of default, tend to be less liquid, and may be more difficult to
value. Changes in economic conditions or other circumstances are more likely to
lead issuers of these securities to have a weakened capacity to make principal
and interest payments.
Many foreign countries in which the fund invests have markets that are less
liquid and more volatile than markets in the U.S. In some of the foreign
countries in which the fund invests, there is also less information available
about foreign issuers and markets because of less rigorous accounting and
regulatory standards than in the U.S. Currency fluctuations could erase
investment gains or add to investment losses. The risk of investing in foreign
securities is greater in the case of less developed countries.
In Europe, Economic and Monetary Union (EMU) and the introduction of a single
currency are scheduled to begin on January 1, 1999. There are significant
political and economic risks associated with EMU, which may increase the
volatility of European markets and present valuation problems for the fund.
The fund is NOT diversified, which means that it can invest a higher percentage
of its assets in any one issuer than a diversified fund. Being non-diversified
may magnify the fund's losses from adverse events affecting a particular issuer.
Travelers Series Fund - 17
<PAGE>
THE FUND'S GOAL AND INVESTMENTS TRAVELERS MANAGED INCOME PORTFOLIO
- --------------------------------------------------------------------------------
- ----------------------------
MANAGER INVESTMENT GOAL
TAMIC is the Manager.
High current income consistent with prudent
risk of capital.
---------------------------------------------
PORTFOLIO MANAGER KEY INVESTMENTS
F. Denney Voss
The fund invests primarily in U.S. corporate
debt obligations and U.S. government
securities, including mortgage and asset
backed securities, but may also invest to a
limited extent in foreign issuers.
CREDIT QUALITY: The fund invests primarily in
investment grade obligations. Up to 35% of
the fund's assets may be invested in below
investment grade obligations with no minimum
rating.
DURATION: At least 65% of the fund's assets
are invested in securities having durations
of 10 years or less. The fund's average
portfolio duration will vary between 2 to 5
years depending on the manager's outlook for
interest rates.
- -------------------------------------------------------------------------------
SELECTION PROCESS
The manager uses a three step "top down" investment approach to selecting
investments for the fund by identifying undervalued sectors and individual
securities. Specifically, the manager:
. Determines appropriate sector and maturity weightings based on the manager's
intermediate and long-term assessments of broad economic and interest rate
trends
. Uses fundamental research methods to identify undervalued sectors of the
government and corporate debt markets and adjusts portfolio positions to take
advantage of new information
. Analyzes yield maturity, issue classification and quality characteristics to
identify individual securities that present what the manager consider the
optimal balance of potential return and manageable risk
- --------------------------------------------------------------------------------
FUND PERFORMANCE
This bar chart indicates the risks of investing in the fund by showing
changes in the fund's performance from year to year. The table shows how the
fund's average annual returns for different calendar periods compare to the
return of the Lehman Brothers Intermediate Government/Corporate Index
("Lehman Brothers Index"). Past performance does not necessarily indicate how
the fund will perform in the future. Performance figures do not reflect
expenses incurred from investing through a Separate Account. Please refer to
the Separate Account prospectus for more information on expenses.
[GRAPH APPEARS HERE]
The bar chart shows the performance of the fund's shares since its inception
on June 16, 1994.
QUARTERLY RETURNS:
Highest: xx% in ___ quarter 199X
Lowest: xx% in ___ quarter 199X
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
---------------------------------------------------------
One Five Since
year years inception
---------------------------------------------------------
Fund
Lehman Brothers Index
---------------------------------------------------------
Travelers Series Fund - 18
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
While investing in debt securities can bring added benefits, it may also
involve risks. Investors could lose money in the fund or the fund's
performance could fall below other possible investments if any of the
following occurs:
[_] The issuer of a debt security in the fund defaults on its obligation to pay
principal or interest, has its credit rating downgraded by a rating
organization or is perceived by the market to be less creditworthy.
[_] Interest rates go up, causing the prices of debt securities in the fund to
fall.
[_] As a result of declining interest rates, the issuer of a security exercises
its right to prepay principal earlier than scheduled, forcing the fund to
reinvest in lower yielding securities. This is known as call or prepayment
risk.
[_] As a result of rising interest rates, the issuer of a security exercises
its right to pay principal later than scheduled, which will lock in a
below-market interest rate and reduce the value of the security. This is
known as extension risk.
[_] The manager's judgment about the attractiveness, value or potential
appreciation of a particular security proves to be incorrect.
The fund may invest in lower quality securities that are speculative and have
only an adequate capacity to pay principal and interest. These securities
have a higher risk of default, tend to be less liquid, and may be more
difficult to value. Changes in economic conditions or other circumstances are
more likely to lead issuers of these securities to have a weakened capacity
to make principal and interest payments.
Many foreign countries in which the fund invests have markets that are less
liquid and more volatile than markets in the U.S. In some of the foreign
countries in which the fund invests, there is also less information available
about foreign issuers and markets because of less rigorous accounting and
regulatory standards than in the U.S. Currency fluctuations could erase
investment gains or add to investment losses. The risk of investing in
foreign securities is greater in the case of less developed countries.
In Europe, Economic and Monetary Union (EMU) and the introduction of a single
currency are scheduled to begin on January 1, 1999. There are significant
political and economic risks associated with EMU, which may increase the
volatility of European markets and present valuation problems for the fund.
Travelers Series Fund - 19
<PAGE>
The Fund's Goal and Investments Putnam Diversified Income Portfolio
- --------------------------------------------------------------------------------
- ------------------------------
Manager and Subadviser Investment Goal
MMC is the manager.
High current income consistent with
preservation of capital.
-------------------------------------------
Putnam Investment Key Investments
Management, Inc. is the
subadviser. The fund invests primarily in debt
securities of U.S. and foreign governments
and corporations.
Putnam has managed mutual
funds since 1937. Putnam CREDIT QUALITY: The fund may invest in
and its affiliates manage over securities with a wide range of credit
$___ billion in assets. qualities depending on the particular
sector of the fixed income securities
market in which the manager invests.
Portfolio Manager Duration: The Fund's Duration will
A team of fixed income generally vary from 3 to 7 years depending
specialists coordinated by on market conditions and the subadviser's
Jennifer Evans Leichter outlook for interest rates. Individual
securities may be of any duration.
- --------------------------------------------------------------------------------
Selection Process
The subadviser combines "top down" and "bottom up" investment styles, with an
emphasis on active sector strategies. The subadviser believes that actively
allocating the fund's investments among sectors of the fixed income securities
markets, as opposed to investing in any one sector, will better enable the fund
to control risk while pursuing its objective of high current income.
The subadviser allocates its investment among the following three sectors of the
fixed income securities market:
. A U.S. Government Sector, consisting primarily of securities of the U.S.
government, its agencies and instrumentalities and related options,
futures and repurchase agreements. The subadviser allocates at least 20%
of the fund to the U.S. Government Sector;
. A High Yield Sector, consisting primarily of high yielding, lower-rated,
high risk U.S. and foreign corporate fixed-income securities commonly
called "junk bonds"; and
. An International Sector, consisting primarily of obligations of foreign
governments, their agencies and instrumentalities, supranational entities,
and foreign corporations, including issuers in emerging markets, and
related options and futures.
The subadviser over- and underweights investments in each sector depending on
the subadviser's views on economic, interest rate and political trends. The
subadviser utilizes proprietary techniques to organize and rank opportunities
presented by the various sectors. In making sector allocations, the subadviser
evaluates:
. Capital flows . Default trends
. Political trends . Interest rate forecasts
Specialists managing each sector then select individual securities within each
sector that represent risk/return opportunities believed optimal. In selecting
securities for investment, the subadviser looks for favorable yield, maturity,
issue classification and quality characteristics.
Travelers Series Fund - 20
<PAGE>
FUND PERFORMANCE
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the Lehman Brothers Aggregate Bond Index and the Salomon Brothers Non-U.S. World
Government Bond Index. Past performance does not necessarily indicate how the
fund will perform in the future. Performance figures do not reflect expenses
incurred from investing through a Separate Account. Please refer to the Separate
Account prospectus for more information on expenses.
[GRAPH APPEARS HERE]
The bar chart shows the performance of the fund's shares since June 16, 1994.
QUARTERLY RETURNS:
Highest: xx% in ___ quarter 199X
Lowest: xx% in ___ quarter 199X
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
-----------------------------------------------------------
One Five Since
year years inception
-----------------------------------------------------------
Fund
Lehman Brothers Index
Salomon Brothers Index
-----------------------------------------------------------
- --------------------------------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE FUND
While investing in fixed income securities can bring added benefits, it may also
involve additional risks. Investors could lose money in the fund or the fund's
performance could fall below other possible investments if any of the following
occurs:
[_] Fixed income securities lose their value due to an increase in market
interest rates in one or more regions, a decline in an issuer's credit
rating or financial condition or a default by an issuer.
[_] As a result of declining interest rates, the issuer of a security
exercises its right to prepay principal earlier than scheduled, forcing
the fund to reinvest in lower yielding securities. This is known as call
or prepayment risk.
[_] As a result of rising interest rates, the issuer of a security exercises
its right to pay principal later than scheduled, which will lock in a
below-market interest rate and reduce the value of the security. This is
known as extension risk.
[_] An unhedged currency in which a security is priced declines in value
relative to the U.S. dollar
[_] The subadviser's judgment about the attractiveness, relative yield, value
or potential appreciation of a particular security, or the stability of a
particular government proves to be incorrect.
The fund may invest in lower quality securities that are speculative and have
only an adequate capacity to pay principal and interest. These securities have a
higher risk of default, tend to be less liquid, and may be more difficult to
value. Changes in economic conditions or other circumstances are more likely to
lead issuers of these securities to have a weakened capacity to make principal
and interest payments.
Many foreign countries in which the fund invests have markets that are less
liquid and more volatile than markets in the U.S. In some of the foreign
countries in which the fund invests, there is also less information available
about foreign issuers and markets because of less rigorous accounting and
regulatory standards than in the U.S. Currency fluctuations could erase
investment gains or add to investment losses. The risk of investing in foreign
securities is greater in the case of less developed countries.
Travelers Series Fund - 21
<PAGE>
The Fund's Goal and Investments Smith Barney High Income Portfolio
- --------------------------------------------------------------------------------
- ------------------
Manager Investment Goal
MMC is the
manager Primary: High current income Secondary: Capital
appreciation
---------------------------------------------------------
Portfolio Manager Key Investments
John C. Bianchi
The fund invests primarily in high yielding, corporate
debt obligations and preferred stock of U.S. and foreign
issuers, but may also invest in foreign issuers.
CREDIT QUALITY: The fund invests primarily in below
investment grade securities, but may not invest more than
10% in securities rated lower than B or unrated
securities of comparable quality. Below investment grade
securities are commonly known as "junk bonds."
MATURITY: Although the fund may invest in securities of
any maturity, under current market conditions, the fund
intends to have an average remaining maturity of between
five and ten years.
- --------------------------------------------------------------------------------
Selection Process
In selecting securities, the manager considers and compares the relative yields
of various types of obligations. The manager seeks to maximize current income by
generally purchasing securities of lower credit quality, but offering higher
current yield. In selecting securities for the fund, the manager employs a
forward looking strategy seeking to identify companies that exhibit favorable
earnings prospects or demonstrate a potential for higher ratings over time. The
manager looks for:
[_] "Fallen angels" or companies that are repositioning in the marketplace
which the manager believes are temporarily undervalued, and
[_] Younger companies with smaller capitalization that have exhibited
improving financial strength or improving credit ratings over time
The manager selects individual debt securities by comparing yield, maturity,
issue classification and quality characteristics. Investments in these companies
may increase the fund's potential for capital appreciation and reduce the fund's
credit risk exposure.
The manager also employs an active sell strategy to dispose of securities that
no longer meet the manager's investment criteria to harvest gains for
reinvestment in new securities exhibiting characteristics as described above.
Travelers Series Fund - 22
<PAGE>
FUND PERFORMANCE
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the Salomon Brothers Intermediate High Yield Index ("Salomon Index") and the
Bear Stearns High Yield Index ("Bear Stearns Index"). Past performance does not
necessarily indicate how the fund will perform in the future. Performance
figures do not reflect expenses incurred from investing through a Separate
Account. Please refer to the Separate Account prospectus for more information on
expenses.
[GRAPH APPEARS HERE]
The bar chart shows the performance of the fund's shares since its inception on
June 16, 1994.
QUARTERLY RETURNS:
Highest: xx% in ___ quarter 199X
Lowest: xx% in ___ quarter 199X
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
-------------------------------------------------
One Five Since
year years inception
-------------------------------------------------
Fund
Salomon Index
Bear Stearns Index
-------------------------------------------------
- --------------------------------------------------------------------------------
PRINCIPAL RISKS OF INVESTING IN THE FUND
While investing in high yield securities can bring added benefits, it may also
involve additional risks. Investors could lose money in the fund or the fund's
performance could fall below other possible investments if any of the following
occurs:
[_] The issuer of a debt security in the fund defaults on its obligation to
pay principal or interest, has its credit rating downgraded by a rating
organization or is perceived by the market to be less creditworthy.
[_] Interest rates go up, causing the prices of debt securities in the fund
to fall.
[_] As a result of declining interest rates, the issuer of a security
exercises its right to prepay principal earlier than scheduled, forcing
the fund to reinvest in lower yielding securities. This is known as call
or prepayment risk.
[_] As a result of rising interest rates, the issuer of a security
exercises its right to pay principal later than scheduled, which will
lock in a below-market interest rate and reduce the value of the
security. This is known as extension risk.
[_] The manager's judgment about the attractiveness, value or potential
appreciation of a particular security proves to be incorrect.
The fund may invest in lower quality securities that are speculative and have
only an adequate capacity to pay principal and interest. These securities have a
higher risk of default, tend to be less liquid, and may be more difficult to
value. Changes in economic conditions or other circumstances are more likely to
lead issuers of these securities to have a weakened capacity to make principal
and interest payments.
Many foreign countries in which the fund invests have markets that are less
liquid and more volatile than markets in the U.S. In some of the foreign
countries in which the fund invests, there is also less information available
about foreign issuers and markets because of less rigorous accounting and
regulatory standards than in the U.S. Currency fluctuations could erase
investment gains or add to investment losses. The risk of investing in
foreign securities is greater in the case of less developed countries.
Travelers Series Fund - 23
<PAGE>
THE FUND'S GOAL AND INVESTMENTS SMITH BARNEY MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------
- -----------------------------
MANAGER INVESTMENT GOAL
MMC is the manager
Maximize current income consistent with
preservation of capital. The fund seeks to
maintain a stable $1 share price.
-----------------------------------------------
PORTFOLIO MANAGER KEY INVESTMENTS
Martin Hanley
The fund invests exclusively in high quality
U.S. dollar denominated short term debt
securities. These include commercial paper,
corporate and municipal obligations,
obligations of U.S. and foreign banks,
securities of the U.S. Government, its
agencies or instrumentalities and related
repurchase agreements.
CREDIT QUALITY: The fund invests exclusively
in securities rated by a nationally
recognized rating organization in the two
highest short term rating categories, or if
unrated, of equivalent quality.
EFFECTIVE MATURITY: The fund invests
exclusively in securities having remaining
effective maturities of 397 days or less, and
maintains a dollar-weighted portfolio
maturity of 90 days or less.
- -------------------------------------------------------------------------------
SELECTION PROCESS
In selecting investments for the fund, the manager looks for:
[_] The best relative values based on an analysis of interest rate
sensitivity, yield and price.
[_] Issuers offering minimal credit risk.
[_] Maturities consistent with the manager's outlook for interest rates.
- --------------------------------------------------------------------------------
FUND PERFORMANCE
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. The table shows how the fund's
average annual returns for different calendar periods compare to the return of
the 90-day Treasury bill. Past performance does not necessarily indicate how the
fund will perform in the future. Performance figures do not reflect expenses
incurred from investing through a Separate Account. Please refer to the Separate
Account prospectus for more information on expenses.
[GRAPH APPEARS HERE]
The bar chart shows the performance of the Fund's shares since its inception on
June 16, 1994.
QUARTERLY RETURNS:
Highest: xx% in ___ quarter 199X
Lowest: xx% in ___ quarter 199X
AVERAGE ANNUAL TOTAL RETURNS
(for the periods ended December 31, 1998)
-------------------------------------------------
One Five Since
year years inception
-------------------------------------------------
Fund
Treasury bill
-------------------------------------------------
The fund's 7-day yield as of ________ was ____%. Call 1-800-xxx-xxxx for the
fund's current 7-day yield.
Travelers Series Fund - 24
<PAGE>
PRINCIPAL RISKS OF INVESTING IN THE FUND
Although the fund seeks to preserve the value of your investment at $1 per
share, it is possible to lose money by investing in the fund, or the fund could
underperform other short term debt instruments or money market funds if any of
the following occurs:
[_] Interest rates rise sharply.
[_] An issuer of the fund's securities defaults, or has its credit rating
downgraded.
[_] Sectors or issuers the fund has emphasized fail to perform as expected.
[_] The manager's judgment about the attractiveness, value or potential
appreciation of a particular security proves to be incorrect.
The value of the fund's foreign securities may go down because of unfavorable
government actions, political instability or the more limited availability of
accurate information about foreign issuers.
Travelers Series Fund - 25
<PAGE>
MORE ON THE FUNDS' INVESTMENTS
ADDITIONAL INVESTMENTS AND INVESTMENT TECHNIQUES
- --------------------------------------------------------------------------------
Each fund describes its SMITH BARNEY PACIFIC BASIN PORTFOLIO
investment objective and its Although the fund intends to be fully
principal investment strategies invested in equity securities, it may
and risks under "Fund Goals invest up to 20% of its assets in
and Strategies." investment grade debt securities.
SMITH BARNEY INTERNATIONAL EQUITY PORTFOLIO
This section provides additional The fund may invest up to 20% of its assets
information about the funds' in debt securities of any credit quality or
investments and certain maturity of foreign corporate and
portfolio management governmental issuers, as well as U.S.
techniques the funds may use. government securities and money market
More information about the obligations of U.S. and foreign corporate
funds' investments and issuers.
portfolio management
techniques, some of which SMITH BARNEY LARGE CAPITALIZATION GROWTH
entail risks, is included in the PORTFOLIO
statement of additional Although the fund intends to be fully
information (SAI). invested in equity securities of growth
companies, it may invest up to 35% of its
total assets in money market instruments for
cash management purposes.
ALLIANCE GROWTH PORTFOLIO
Although the fund invests primarily in U.S.
equity securities, it may also invest up to
25% of its assets in high yield securities
with no minimum credit quality restriction,
and may also invest up to 15% in foreign
securities.
MFS TOTAL RETURN PORTFOLIO
The fund may invest without limit in ADRs
and up to 20% of its total assets in foreign
securities.
TRAVELERS MANAGED INCOME PORTFOLIO
The fund may invest up to 35% of its total
assets in non-investment grade debt
obligations, commonly known as "junk bonds."
The fund may also invest up to 35% of its
total assets in fixed-income obligations
having durations longer than 10 years. The
fund may also invest up to 25% of its assets
in asset-backed and mortgage-backed
securities, including CMOs.
SMITH BARNEY HIGH INCOME PORTFOLIO
Although the fund invests primarily in high
yield securities, the fund may also invest
up to 35% of its assets in common stock and
common stock equivalents, including
convertible securities, options, warrants
and rights. The fund may invest up to 20% of
its assets in foreign currency denominated
securities and without limit in U.S. dollar
denominated securities of foreign issuers.
Travelers Series Fund - 26
<PAGE>
EQUITY INVESTMENTS Subject to its particular investment
policies, each of these funds may invest in
Each equity fund, MFS Total all types of equity securities. Equity
Return Portfolio and Smith Barney securities include exchange-traded and
High Income Portfolio over-the-counter (OTC) common and preferred
stocks, warrants, rights, investment grade
convertible securities, receipts and shares,
trust certificates, limited partnership
interests, shares of other investment
companies, real estate investment trusts and
equity participations.
- --------------------------------------------------------------------------------
FIXED INCOME INVESTMENTS Subject to its particular investment
policies, each fund may invest in fixed
Each fixed income fund and, to a income securities. Fixed income investments
limited extent, each equity fund include bonds, notes (including structured
notes), mortgage-related securities, asset-
backed securities, convertible securities,
Eurodollar and Yankee dollar instruments,
preferred stocks and money market
instruments. Fixed income securities may be
issued by U.S. and foreign corporations or
entities; U.S. and foreign banks; the U.S.
government, its agencies, authorities,
instrumentalities or sponsored enterprises;
state and municipal governments;
supranational organizations; and foreign
governments and their political
subdivisions.
Fixed income securities may have all types
of interest rate payment and reset terms,
including fixed rate, adjustable rate, zero
coupon, contingent, deferred, payment in
kind and auction rate features.
Each of these funds may invest in mortgage-
MFS Total Return, Travelers backed and asset-backed securities.
Managed Income, Putnam Mortgage-related securities may be issued by
Diversified Income and Smith private companies or by agencies of the U.S.
Barney High Income Portfolios government and represent direct or indirect
participations in, or are collateralized by
and payable from, mortgage loans secured by
real property. Asset-backed securities
represent participations in, or are secured
by and payable from, assets such as
installment sales or loan contracts, leases,
credit card receivables and other categories
of receivables.
- --------------------------------------------------------------------------------
CREDIT QUALITY
If a security receives different ratings, a
fund will treat the securities as being
rated in the highest rating category. A fund
may choose not to sell securities that are
downgraded after their purchase below the
fund's minimum acceptable credit rating.
Each fund's credit standards also apply to
counterparties to OTC derivatives contracts.
INVESTMENT GRADE SECURITIES
Securities are investment grade if:
[_] They are rated, respectively, in one
of the top four long-term rating
categories of a nationally
recognized statistical rating
organization.
[_] They have received a comparable
short-term or other rating.
[_] They are unrated securities that the
manager believes are of comparable
quality to investment grade
securities.
Travelers Series Fund - 27
<PAGE>
HIGH YIELD, LOWER QUALITY SECURITIES
Alliance Growth, MFS Total Each of these funds may invest in fixed
Return, Travelers Managed income securities that are high yield,
Income, Putnam Diversified lower quality securities rated by a rating
Income, Gt Global Strategic organization below its top four long term
Income And Smith Barney High rating categories or unrated securities
Income Portfolios Only determined by the manager or Subadviser to
be of equivalent quality. The issuers of
lower quality bonds may be highly
leveraged and have difficulty servicing
their debt, especially during prolonged
economic recessions or periods of rising
Alliance Growth Portfolio may interest rates. The prices of lower
invest in these securities primarily quality securities are volatile and may
for their capital growth potential go down due to market perceptions of
deteriorating issuer credit-worthiness
or economic conditions. Lower quality
securities may become illiquid and hard
to value in down markets.
- --------------------------------------------------------------------------------
FOREIGN AND EMERGING MARKET Each fund may invest in foreign
INVESTMENTS securities, although the foreign
investments of Smith Barney Money Market
Portfolio are limited to U.S. dollar
denominated investments issued by foreign
branches of U.S. banks and by U.S. and
foreign branches of foreign banks.
Investments in securities of foreign
entities and securities quoted or
denominated in foreign currencies involve
special risks. These include possible
political and economic instability and the
possible imposition of exchange controls
or other restrictions on investments. If a
fund invests in securities denominated or
quoted in currencies other than the U.S.
dollar, changes in foreign currency rates
relative to the U.S. dollar will affect
the U.S. dollar value of the fund's
assets.
Smith Barney Pacific Basin, Smith Emerging market investments offer the
Barney International Equity, MFS potential of significant gains but also
Total Return Putnam Diversified involve greater risks than investing in
Income and GT Global Strategic More developed countries. Political or
Income Portfolios only economic instability, lack of market
liquidity and government actions such as
currency controls or seizure of private
business or property may be more likely in
emerging markets.
Travelers Series Fund - 28
<PAGE>
SOVEREIGN GOVERNMENT AND SUPRANATIONAL DEBT
MFS Total Return, Travelers These funds may invest in all types of
Managed Income, Putnam fixed income securities of governmental
Diversified Income and GT Global issuers in all countries, including
Strategic Income Portfolios only emerging markets. These sovereign debt
securities may include:
[_] Fixed income securities issued or
guaranteed by governments,
governmental agencies or
instrumentalities and political
subdivisions located in emerging
market countries.
[_] Participations in loans between
emerging market governments and
financial institutions.
[_] Fixed income securities issued by
government owned, controlled or
sponsored entities located in
emerging market countries.
[_] Interests in entities organized and
operated for the purpose of
restructuring the investment
characteristics of instruments
issued by any of the above issuers.
[_] Brady Bonds.
[_] Fixed income securities issued by
corporate issuers, banks and
finance companies located in
emerging market countries.
[_] Fixed income securities issued by
supranational entities such as the
World Bank or the European Economic
Community (A supranational entity
is a bank, commission or company
established or financially
supported by the national
governments of one or more
countries to promote reconstruction
or development.)
- --------------------------------------------------------------------------------
DERIVATIVES AND HEDGING Each fund may, but need not, use derivative
TECHNIQUES contracts, such as futures and options on
securities, securities indices or
currencies; options on these futures;
forward currency contracts; and interest
All funds except Smith Barney rate or currency swaps for any of the
Money Market Portfolio following purposes:
. To hedge against the economic
impact of adverse changes in the
market value of its securities, due
to changes in stock market prices,
currency exchange rates or interest
rates
. As a substitute for buying or
selling securities
. To enhance the fund's return
A derivative contract will obligate or
entitle a fund to deliver or receive an
asset or cash payment that is based on the
change in value of one or more securities,
currencies or indices. Even a small
investment in derivative contracts can have
a big impact on a fund's stock market,
currency and interest rate exposure.
Therefore, using derivatives can
disproportionately increase losses and
reduce opportunities for gains when stock
prices, currency rates or interest rates
are changing. A fund may not fully benefit
from or may lose money on derivatives if
changes in their value do not correspond
accurately to changes in the value of the
fund's holdings. The other parties to
certain derivative contracts present the
same types of credit risk as issuers of
fixed income securities. Derivatives can
also make a fund less liquid and harder to
value, especially in declining markets.
Travelers Series Fund - 29
<PAGE>
SECURITIES LENDING Each fund, except Van Kampen Capital
Enterprise Portfolio, may engage in
securities lending to increase its net
investment income. Each fund will only lend
securities if the loans are callable by the
fund at any time and the loans are
continuously secured by cash or liquid
securities equal to no less than the market
value, determined daily, of the securities
loaned. The risks in lending securities
consist of possible delay in receiving
additional collateral, delay in recovery of
securities when the loan is called or
possible loss of collateral should the
borrower fail financially.
- --------------------------------------------------------------------------------
DEFENSIVE INVESTING Each fund may depart from its principal
investment strategies in response to
adverse market, economic or political
conditions by taking temporary defensive
positions in all types of money market and
short-term debt securities. If a fund takes
a temporary defensive position, it may be
unable to achieve its investment goal.
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER Each fund may engage in active and frequent
trading to achieve its principal investment
strategies. Frequent trading also increases
transaction costs, which could detract from
a fund's performance.
Travelers Series Fund - 30
<PAGE>
MANAGEMENT
THE MANAGERS
MUTUAL MANAGEMENT CORP.
Mutual Management Corp. is a wholly owned subsidiary of Citigroup, a financial
services holding company engaged, through its subsidiaries, principally in four
business segments: Investment Services including Asset Management, Consumer
Finance Services, Life Insurance Services and Property & Casualty Insurance
Services. MMC is located at 388 Greenwich Street, New York, New York 10013. MMC
acts as investment manager to investment companies having aggregate assets as of
the date of this prospectus of approximately $94 billion.
MMC manages the investment operations of the following funds (Smith Barney
funds) and receives from each fund for these services the fee indicated:
<TABLE>
<CAPTION>
Actual management fee
paid for the fiscal year Contractual
ended October 31, 1998 management fee
(as a percentage (as a percentage
of the fund's of the fund's
Fund average daily net assets) average daily net assets)
- ---- ------------------------- -------------------------
<S> <C> <C>
Smith Barney Pacific Basin Portfolio ___% 0.90%
Smith Barney International Equity Portfolio ___% 0.90%
Smith Barney Large Cap Value Portfolio ___% 0.65%
Smith Barney Large Capitalization Growth Portfolio ___% 0.75%
Smith Barney High Income Portfolio ___% 0.60%
Smith Barney Money Market Portfolio ___% 0.50%*
</TABLE>
* Prior to March 11, 1998, the annual management fee paid to MMC was 0.60% of
the average daily net assets of the fund.
Travelers Series Fund - 31
<PAGE>
TRAVELERS INVESTMENT ADVISER INC.
Travelers Investment Adviser Inc. (TIA) is a wholly owned subsidiary of The
Plaza Corporation (Plaza), which is an indirect wholly owned subsidiary of
Citigroup, an affiliate of MMC. TIA is located at 388 Greenwich Street, New
York, New York 10013. TIA acts as investment manager to investment companies
having aggregate assets as of the date of this prospectus of approximately
$______ billion.
TIA manages the investment operations of the following funds (TIA funds) and
receives for these services from each fund the fee indicated:
<TABLE>
<CAPTION>
Actual management fee
paid for the fiscal year Contractual management
ended October 31, 1998 fee paid
(as a percentage (as a percentage
of the fund's of the fund's
Fund average daily net assets) average daily net assets)
- ---- ------------------------- -------------------------
<S> <C> <C>
Alliance Growth Portfolio ___% 0.80%
AIM Capital Appreciation Portfolio ___% 0.80%
Van Kampen American Capital Enterprise Portfolio ___% 0.70%
MFS Total Return Portfolio ___% 0.80%
GT Global Strategic Income Portfolio ___% 0.80%
Putnam Diversified Income Portfolio ___% 0.75%
</TABLE>
Travelers Asset Management International Corporation
Travelers Asset Management International Corporation (TAMIC) is a wholly owned
subsidiary of Citigroup and an affiliate of MMC. TAMIC is located at One Tower
Square - 10PB, Hartford, Connecticut 06183-2030. TAMIC also acts as investment
adviser or subadviser for other investment companies used to fund variable
products, as well as for individual and pooled pension and profit-sharing
accounts, and for affiliated domestic insurance companies.
TAMIC manages the investment operations of the following funds (TAMIC funds)
and receives for these services from each fund the fee indicated:
<TABLE>
<CAPTION>
Actual management fee
paid for the fiscal year Contractual management
ended October 31, 1998 fee paid
(as a percentage (as a percentage
of the fund's of the fund's
Fund average daily net assets) average daily net assets)
- ---- ------------------------- -------------------------
<S> <C> <C>
Travelers Managed Income Portfolio ___% 0.65%
</TABLE>
Travelers Series Fund - 32
<PAGE>
THE SUBADVISERS AND The MMC funds are managed solely by
PORTFOLIO MANAGERS MMC. The TAMIC funds are managed
solely by TAMIC. Each of the TIA
funds' investments are selected by a
subadviser which is supervised by
TIA. The table below sets forth the
name and business experience of each
fund's portfolio manager, including
where applicable, the portfolio
manager employed by the subadviser.
<TABLE>
<CAPTION>
FUND PORTFOLIO MANAGER AND SUBADVISER BUSINESS EXPERIENCE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SMITH BARNEY PACIFIC DAVID S. ISHIBASHI (since 1996) Investment Officer, MMC; Vice President,
BASIN PORTFOLIO MMC Salomon Smith Barney.
388 Greenwich Street
New York, New York 10013
SCOTT KALB (since 1996) Investment Officer, MMC; Managing
MMC Director, Salomon Smith Barney.
- -----------------------------------------------------------------------------------------------------------------------------------
SMITH BARNEY JAMES CONHEADY (since inception) Investment Officer, MMC; Vice President,
INTERNATIONAL EQUITY MMC Travelers Series Fund; Managing Director,
PORTFOLIO 388 Greenwich Street Salomon Smith Barney.
New York, New York 10013
JEFFREY RUSSELL (since inception) Investment Officer, MMC; Vice President,
MMC Travelers Series Fund; Managing Director,
Salomon Smith Barney.
- -----------------------------------------------------------------------------------------------------------------------------------
SMITH BARNEY LARGE ELLEN CARDOZO SONSINO (since 1998) Investment Officer, MMC; Managing
CAP VALUE PORTFOLIO MMC Director and Senior Equity Portfolio
388 Greenwich Street, Manager, Salomon Smith Barney.
New York, New York 10013
- -----------------------------------------------------------------------------------------------------------------------------------
SMITH BARNEY LARGE ALAN BLAKE (since inception) Investment Officer, MMC; Managing
CAPITALIZATION GROWTH MMC Director, Salomon Smith Barney.
PORTFOLIO 388 Greenwich Street
New York, New York 10013
- -----------------------------------------------------------------------------------------------------------------------------------
ALLIANCE GROWTH TYLER SMITH (since inception) Senior Vice President, Alliance Capital.
PORTFOLIO Alliance Capital Management L.P.
1345 Avenue of the Americas
New York, New York 10105
- -----------------------------------------------------------------------------------------------------------------------------------
AIM CAPITAL KENNETH A. ZSCHAPPEL (since Vice President, A I M Capital.
APPRECIATION PORTFOLIO inception)
A I M Capital Management, Inc. 11 Greenway
Plaza, Suite 100 Houston, TX 77046
CHARLES D. SCAVONE (since inception) Vice President, A I M Capital. Associate
A I M Capital Management Portfolio Manager, Van Kampen Capital
Asset Management, Inc. from 1994 to
1996. Prior to that, Equity Research
Analyst/ Assistant Portfolio Manager,
Texas Commerce Investment Management
Company from 1991 to 1994.
</TABLE>
Travelers Series Fund - 33
<PAGE>
<TABLE>
<CAPTION>
FUND PORTFOLIO MANAGER AND SUBADVISER BUSINESS EXPERIENCE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
DAVID P. BARNARD (since inception) Vice President, A I M Capital.
A I M Capital Management
ROBERT M. KIPPES (since inception) Vice President, A I M Capital.
A I M Capital Management
- ------------------------------------------------------------------------------------------------------------------------------------
VAN KAMPEN CAPITAL JEFF NEW (since July 1994) Senior Vice President, Van Kampen Asset
ENTERPRISE PORTFOLIO Van Kampen Asset Management, Inc. Management; Senior Vice President, Van
One Parkview Plaza Kampen Investment Advisory, Inc.
Oakbrook Terrace, IL 60181
- -----------------------------------------------------------------------------------------------------------------------------------
MFS TOTAL RETURN DAVID M. CALABRO (since inception) Senior Vice President, MFS.
PORTFOLIO Massachusetts Financial Services
Company
500 Boylston Street
Boston, MA 02116
GEOFFREY L. KURINSKY (since inception) Senior Vice President, MFS.
MFS
CONSTANTINOS MOKAS (since 1998) Vice President, MFS.
MFS
LISA B. NURME (since inception) Senior Vice President, MFS.
MFS
MAURA A. SHAUGHNESSY (since Senior Vice President, MFS.
inception)
MFS
- -----------------------------------------------------------------------------------------------------------------------------------
GT GLOBAL STRATEGIC CHENG-HOCK LAU (since 1996) Chief Investment Officer, Fixed Income,
INCOME PORTFOLIO INVESCO (NY), Inc. INVESCO since 1996. Senior Portfolio
1166 Avenue of the Americas Manager for Global/International Fixed
New York, NY 10036 Income, Chancellor LGT from 1995 to 1996.
Prior to that, Senior Vice President and
Senior Portfolio Manager, Fiduciary Trust
Company International from 1993 to 1995. Prior
to that, Vice President, Bankers Trust Company
from 1991 to 1993.
DAVID HUGHES (since 1998) Head of Global Fixed Income, North
INVESCO (NY), Inc. America, INVESCO since 1997. Senior Portfolio
Manager, Global/International Fixed Income,
INVESCO from July 1995 to December 1997. Prior
to that, Mr. Hughes was employed by Chancellor
Capital from July 1995 to October 1996. Prior
to that, Assistant Vice President, Fiduciary
Trust Company International from 1994 to 1995.
CRAIG MUNRO (since 1998) Portfolio Manager, INVESCO since
INVESCO (NY), Inc. August 1997. Prior thereto, Vice President
and Senior Analyst, Emerging Markets
Group, Global Fixed Income Division,
Merrill Lynch Asset Management from
1993 to August 1997.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Travelers Series Fund - 34
<PAGE>
<TABLE>
<CAPTION>
FUND PORTFOLIO MANAGER AND SUBADVISER BUSINESS EXPERIENCE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRAVELERS MANAGED F. DENNEY VOSS (since 1998) Executive Vice President, Salomon Smith
INCOME PORTFOLIO TAMIC Barney.
One Tower Square - 10PB
Hartford, Connecticut 06183-2030
- -----------------------------------------------------------------------------------------------------------------------------------
PUTNAM DIVERSIFIED JENNIFER EVANS LEICHTER (since 1998) Managing Director and Chief Investment
INCOME PORTFOLIO Putnam Investment Officer, Corporate Credit Group, Putnam
Management, Inc. Management.
One Post Office Square
Boston, MA 02109
- -----------------------------------------------------------------------------------------------------------------------------------
SMITH BARNEY HIGH JOHN C. BIANCHI (since inception) Investment Officer, MMC; Managing
INCOME PORTFOLIO MMC Director, Salomon Smith Barney.
388 Greenwich Street
New York, New York 10013
- -----------------------------------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO MARTIN HANLEY (since inception) Investment Officer, MMC; Vice President,
MMC Salomon Smith Barney.
388 Greenwich Street
New York, New York 10013
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
YEAR 2000 ISSUE. Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the funds. The managers are addressing the Year 2000 issue
for their systems. The funds have been informed by their other service
providers that they are taking similar measures. Although the funds do not
expect the Year 2000 issue to adversely affect them, the funds cannot
guarantee that their efforts or the efforts of their service providers to
correct the problem will be successful.
Travelers Series Fund - 35
<PAGE>
SHARE TRANSACTIONS
AVAILABILITY OF THE FUNDS
Shares of the funds are available only through the purchase of variable annuity
or variable life insurance contracts issued by insurance companies through their
separate accounts. The variable insurance products may or may not make
investments in all the funds described in this prospectus.
The interests of different variable insurance products investing in a fund could
conflict due to differences of tax treatment and other considerations. The Fund
currently does not foresee any disadvantages to investors arising from the fact
that each fund may offer its shares to different insurance company separate
accounts that serve as the investment medium for their variable annuity and
variable life products. Nevertheless, the Board of Trustees intends to monitor
events to identify any material irreconcilable conflicts which may arise, and to
determine what action, if any, should be taken in response to these conflicts.
If a conflict were to occur, one or more insurance companies' separate accounts
might be required to withdraw their investments in one or more funds and shares
of another fund may be substituted. In addition, the sale of shares may be
suspended or terminated if required by law or regulatory authority or is in the
best interests of the funds' shareholders.
REDEMPTION OF SHARES
The redemption price of the shares of each fund will be the net asset value next
determined after receipt by the fund of a redemption order from a separate
account, which may be more or less than the price paid for the shares. The fund
will ordinarily make payment within one business day after receipt of a
redemption request in good order, though redemption proceeds must be remitted to
a separate account on or before the third day following receipt of the request
in good order, except on a day on which the New York Stock Exchange is closed or
as permitted by the SEC in extraordinary circumstances.
SHARE PRICE
Each fund's net asset value is the value of its assets minus its liabilities.
Each fund calculates its net asset value every day the New York Stock Exchange
is open. This calculation is done when regular trading closes on the Exchange
(normally 4:00 p.m., Eastern time). If the New York Stock Exchange closes early,
each fund accelerates the calculation of its net asset value to the actual
closing time.
Each fund generally values its fund securities based on market prices or
quotations. To the extent a fund holds securities denominated in a foreign
currency the fund's currency conversions are done when the London stock exchange
closes, which is 12 noon Eastern time. When market prices are not available, or
when the manager believes that they are unreliable or that the value of a
security has been materially affected by events occurring after a foreign
exchange closes, the funds may price those securities at fair value. Fair value
is determined in accordance with procedures approved by the fund's board. A fund
that uses fair value to price securities may value those securities higher or
lower than another fund that uses market quotations to price the same
securities.
International markets may be open on days when U.S. markets are closed, and the
value of foreign securities owned by the fund could change on days when fund
shares may not be purchased or redeemed.
Unless there are extraordinary or unusual circumstances, Smith Barney Money
Market Portfolio uses the amortized cost method of valuing its money market
securities. Under the amortized cost method, assets are valued by constantly
amortizing over the remaining life of an instrument the difference between the
principal amount due at maturity and the cost of the instrument to the fund.
Travelers Series Fund - 36
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each fund intends to qualify and be taxed as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986 (the "Code"), as
amended. In order to qualify to be taxed as a regulated investment company, each
fund must meet certain income and diversification tests and distribution
requirements. As a regulated investment company meeting these requirements, a
fund will not be subject to federal income tax on its net investment income and
net capital gains that it distributes to its shareholders. All income and
capital gain distributions are automatically reinvested in additional shares of
the fund at net asset value and are includable in gross income of the separate
accounts holding such shares. See the accompanying contract prospectus for
information regarding the federal income tax treatment of distributions to the
separate accounts and to holders of the contracts.
Each fund is also subject to asset diversification regulations promulgated by
the U.S. Treasury Department under the Code. The regulations generally provide
that, as of the end of each calendar quarter or within 30 days thereafter, no
more than 55% of the total assets of each fund may be represented by any one
investment, no more than 70% by any two investments, no more than 80% by any
three investments, and no more than 90% by any four investments. For this
purpose all securities of the same issuer are considered a single investment. An
alternative diversification test may be satisfied under certain circumstances.
If a fund should fail to comply with these regulations or fails to qualify for
the special tax treatment afforded regulated investment companies under the
Code, Contracts invested in that fund would not be treated as annuity, endowment
or life insurance contracts under the Code.
Travelers Series Fund - 37
<PAGE>
FINANCIAL HIGHLIGHTS
================================================================================
The financial highlights tables are intended to help you understand the
performance of each fund for the past five years (or since inception if less
than five years). The information in the following tables was audited by KPMG
Peat Marwick LLP, independent accountants, whose report, along with each fund's
financial statements, are included in the annual report (available upon
request). Certain information reflects financial results for a single share.
Total returns represent the rate that a shareholder would have earned (or lost)
on a share of a fund assuming reinvestment of all dividends and distributions.
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
SMITH BARNEY PACIFIC BASIN
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $9.75 $8.95 $10.10 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (loss) (2) (0.01) 0.08 (0.04)(3) (0.04)
Net realized and unrealized (1.64) 0.75 (1.11) 0.14
gain (loss)
- ----------------------------------------------------------------------------------------------------------------------------
Total income (loss) from (1.65) 0.83 (1.15) 0.10
operations
- ----------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.06) (0.03) --- ---
Net realized gains --- --- --- ---
- ----------------------------------------------------------------------------------------------------------------------------
Total distributions (0.06) (0.03) --- ---
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $8.04 $9.75 $8.95 $10.10
- ----------------------------------------------------------------------------------------------------------------------------
Total return (17.02)% 9.26% (11.39)% 1.00%(4)
- ----------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's) $18,225 $16,657 $7,122 $4,238
- ----------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (2) 1.38% 1.34% 1.83% 1.26%(5)
Net investment income (loss) (0.08) 0.47 (0.51) (0.93)(5)
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 156% 59% 28% ---
============================================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) Mutual Management Corp. (the "Manager") waived all or part of its fees for
the years ended October 31, 1996, October 31, 1995 and the period ended
October 31, 1994. In addition, the Manager reimbursed the fund $9,778 in
expenses for the period ended October 31, 1994. If such fees were not
waived and expenses not reimbursed, the per share increase in net
investment loss and the ratios of expenses to average net assets for the
fund would have been as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share Decreases in Net Investment Income $0.02 $0.03 $0.06
- ----------------------------------------------------------------------------------------------------------------------------
Expense Ratios Without Fee Waivers and Reimbursement 1.58% 2.23% 2.82%(5)
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition, during the years ended October 31, 1995 and 1996, the fund
earned credits from the custodian, which reduces service fees incurred. If
the credits are taken into consideration the expense ratios for these
periods were 1.17% and 1.30%, respectively. Figures before October 31, 1995
have not been restated to reflect these adjustments.
(3) Includes realized gains and losses from foreign currency transactions.
(4) Not annualized.
(5) Annualized.
Travelers Series Fund - 38
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
SMITH BARNEY INTERNATIONAL EQUITY
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.18 $10.48 $10.55 $10.00
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income 0.01 0.02 0.03(3) (0.03)
(loss)(2) 1.05 1.69 (0.10) 0.58
Net realized and unrealized
gain (loss)
- ------------------------------------------------------------------------------------------------------------------------------
Total income (loss) from 1.06 1.71 (0.07) 0.55
operations
- ------------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.01) 0.01) --- ---
Net realized gains --- --- --- ---
- ------------------------------------------------------------------------------------------------------------------------------
Total distributions (0.01) (0.01) --- ---
- ------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $13.23 $12.18 $10.48 $10.55
- ------------------------------------------------------------------------------------------------------------------------------
Total return 8.73% 16.36% (0.66)% 5.50%(4)
- ------------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's) $219,037 $143,323 $53,538 $13,811
- ------------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (2) 1.01% 1.10% 1.44% 1.20%(5)
Net investment income (loss) 0.09 0.23 0.25 (0.73)(5)
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 38% 41% 29% ---
==============================================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) Mutual Management Corp. (the "Manager") waived all or a part of its fees
for the period ended October 31, 1994 for the fund. If such fees were not
waived the effect of the per share increase in net investment loss for the
fund would have been $0.03 and the ratio of expenses to average net assets
would have been 2.00%(5).
In addition, during the years ended October 31, 1995 and 1996, the fund
earned credits from the custodian, which reduces service fees incurred. If
the credits are taken into consideration the expense ratios for these
periods were 1.21% and 1.05%, respectively. Figures before October 31, 1995
have not been restated to reflect these adjustments.
(3) Includes realized gains and losses from foreign currency transactions.
(4) Not annualized.
(5) Annualized.
Travelers Series Fund - 39
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
SMITH BARNEY LARGE CAP VALUE (1)
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994(2)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 14.84 $ 12.12 $ 10.14 $10.00
--------------------------------------------------------------------------------------------------------------------------
Income from operations:
Net investment income (3) 0.25 0.32 0.28 0.11
Net realized and unrealized 3.16 2.62 1.76 0.03
gain
--------------------------------------------------------------------------------------------------------------------------
Total income from operations 3.41 2.94 2.04 0.14
--------------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.18) (0.17) (0.06) ---
Net realized gains (0.17) (0.05) --- ---
--------------------------------------------------------------------------------------------------------------------------
Total distributions (0.35) (0.22) (0.06) ---
--------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 17.90 $ 14.84 $ 12.12 $10.14
--------------------------------------------------------------------------------------------------------------------------
Total return 23.38% 24.55% 20.21% 1.40%(4)
--------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's) $287,333 $138,712 $39,364 $6,377
--------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (3) 0.69% 0.73% 0.73% 0.73%(5)
Net investment income 2.01 2.35 2.70 2.82(5)
--------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 46% 32% 38% 2%
==========================================================================================================================
</TABLE>
(1) Formerly known as Smith Barney Income and Growth Portfolio.
(2) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(3) Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual
Funds Management Inc. (the "Manager") waived all or part of its fees for
the year ended October 31, 1995 and the period ended October 31, 1994. In
addition, the Manager reimbursed the fund for $13,120 in expenses for the
period ended October 31, 1994. If such fees were not waived and expenses
not reimbursed, the per share decreases in net investment income and the
ratios of expenses to average net assets for the fund would have been as
follows:
<TABLE>
<CAPTION>
1995 1994
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share Decreases in Net Investment Income $0.02 $0.05
---------------------------------------------------------------------------------------------------------------------
Expense Ratios Without Fee Waivers and Reimbursement 0.94% 2.08%(5)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) Not annualized.
(5) Annualized.
Travelers Series Fund - 40
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
SMITH BARNEY LARGE CAP GROWTH
------------------------------------
1998(1)
------------------------------------------------------------------------
Net asset value, beginning of year
------------------------------------------------------------------------
Income from operations:
Net investment income (3)
Net realized and unrealized
gain
------------------------------------------------------------------------
Total income from operations
------------------------------------------------------------------------
Less distributions from:
Net investment income
Net realized gains
------------------------------------------------------------------------
Total distributions
------------------------------------------------------------------------
Net asset value, end of year
------------------------------------------------------------------------
Total return (3)
------------------------------------------------------------------------
Net assets, end of year (000's)
------------------------------------------------------------------------
Ratios to average net assets: (4)
Expenses (2)
Net investment income
------------------------------------------------------------------------
Portfolio turnover rate
========================================================================
(1) For the period from May 1, 1998 (commencement of operations) to October
31, 1998.
(2) Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual
Funds Management Inc. (the "Manager") waived all or part of its fees for
the period ended October 31, 1998. In addition, the Manager reimbursed the
fund for $_______ in expenses for the period ended October 31, 1998. If
such fees were not waived and expenses not reimbursed, the per share
decreases in net investment income and the ratios of expenses to average
net assets for the fund would have been $_____ and _____% respectively.
(3) Not annualized.
(4) Annualized.
Travelers Series Fund - 41
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
ALLIANCE GROWTH
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 16.30 $ 13.28 $ 10.65 $ 10.00
--------------------------------------------------------------------------------------------------------------------------
Income from operations:
Net investment income (2) 0.05 0.04 0.14 0.06
Net realized and unrealized 5.11 3.39 2.61 0.59
gain
--------------------------------------------------------------------------------------------------------------------------
Total income from operations 5.16 3.43 2.75 0.65
--------------------------------------------------------------------------------------------------------------------------
Less distributions from: (0.02)
Net investment income (0.62) (0.09) (0.02) ---
Net realized gains (0.32) (0.10) ---
--------------------------------------------------------------------------------------------------------------------------
Total distributions (0.64) (0.41) (0.12) ---
--------------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 20.82 $ 16.30 $ 13.28 $ 10.65
--------------------------------------------------------------------------------------------------------------------------
Total return 32.59% 26.55% 26.18% 6.50%(3)
--------------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's) $544,526 $294,596 $111,573 $17,086
--------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (2) 0.82% 0.87% 0.90% 0.88%(4)
Net investment income 0.32 0.39 1.24 1.47(4)
--------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 66% 88% 78% 37%
==========================================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) Travelers Investment Adviser, Inc. (the "Manager") waived all or part of
its fees for the year ended October 31, 1995 and the period ended October
31, 1994. In addition, the Manager reimbursed the fund for $3,500 in
expenses for the year ended October 31, 1994. If such fees were not waived
and expenses not reimbursed, the per share decreases in net investment
income and the ratios of expenses to average net assets for the fund would
have been as follows:
<TABLE>
<CAPTION>
1995 1994
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share Decreases in Net Investment Income $0.01 $0.03
---------------------------------------------------------------------------------------------------------------------
Expense Ratios Without Fee Waivers and Reimbursement 0.97% 1.76%(4)
---------------------------------------------------------------------------------------------------------------------
</TABLE>
(3) Not Annualized.
(4) Annualized.
Travelers Series Fund - 42
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
AIM CAPITAL APPRECIATION
-------------------------------------------------------------
1998 1997 1996(1) 1995(1)(2)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year $10.76 $10.00 $10.00
- -------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (loss) (3) 0.02 0.02 0.02
Net realized and unrealized 1.91 0.75 (0.02)
gain (loss)
- -------------------------------------------------------------------------------------------------------
Total income (loss) from 1.93 0.77 --
operations
- -------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.01) (0.01) --
- -------------------------------------------------------------------------------------------------------
Total distributions (0.01) (0.01) --
- -------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 12.68 $ 10.76 $10.00
- -------------------------------------------------------------------------------------------------------
Total return 17.96% 7.71% 0.00%
- -------------------------------------------------------------------------------------------------------
Net assets, end of year (000's) $202,846 $112,905 $8,083
- -------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (3) 0.85% 0.96% 1.00%(4)
Net investment income 0.20 0.22 4.07(4)
- -------------------------------------------------------------------------------------------------------
Portfolio turnover rate 56% 44% 6%
=======================================================================================================
</TABLE>
(1) Per share amounts calculated using the monthly average shares method.
(2) For the period from October 10, 1995 (commencement of operations) to October
31, 1995.
(3) Travelers Investment Adviser, Inc. (the "Manager") waived all or part of its
fees with respect to the fund for the years ended October 31, 1996 and the
period ended October 31, 1995. In addition, the Manager reimbursed the fund
for $13,456 in expenses for the period ended October 31, 1995. If such fees
were not waived and expenses not reimbursed, the per share decreases in net
investment income and the ratios of expenses to average net assets for the
fund would have been:
<TABLE>
<CAPTION>
1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
Per Share Decreases in Net Investment Income $0.03
- --------------------------------------------------------------------------------------------------------------------
Expense Ratios Without Fee Waivers and Reimbursement 5.95%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(4) Annualized.
Travelers Series Fund - 43
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
VAN KAMPEN AMERICAN CAPITAL ENTERPRISE
-------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 15.37 $ 12.89 $ 10.38 $10.00
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (loss) (2) 0.06 0.05 0.03 0.03
Net realized and unrealized gain 4.51 2.87 2.53 0.35
(loss)
- -------------------------------------------------------------------------------------------------------------------
Total income (loss) from operations 4.57 2.92 2.56 0.38
- -------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.05) (0.04) (0.02) --
Net realized gains -- (0.40) (0.03) --
- -------------------------------------------------------------------------------------------------------------------
Total distributions (0.05) (0.44) (0.05) --
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 19.89 $ 15.37 $ 12.89 $10.38
- -------------------------------------------------------------------------------------------------------------------
Total return 29.81% 23.35% 24.74% 3.80%(3)
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's) $196,583 $103,691 $32,447 $5,734
- -------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (2) 0.74% 0.83% 0.88% 0.84%(4)
Net investment income 0.41 0.53 0.65 0.79(4)
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 75% 112% 180% 55%
===================================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) Travelers Investment Adviser, Inc. (the "Manager") waived all or part of its
fees for the year ended October 31, 1995 and the period ended October 31,
1994 for the fund. In addition, the Manager reimbursed the fund for $19,007
in expenses for the period ended October 31, 1994. If such fees were not
waived and expenses not reimbursed, the per share decreases in net
investment income and the ratios of expenses to average net assets for the
fund would have been as follows:
<TABLE>
<CAPTION>
1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share Decreases in Net Investment Income $0.06 $0.07
- ---------------------------------------------------------------------------------------------------------------
Expense Ratios Without Fee Waivers and Reimbursement 1.26% 2.66(4)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(3) Not annualized.
(4) Annualized.
Travelers Series Fund - 44
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
GT GLOBAL STRATEGIC INCOME
-------------------------------------------------------------------------
1998 1997(1) 1996 1995 1994(2)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 12.45 $ 10.77 $ 9.95 $10.00
- -------------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (3) 0.75 0.74 0.64(4) 0.17
Net realized and unrealized 0.36 1.36 0.28 (0.22)
gain (loss)
- -------------------------------------------------------------------------------------------------------------------
Total income (loss) from 1.11 2.10 0.92 (0.05)
operations
- -------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.46) (0.42) (0.10) --
Net realized gains (0.58) -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total distributions (1.04) (0.42) (0.10) --
- -------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 12.52 $ 12.45 $10.77 $ 9.95
- -------------------------------------------------------------------------------------------------------------------
Total return 9.32% 20.07% 9.37% (0.50)%(5)
- -------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's) $29,232 $19,152 $8,397 $2,624
- -------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (3) 1.07% 1.23% 1.47% 1.07%(6)
Net investment income 6.05 6.87 6.44 4.58(6)
- -------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 161% 192% 295% 56%
===================================================================================================================
</TABLE>
(1) Per share amounts calculated using the monthly average shares method.
(2) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(3) Travelers Investment Adviser, Inc. (the "Manager") waived all or part of its
fees for the years ended October 31, 1996, October 31, 1995 and the period
ended October 31, 1994. In addition, the Manager reimbursed the fund for
$18,556 in expenses for the period ended October 31, 1994. If such fees were
not waived and expenses not reimbursed, the per share decreases in net
investment income and the ratios of expenses to average net assets for the
fund would have been as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C>
Per Share Decreases in Net Investment Income $0.02 $0.04 $0.13
- ------------------------------------------------------------------------------------------------------------------
Expense Ratios Without Fee Waivers and Reimbursement 1.38% 1.93% 4.53%(6)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition, during the years ended October 31, 1996 and 1995, the fund
earned credits from the custodian which reduce service fees incurred. If the
credits are taken into consideration the expense ratios for these periods
were 1.11% and 1.11%, respectively. Figures before October 31, 1995 have not
been restated to reflect these credits.
(4) Includes realized gains and losses from foreign currency transactions.
(5) Not annualized.
(6) Annualized.
Travelers Series Fund - 45
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
TRAVELERS MANAGED INCOME
------------------------------------------------------------------------
1998 1997(1) 1996(1) 1995 1994(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of year $ 11.06 $ 11.16 $ 10.04 $10.00
- ------------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (3) 0.70 0.65 0.61 0.21
Net realized and unrealized 0.28 (0.14) 0.64 (0.17)
gain (loss)
- ------------------------------------------------------------------------------------------------------------------
Total income (loss) from 0.98 0.51 1.25 0.04
operations
- ------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.49) (0.46) (0.13) --
Net realized gains -- (0.15) -- --
- ------------------------------------------------------------------------------------------------------------------
Total distributions (0.49) (0.61) (0.13) --
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 11.55 $ 11.06 $ 11.16 $10.04
- ------------------------------------------------------------------------------------------------------------------
Total return 9.19% 4.61% 12.68% 0.40%(4)
- ------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's) $31,799 $23,532 $11,279 $3,840
- ------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (3) 0.87% 0.92% 0.92% 0.87%(5)
Net investment income 6.48 6.19 6.13 5.67(5)
- ------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 259% 255% 170% 42%
==================================================================================================================
</TABLE>
(1) Per share amounts calculated using the monthly average shares method.
(2) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(3) Travelers Investment Adviser, Inc. (the "Manager") waived all or part of its
fees for the years ended October 31, 1995 and the period ended October 31,
1994. In addition, the Manager reimbursed the fund for $15,557 in expenses
for the period ended October 31, 1994. If such fees were not waived and
expenses not reimbursed, the per share decreases in net investment income
and the ratios of expenses to average net assets for the fund would have
been as follows:
<TABLE>
<CAPTION>
1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per Share Decreases in Net Investment Income $0.04 $0.07
- ----------------------------------------------------------------------------------------------------------------
Expense Ratios Without Fee Waivers and Reimbursement 1.29% 2.91%(5)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(4) Not annualized.
(5) Annualized.
Travelers Series Fund - 46
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
PUTNAM DIVERSIFIED INCOME
--------------------------------------------------------------------------
1998 1997 1996(1) 1995 1994(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 11.99 $ 11.46 $ 10.18 $10.00
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (3) 0.67 0.78 0.79 0.23
Net realized and unrealized 0.30 0.27 0.58 (0.05)
gain (loss)
- --------------------------------------------------------------------------------------------------------------------
Total income (loss) from 0.97 1.05 1.37 0.18
operations
- --------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.56) (0.39) (0.09) ---
Net realized gains (0.09) (0.13) --- ---
- --------------------------------------------------------------------------------------------------------------------
Total distributions (0.65) (0.52) (0.09) ---
- ------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 12.31 $ 11.99 $ 11.46 $10.18
- --------------------------------------------------------------------------------------------------------------------
Total return 8.44% 9.43% 13.55% 1.80%(4)
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's) $121,601 $81,076 $31,514 $6,763
- --------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (3) 0.88% 0.96% 0.97% 0.98%(5)
Net investment income 6.99 7.57 7.53 6.14(5)
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 253% 2.55% 276% 20%
====================================================================================================================
</TABLE>
(1) Per share amounts calculated using the monthly average shares method.
(2) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(3) Travelers Investment Adviser, Inc. (the "Manager") waived all or part of
its fees for the year ended, October 31, 1995 and the period ended October
31, 1994. In addition, the Manager reimbursed the fund for $19,028 in
expenses for the period ended October 31, 1994. If such fees were
not waived and expenses not reimbursed, the per share decreases in net
investment income and the ratios of expenses to average net assets of the
fund would have been as follows:
1995 1994
- ------------------------------------------------------------------------------
Per Share Decreases in Net Investment Income $0.04 $0.07
- ------------------------------------------------------------------------------
Expense Ratios Without Fee Waivers and Reimbursement 1.31% 2.92%(5)
- ------------------------------------------------------------------------------
(4) Not annualized.
(5) Annualized.
Travelers Series Fund - 47
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
SMITH BARNEY HIGH INCOME
--------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 12.09 $ 11.26 $ 10.07 $10.00
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (loss) (2) 0.88 1.14 0.93 0.29
Net realized and unrealized 1.00 0.19 0.48 (0.22)
gain (loss)
- --------------------------------------------------------------------------------------------------------------------
Total income (loss) from 1.88 1.33 1.41 0.07
operations
- --------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.66) (0.50) (0.22) ---
Net realized gains (0.06) --- --- ---
- --------------------------------------------------------------------------------------------------------------------
Total distributions (0.72) (0.50) (0.22) ---
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 13.25 $ 12.09 $ 11.26 $10.07
- --------------------------------------------------------------------------------------------------------------------
Total return 16.24% 12.17% 14.30% 0.70%(3)
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's) $123,726 $65,955 $20,450 $ 3,395
- --------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (2) 0.70% 0.84% 0.70% 0.69%(4)
Net investment income 9.36 9.79 9.54 7.55(4)
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 89% 104% 57% 15%
====================================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) Mutual Management Corp. (the "Manager") waived all or part of its fees for
the year ended October 31, 1995 and the period ended October 31, 1994. In
addition, the Manager reimbursed the fund for $17,664 in expenses for the
period ended October 31, 1994. If such fees were not waived and expenses
not reimbursed, the per share decreases in net investment income and the
ratios of expenses to average net assets for the fund would have been as
follows:
1995 1994
- -------------------------------------------------------------------------------
Per Share Decreases in Net Investment Income $0.04 $0.07
- -------------------------------------------------------------------------------
Expense Ratios Without Fee Waivers and Reimbursement 1.07% 2.60%(4)
- -------------------------------------------------------------------------------
(3) Not annualized.
(4) Annualized.
Travelers Series Fund - 48
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
MFS TOTAL RETURN
--------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 13.13 $ 11.53 $ 9.98 $ 10.00
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (loss) (2) 0.38 0.33 0.45 0.13
Net realized and unrealized 2.27 1.62 1.15 (0.15)
gain (loss)
- --------------------------------------------------------------------------------------------------------------------
Total income (loss) from 2.65 1.95 1.60 (0.02)
operations
- --------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.29) (0.27) (0.05) ---
Net realized gains (0.18) (0.08) --- ---
- --------------------------------------------------------------------------------------------------------------------
Total distributions (0.47) (0.35) (0.05) ---
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 15.31 $ 13.13 $ 11.53 $ 9.98
- --------------------------------------------------------------------------------------------------------------------
Total return 20.64% 17.16% 16.12% (0.20)%(3)
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's) $263,585 $134,529 $49,363 $ 8,504
- --------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (2) 0.86% 0.91% 0.95% 0.93%(4)
Net investment income 3.54 3.82 4.40 3.51(4)
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate 99% 139% 104% 18%
====================================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) Travelers Investment Adviser, Inc. (the "Manager") waived all or part of
its fees for the year ended October 31, 1995 and the period ended October
31, 1994. In addition, the Manager reimbursed the fund for $13,857 in
expenses for the period ended October 31, 1994. If such fees were not
waived and expenses not reimbursed, the per share decreases in net
investment income and the ratios of expenses to average net assets for the
fund would have been as follows:
1995 1994
- -------------------------------------------------------------------------------
Per Share Decreases in Net Investment Income $0.01 $0.06
- -------------------------------------------------------------------------------
Expense Ratios Without Fee Waivers and Reimbursement 1.06% 2.51%(4)
- -------------------------------------------------------------------------------
(3) Not annualized.
(4) Annualized.
Travelers Series Fund - 49
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
SMITH BARNEY MONEY MARKET
--------------------------------------------------------------------------
1998 1997 1996 1995 1994(1)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (2) 0.049 0.049 0.052 0.014
Net realized and unrealized --- --- --- ---
gain (loss)
- --------------------------------------------------------------------------------------------------------------------
Total income (loss) from 0.049 0.049 0.052 0.014
operations
- --------------------------------------------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.049) (0.049) (0.052) (0.014)
Net realized gains
- --------------------------------------------------------------------------------------------------------------------
Total distributions (0.049) (0.049) (0.052) (0.014)
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------------------------------------------------
Total return 5.05% 5.05% 5.35% 1.46%(3)
- --------------------------------------------------------------------------------------------------------------------
Net assets, end of year (000's) $111,168 $99,150 $37,487 $ 5,278
- --------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (2) 0.65% 0.65% 0.65% 0.66%(4)
Net investment income 4.94 4.86 5.26 3.83(4)
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate n/a n/a n/a n/a
====================================================================================================================
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) Mutual Management Corp. (the "Manager") waived all or part of its fees
with respect to the fund for the years ended October 31, 1997, 1996,
1995 and the period ended October 31, 1994. In addition, the Manager
reimbursed the fund for $15,423 in expenses for the period ended October
31, 1994. If such fees were not waived and expenses not reimbursed, the
per share decreases in net investment income and the ratios of expense to
average net assets of the fund would have been as follows:
<TABLE>
1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share Decreases in Net Investment Income $0.000(5) $0.001 $0.003 $0.005
- ------------------------------------------------------------------------------------------------------------------
Expense Ratios Without Fee Waivers and 0.67% 0.74% 0.94% 2.11%(4)
Reimbursement
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(3) Not annualized
(4) Annualized.
(5) Amount represents less than $0.001.
Travelers Series Fund - 50
<PAGE>
TRAVELERS SERIES FUND INC.
ADDITIONAL INFORMATION
Shareholder reports. Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends one report to a household if more than one account has the same
address. Contact your [_________________] if you do not want this policy to
apply to you.
Statement of additional information. The statement of additional information
provides more detailed information about the fund. It is incorporated by
reference into this prospectus.
You can make inquiries about the funds or obtain shareholder reports or the
statement of additional information (without charge) by calling 1-800-xxx-xxxx
or writing to Travelers Series Fund, ______________.
You can also review the fund's shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. The Commission charges a fee for this
service. Information about the public reference room may be obtained by calling
1-800-SEC-0330. You can get the same reports and information free from the
Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. The fund is not offering to sell its
shares to any person to whom the fund may not lawfully sell its shares.
Smith Barney Pacific Basin Portfolio
Smith Barney International Equity Portfolio
Smith Barney Large Cap Value Portfolio
Smith Barney Large Capitalization Growth Portfolio
Alliance Growth Portfolio
AIM Capital Appreciation Portfolio
Van Kampen American Capital Enterprise Portfolio
MFS Total Return Portfolio
GT Global Strategic Income Portfolio
Travelers Managed Income Portfolio
Putnam Diversified Income Portfolio
Smith Barney High Income Portfolio
Smith Barney Money Market Portfolio
PART B
Statement of Additional Information
February 26, 1999
STATEMENT OF ADDITIONAL INFORMATION
TRAVELERS SERIES FUND INC.
388 Greenwich Street
New York, New York 10013
[insert phone number - must be toll-free or collect]
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 26, 1999 Prospectus which may be
obtained, without charge, from the Company or your Salomon Smith
Barney Financial Consultant. Shares of the Company may only be
purchased by insurance company separate accounts.
Travelers Series Fund Inc. (the "Company"), the investment
underlying certain variable annuity and variable life insurance
contracts, offers a choice of thirteen portfolios (each, a
"fund"):
The Smith Barney Pacific Basin Portfolio seeks long-term capital
appreciation through investment primarily in equity securities of
countries in the Asian Pacific region.
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 Large Cap Value Portfolio seeks current income
and long-term growth of income and capital. This fund invests
primarily, but not exclusively, in common stocks.
The Smith Barney Large Capitalization Growth Portfolio seeks long-
term growth of capital by investing in equity securities of
companies with market capitalization of at least $5 billion at the
time of investment.
The Alliance Growth Portfolio seeks long-term growth of capital.
Current income is only an incidental consideration.
The AIM Capital Appreciation Portfolio seeks to provide growth of
capital by investing primarily in the common stocks of small and
medium-sized growth companies.
The Van Kampen American Capital Enterprise Portfolio seeks capital
appreciation by investing primarily in common stocks of companies
which have above average potential for capital appreciation.
The MFS Total Return Portfolio seeks above-average income
(compared to a fund invested entirely in equity securities)
consistent with prudent employment of capital. While current
income is the primary objective, the fund believes that there
should be a reasonable opportunity for growth of capital and
income.
The GT Global Strategic Income Portfolio primarily seeks high
current income and, secondarily, capital appreciation by investing
primarily in the debt securities of U.S. and foreign companies,
banks and governments, including those in emerging markets.
The Travelers Managed Income Portfolio seeks high current income
consistent with what its investment adviser believes to be prudent
risk of capital. The fund invests primarily in U.S. corporate
debt obligations and U.S. government securities, including
mortgage and asset backed securities, but may also invest to a
limited extent in foreign issuers.
The Putnam Diversified Income Portfolio seeks high current income
consistent with preservation of capital.
The Smith Barney High Income Portfolio seeks high current income
by investing at least 65% of its assets in high-yielding corporate
debt obligations and preferred stock of U.S. and foreign issuers,
but may also invest in foreign issuers. Capital appreciation is a
secondary objective.
The Smith Barney Money Market Portfolio seeks maximum current
income consistent with preservation of capital.
Shares of Smith Barney Money Market Portfolio are not insured or
guaranteed by the U.S. Government. There is no assurance that the
fund will be able to maintain a stable net asset value of $1.00
per share.
In all cases, there can be no assurance that a fund will achieve
its investment objective.
Shares of each fund are offered only to insurance company separate
accounts (the "Separate Accounts"), which fund certain variable
annuity and variable life insurance contracts (the "Contracts").
The Separate Accounts invest in shares of one or more of the funds
in accordance with allocation instructions received from Contract
owners. Such allocation rights are further described in the
accompanying Contract prospectus.
Shares of each fund are offered to Separate Accounts without a
sales charge at their net asset value, next determined after
receipt of an order by an insurance company. The offering of
shares of a fund may be suspended from time to time and the
Company reserves the right to reject any specific purchase order.
CONTENTS
Directors and Officers 3
Investment Objectives and Management Policies 5
Investment Practices 18
Risk Factors 39
Investment Restrictions 49
Portfolio Turnover 64
Performance Information 64
Determination of Net Asset Value 65
Availability of the Funds 66
Redemption of Shares 66
Management Agreement 66
Other Information about the Company 72
Financial Statements 74
Appendix - Ratings of Debt Obligations A-1
DIRECTORS AND OFFICERS
Overall responsibility for management and supervision of each fund
rests with the Company's Board of Directors. The directors approve
all significant agreements between the Company and the companies
that furnish services to the Company and the funds, including
agreements with the Company's distributor, investment, adviser,
subadvisers, custodian and transfer agent. The day-to-day
operations of each fund are delegated by the directors to that
fund's manager. The directors and officers of the Company are
listed below.
VICTOR K. ATKINS, Director
Retired; 120 Montgomery Street, San Francisco, CA. Former
President of Lips Propellers, Inc., a ship propeller repair
company. Director of two investment companies associated with
Salomon Smith Barney; 76.
ABRAHAM E. COHEN, Director
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; 61.
ROBERT A. FRANKEL, Director
Managing Partner of Robert A. Frankel Managing Consultants, 102
Grand Street, Croton-on-Hudson, NY. Director of seven investment
companies associated with Salomon Smith Barney. Former Vice
President of The Readers Digest Association, Inc.; 70.
RAINER GREEVEN, Director
Partner of the law firm of Greeven & Ercklentz; 630 Fifth Avenue,
New York, NY. Director of two investment companies associated with
Salomon Smith Barney; 62.
SUSAN M. HEILBRON, Director
Attorney; Lacey & Heilbron, 3 East 54th Street, New York, NY.
Prior to November 1990, Vice President and General Counsel of
MacMillan, Inc. and Executive Vice President of The Trump
Organization. Director of two investment companies associated with
Salomon Smith Barney; 53.
*HEATH B. McLENDON, Chairman of the Board, President and Chief
Executive Officer
Managing Director of Salomon Smith Barney; Director of forty-two
investment companies associated with Salomon Smith Barney;
Director and President of Mutual Management Corp. (the ''MMC'')
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 PanAgora Asset
Management, Inc. and PanAgora Asset Management Limited; 64.
JAMES M. SHUART, Director
President, Hofstra University, 101 Hofstra University, Hempstead,
New York, 11550. 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 Salomon Smith
Barney; 67.
*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Salomon Smith Barney, and Senior Vice
President and Treasurer of forty-two investment companies
associated with Salomon Smith Barney; and Director and Senior Vice
President of the Manager and TIA; 40
*JAMES B. CONHEADY, Vice President and Investment Officer
Managing Director of Salomon Smith Barney. Formerly First Vice
President of Drexel Burnham Lambert Incorporated; 62.
*JEFFREY RUSSELL, Vice President and Investment Officer
Managing Director of Salomon Smith Barney. Formerly Vice President
of Drexel Burnham Lambert Incorporated; 40.
*JOHN C. BIANCHI, Vice President and Investment Officer
Managing Director of Salomon Smith Barney; Vice President of
_______ other investment companies associated with Salomon Smith
Barney; 43.
*MARTIN HANLEY, Vice President and Investment Officer
Vice President of _______ other investment companies associated
with Salomon Smith Barney; 32.
*DAVID S. ISHIBASHI, Vice President and Investment Officer
Vice President of Salomon Smith Barney; formerly Head of Japanese
equities desk at SG Warburg; 42
*SCOTT KALB, Vice President and Investment Officer
Managing Director of Salomon Smith Barney. Formerly Vice President
of Drexel Burnham Lambert Incorporated; 42
*PHYLLIS M. ZAHORODNY, Vice President and Investment Officer
Managing Director of Salomon Smith Barney; Vice President of
_______ other investment companies associated with Salomon Smith
Barney; 40.
*IRVING DAVID, Controller
Director of Salomon Smith Barney. Formerly Assistant Treasurer of
First Investment Management Company; 37.
*CHRISTINA T. SYDOR, Secretary
Managing Director of Salomon Smith Barney and Secretary of forty-
two investment companies associated with Salomon Smith Barney;
Secretary and General Counsel of the Manager and TIA; 47.
___________________
* 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 Company officers or
directors.
On February ___, 1999 Directors and officers owned in the
aggregate less than 1% of the outstanding securities of the
Company.
The following table shows the compensation paid by the Company to
each director during the Company's last fiscal year. None of the
officers of the Company received any compensation from the Company
for such period. Officers and interested directors of the Company
are compensated by Salomon Smith Barney.
Director
Aggregate
Compensation from the
Company
Total
Compensation
from Company and
Complex Paid to
Director
Number of Funds
for
Which Director
Serves
Within Fund
Complex
Victor K. Atkins
2
Abraham E. Cohen
2
Robert A.
Frankel
8
Rainer Greeven
2
Susan M.
Heilbron
2
Heath B.
McLendon
59
James M. Shuart
2
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
Each fund's investment objectives and certain investment
restrictions may be changed only by the ''vote of a majority of
the outstanding voting securities'' as defined in the 1940 Act.
However, each fund's investment policies are nonfundamental, and
thus may be changed by the Board of Directors, provided such
change is not prohibited by the fund's fundamental investment
restrictions (described under INVESTMENT RESTRICTIONS) or
applicable law, and any such change will first be disclosed in the
then current prospectus. Refer to the "INVESTMENT PRACTICES" and
"RISK FACTORS" for further information on the funds' investments.
Smith Barney Pacific Basin Portfolio
Pacific Basin Portfolio invests primarily in equity securities,
including American Depository Receipts ("ADRs"), of companies in
the Asia Pacific region. The Asia Pacific region currently
includes Australia, Hong Kong, India, Indonesia, Japan, Malaysia,
New Zealand, Pakistan, Papua New Guinea, the People's Republic of
China, the Philippines, Singapore, South Korea, Sri Lanka, Taiwan
and Thailand. The Manager may change this list at its discretion.
The fund's Manager considers a company to be in the Asia Pacific
region if its securities trade on exchanges in the Asia Pacific
region, it generates at least half of its revenue from the Asia
Pacific region or it is organized under the laws of an Asia
Pacific region country.
The fund will normally invest at least 80% of its total assets in
equity securities of companies in the Asia Pacific region. Equity
securities include exchange traded and over-the-counter common
stocks, preferred shares, debt securities convertible into equity
securities, depository receipts and warrants and rights relating
to equity securities. The fund may also invest up to 20% of its
total assets in debt securities and other types of investments.
Concentration of the fund's assets in one or a few of the
countries in the Asia Pacific Region and Asia Pacific currencies
will subject the fund to greater risks than if the fund's assets
were not geographically concentrated.
It is expected that portfolio securities will ordinarily be traded
on a stock exchange or other market in the country in which the
issuer is principally based, but may also be traded on markets in
other countries including, in many cases, the United States
securities exchanges and over-the-counter markets. Debt securities
in which the fund may invest will generally be rated at the time
of purchase at least Baa by Moody's Investors Services ("Moody's")
or BBB by Standard and Poor's ("S&P"). Debt securities rated Baa
or BBB may have speculative characteristics and changes in
economic conditions or other circumstances are more likely to lead
to a weakened capacity of their issuers to pay interest and repay
principal than is the case with higher rated securities.
The fund may enter into reverse repurchase agreements with
broker/dealers and other financial institutions up to 5% of its
net assets.
Smith Barney International Equity Portfolio
Under normal market conditions, International Equity Portfolio
invests at least 80% of its assets in a diversified portfolio of
equity securities and may invest up to 20% of the fund's assets in
bonds, notes and debt securities (consisting of securities issued
in the Eurocurrency markets or obligations of the United States or
foreign governments and their political sub-divisions) or
established non-United States issuers.
In seeking to achieve its objective, the fund invests its assets
primarily in common stocks of foreign companies which in the
opinion of the Manager have potential for growth of capital.
However, there is no requirement that the fund invest exclusively
in common stocks or other equity securities and, if deemed
advisable, the fund may invest up to 20% of its assets in bonds,
notes and other debt securities (including securities issued in
the Eurocurrency markets or obligations of the United States or
foreign governments and their political subdivisions).
The fund will generally invest its assets broadly among countries
and will normally have represented in the portfolio business
activities in not less than three different countries. Except as
stated below, the fund will invest at least 80% of its assets in
companies organized or governments located in any area of the
world other than the United States, such as the Far East (e.g.,
Japan, Hong Kong, Singapore, Malaysia), Western Europe (e.g.,
United Kingdom, Germany, the Netherlands, France, Italy,
Switzerland), Eastern Europe (e.g., the Czech Republic, Hungary,
Poland, and the countries of the former Soviet Union), Central and
South America (e.g., Mexico, Chile, and Venezuela), Australia,
Canada and such other areas and countries as the fund's manager
may determine from time to time. Concentration of the fund's
assets in one or a few countries or currencies will subject the
fund to greater risks than if the fund's assets were not
geographically concentrated.
It is expected that fund securities will ordinarily be traded on a
stock exchange or other market in the country in which the issuer
is principally based, but may also be traded on markets in other
countries including, in many cases, the United States securities
exchanges and over-the-counter markets.
The fund may enter into reverse repurchase agreements with
broker/dealers and other financial institutions up to 5% of its
net assets.
Smith Barney Large Cap Value Portfolio
Under normal market conditions at least 65% of the fund's assets
will be invested in equity securities.
The fund may make investments in foreign securities, though
management currently intends to limit such investments to 5% of
the fund's assets, and an additional 10% of its assets may be
invested in sponsored American Depositary Receipts ("ADRs"), which
are certificates issued by U.S. banks representing the right to
receive securities of a foreign issuer deposited with that bank or
a correspondent bank. The fund will ordinarily purchase foreign
securities that are traded in the U.S. It may, however, also
purchase the securities of foreign issuers directly in foreign
markets. The fund may also lend up to 20% of the value of its
total assets and may purchase or sell securities on a when-issued
or delayed delivery basis.
Although the fund 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 fund does not
currently intend to commit more than 5% of its assets to be
invested in or subject to put and call options.
Smith Barney Large Capitalization Growth Portfolio
Under normal market conditions, Large Capitalization Growth
Portfolio invests 65% of its assets in equity securities of
companies with market capitalizations of at least $5 billion at
the time of investment. The core holdings of the fund will be
large capitalization companies that are dominant in their
industries, global in scope and have a long term history of
performance. The fund has the flexibility, however, to invest up
to 35% of assets in companies with other market capitalizations.
Companies with large market capitalizations typically have a large
number of publicly held shares and a high trading volume resulting
in a high degree of liquidity. Companies whose capitalization
falls below this level after purchase will continue to be
considered large capitalization companies for purposes of the 65%
policy.
The fund may invest in securities of non-U.S. issuers in the form
of ADRs, European Depositary Receipts ("EDRs") or similar
securities representing interests in the common stock of foreign
issuers. Management intends to limit the fund's investment in
these types of securities, to 10% of the fund's net assets. ADRs
are receipts, typically issued by a U.S. bank or trust company,
which evidence ownership of underlying securities issued by a
foreign corporation. EDRs are receipts issued in Europe which
evidence a similar ownership arrangement. Generally, ADRs, in
registered form, are designed for use in the U.S. securities
markets and EDRs are designed for use in European securities
markets. The underlying securities are not always denominated in
the same currency as the ADRs or EDRs. Although investment in the
form of ADRs or EDRs facilitates in foreign securities, it does
not mitigate the risks associated with investing in foreign
securities.
Under normal market conditions, at least 65% of the fund's
portfolio will consist of common stocks, but it also may contain
money market instruments for cash management purposes, including
U.S. government securities; certificates of deposit, time deposits
and bankers' acceptances issued by domestic banks (including their
branches located outside the United States and subsidiaries
located in Canada), domestic branches of foreign banks, savings
and loan associations and similar institutions; high grade
commercial paper; and repurchase agreements with respect to such
instruments.
Alliance Growth Portfolio
The fund invests primarily in equity securities. The fund may also
invest a portion of its assets in developing countries or
countries with new or developing capital markets.
Because the values of fixed-income securities are expected to vary
inversely with changes in interest rates generally, when the
subadviser expects a general decline in interest rates, the fund
may also invest for capital growth in fixed-income securities. The
fund may invest up to 25% of total assets in high-yield, high-
risk, fixed-income and convertible securities rated at the time of
purchase Ba or lower by or BB or lower by S&P, or, if unrated,
judged by the subadviser to be of comparable quality. The fund
will generally invest in fixed income securities with a minimum
rating of Caa- by Moody's or CCC- by S&P or in unrated securities
judged by the subadviser to be of comparable quality. However,
from time to time, the fund may invest in securities rated in the
lowest grades of Moody's (C) or S&P (D) or in unrated securities
judged by the subadviser to be of comparable quality, if the
subadviser determines that there are prospects for an upgrade or a
favorable conversion into equity securities (in the case of
convertible securities). Securities rated Ba or lower (and
comparable unrated securities) are commonly referred to as "junk
bonds." Securities rated D by S&P are in default.
The fund may invest in securities that are not publicly traded,
including securities sold pursuant to Rule 144A under the
Securities Act of 1933 ("Rule 144A Securities"). Investment in
non-publicly traded securities is restricted to 5% of the fund's
total assets (not including Rule 144A Securities, to the extent
permitted by applicable law) and is also subject to the fund's
restriction against investing more than 15% of net assets in
"illiquid securities." To the extent permitted by applicable law,
Rule 144A Securities will not be treated as illiquid for purposes
of the foregoing restriction so long as such securities meet
liquidity guidelines established by the fund's Board of Directors.
The fund may also invest in zero-coupon bonds, payment-in-kind
bonds and real estate investment trusts. It may also buy and sell
stock index futures contracts ("index futures") and may buy
options on index futures and on stock indices for hedging
purposes. The fund may buy and sell call and put options on index
futures or on stock indices in addition to, or as an alternative
to, purchasing or selling index futures or, to the extent
permitted by applicable law, to earn additional income. The fund
may also, for hedging purposes, purchase and sell futures
contracts, options thereon and options with respect to U.S.
Treasury securities, including U.S. Treasury bills, notes and
bonds. The fund may also seek to increase its current return by
writing covered call and put options on securities it owns or in
which it may invest.
The fund may lend portfolio securities amounting to not more than
25% of its total assets and may enter into repurchase agreements
on up to 25% of its total assets. It may also purchase securities
for future delivery, which may increase its overall investment
exposure and involves a risk of loss if the value of the
securities declines prior to the settlement date. In addition, the
fund may invest in real estate investment trusts.
AIM Capital Appreciation Portfolio
The fund invests principally in common stocks, with emphasis on
medium-sized and smaller emerging growth companies. Management of
the fund will be particularly interested in companies that are
likely to benefit from new or innovative products, services or
processes that should enhance such companies' prospects for future
growth in earnings. As a result of this policy, the market prices
of many of the securities purchased and held by the fund may
fluctuate widely.
Special Situations. Although the fund 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 fund 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 fund's investment in all such companies, taken at cost, to
exceed 5% of the value of its total assets.
The fund may not invest more than 20% of its total assets in
foreign securities, including ADRs as well as EDRs and other
securities representing underlying securities of foreign issuers
as foreign securities for purposes of this limitation.
The fund may also invest up to 15% of its net assets in illiquid
securities, including repurchase agreements with maturities in
excess of seven days. In addition, the fund may purchase domestic
stock index futures contracts. It may also write (sell) covered
call options on no more than 25% of the value of its net assets.
Van Kampen American Capital Enterprise Portfolio
In addition to common stocks of companies, the fund may invest in
warrants and preferred stocks, and in other investment companies.
The fund may also invest up to 15% of the value of its total
assets in securities of foreign issuers.
The fund generally holds a portion of its assets in investment
grade short-term debt securities in order to provide liquidity.
The fund may also hold investment grade corporate or government
bonds. The market prices of such bonds can be expected to vary
inversely with changes in prevailing interest rates.
The fund expects to utilize options, futures contracts and options
thereon in several different ways, depending upon the status of
its portfolio and the subadviser's expectations concerning the
securities markets. In times of stable or rising stock prices, the
fund generally seeks to obtain maximum exposure to the stock
market, i.e., to be "fully invested." Nevertheless, even when the
fund is fully invested, prudent management requires that at least
a small portion of assets be available as cash to honor redemption
requests and for other short term needs. The fund may also have
cash on hand that has not yet been invested. The portion of the
fund's assets that is invested in cash equivalents does not
fluctuate with stock market prices, so that, in times of rising
market prices, the fund may underperform the market in proportion
to the amount of cash equivalents in its portfolio. By purchasing
stock index futures contracts, however, the fund can compensate
for the cash portion of its assets and obtain performance
equivalent to investing 100% of its assets in equity securities.
If the subadviser anticipates a market decline, the fund may seek
to reduce its exposure to the stock market by increasing its cash
position. By selling stock index futures contracts instead of
portfolio securities, a similar result may be achieved to the
extent that the performance of the stock index futures contracts
correlates to the performance of the fund's securities. Sales of
futures contracts could frequently be accomplished more rapidly
and at less cost than the actual sale of securities. Once the
desired hedged position has been effected, the fund could then
liquidate securities in a more deliberate manner, reducing its
futures position simultaneously to maintain the desired balance,
or it could maintain the hedged position.
As an alternative to selling futures contracts, the fund can
purchase puts (or futures puts) to hedge the fund's risk in a
declining market. Since the value of a put increases as the
underlying security declines below a specified level, the fund's
value is protected against a market decline to the degree the
performance of the put correlates with the performance of its
investment portfolio. If the market remains stable or advances,
the fund can refrain from exercising the put and its portfolio
will participate in the advance, having incurred only the premium
cost for the put.
MFS Total Return Portfolio
The fund's policy is to invest in a broad list of securities,
including short-term obligations. The list may be diversified not
only by companies and industries, but also by type of security.
Fixed income securities and equity securities may be held by the
fund. Some fixed income securities may also have a call on common
stock by means of a conversion privilege or attached warrants. The
fund may vary the percentage of assets invested in any one type of
security in accordance with the subadviser's interpretation of
economic and money market conditions, fiscal and monetary policy
and underlying security values. The fund's debt investments may
consist of both "investment grade" securities (rated Baa or better
by Moody's or BBB or better by S&P or Fitch IBCA, Inc. (formerly
Fitch Investors Service, Inc.) ("Fitch")) and securities that are
unrated or are in the lower rating categories (rated Ba or lower
by Moody's or BB or lower by S&P or Fitch) (commonly known as
"junk bonds") including up to 20% of its net assets in
nonconvertible fixed income securities that are in these lower
rating categories and comparable unrated securities. Generally,
most of the fund's long-term debt investments will consist of
"investment grade" securities. See Appendix A for a description of
these ratings. It is not the fund's policy to rely exclusively on
ratings issued by established credit rating agencies but rather to
supplement such ratings with the subadviser's own independent and
ongoing review of credit quality.
As noted above, the fund invests in lower-rated and unrated
corporate debt securities, commonly known as "junk bonds."
Investments of this type are subject to a greater risk of loss of
principal and interest. Purchasers should carefully assess the
risks associated with an investment in this fund. See "Risk
Factors."
The fund may also invest in emerging market securities, Brady
Bonds, U.S. Government securities, mortgage pass-through
securities, corporate asset-backed securities, zero-coupon bonds,
deferred interest bonds and payment-in-kind bonds. In addition,
the fund may enter into repurchase agreements and mortgage dollar
roll transactions, may lend its portfolio securities, purchase
securities on a when-issued or forward delivery basis, enter into
swap transactions and invest in indexed securities and loan
participations and other direct indebtedness. The fund may invest
up to 15% of its net assets in illiquid securities and may also
invest in restricted securities, including Rule 144A Securities.
Finally, the fund may engage in various options and futures
transactions including options on securities, options on stock
indexes, options on foreign currencies, stock indices and foreign
currency futures contracts, options on futures contracts, forward
foreign currency exchange contracts and yield curve options.
The fund will be managed actively with respect to the fund's fixed
income securities and the asset allocations modified as the
subadviser deems necessary. Although the fund does not intend to
seek short-term profits, fixed income securities will be sold
whenever the sub-adviser believes it is appropriate to do so
without regard to the length of time the particular asset may have
been held. With respect to its equity securities the fund does not
intend to trade in securities for short-term profits and
anticipates that portfolio securities ordinarily will be held for
one year or longer. However, the fund will effect trades whenever
it believes that changes in its portfolio securities are
appropriate.
GT Global Strategic Income Portfolio
Debt securities in which the fund may invest include bonds, notes,
debentures, and other similar instruments. The fund normally
invests at least 50% of its net assets in U.S. and foreign debt
and other fixed income securities that, at the time of purchase,
are rated at least investment grade by Moody's or S&P or, if
unrated, determined by the subadviser to be of comparable quality.
No more than 50% of the fund's total assets may be invested in
securities rated below investment grade. Such securities involve a
high degree of risk and are predominantly speculative. The fund
may also invest in securities that are in default as to payment of
principal and/or interest. See "Risk Factors."
For purposes of the fund's operations, "emerging markets" will
consist of all countries determined by the subadviser to have
developing or emerging economies and markets. These countries
generally include every country in the world except the United
States, Canada, Japan, Australia, New Zealand and most countries
located in Western Europe. The fund will consider investment in,
but not be limited to, the following emerging markets: Algeria,
Argentina, Bolivia, Botswana, Brazil, Bulgaria, Chile, China,
Colombia, Costa Rica, Cyprus, Czech Republic, Dominican Republic,
Ecuador, Egypt, El Salvador, Finland, Greece, Ghana, Hong Kong,
Hungary, India, Indonesia, Israel, Ivory Coast, Jamaica, Jordan,
Kazakhstan, Kenya, Lebanon, Malaysia, Mauritius, Mexico, Morocco,
Nicaragua, Nigeria, Oman, Pakistan, Panama, Paraguay, Peru,
Philippines, Poland, Portugal, Republic of Slovakia, Russia,
Singapore, Slovenia, South Africa, South Korea, Sri Lanka,
Swaziland, Taiwan, Thailand, Turkey, Ukraine, Uruguay, Venezuela,
Zambia and Zimbabwe.
The fund will not be invested in all such markets at all times.
Moreover, investing in some of those markets currently may not be
desirable or feasible, due to the lack of adequate custody
arrangements, overly burdensome repatriation requirements and
similar restrictions, the lack of organized and liquid securities
markets, unacceptable political risks or for other reasons.
An issuer in an emerging market is an entity: (i) for which the
principal securities trading market is an emerging market, as
defined above; (ii) that (alone or on a consolidated basis)
derives 50% or more of its total revenue from either goods
produced, sales made or services performed in emerging markets; or
(iii) organized under the laws of, or with a principal office in,
an emerging market.
The fund's investments in emerging market securities may consist
substantially of Brady Bonds and other sovereign debt securities
issued by emerging market governments that are traded in the
markets of developed countries or groups of developed countries.
The subadviser may invest in debt securities of emerging market
issuers that it determines to be suitable investments for the fund
without regard to ratings. Currently, the substantial majority of
emerging market debt securities are considered to have a credit
quality below investment grade.
The fund also may consider making investments in below-investment
grade debt securities of corporate issuers in the United States
and in developed foreign countries, subject to the overall 50%
limitation. The fund also may invest in bank loan participations
and assignments, which are fixed and floating rate loans arranged
through private negotiations between foreign entities. The fund
may invest up to 15% of its net assets in illiquid securities. The
fund also may borrow for investment purposes up to 33 1/3% of its
total assets. The fund may also use instruments (including forward
currency contracts) often referred to as "derivatives."
Pending investment of proceeds from new sales of fund shares or to
meet ordinary daily cash needs, the fund may hold cash (U.S.
dollars, foreign currencies or multinational currency units) and
may invest its assets in high quality foreign or domestic money
market instruments.
Asset Allocation. The fund invests in debt obligations allocated
among diverse markets and denominated in various currencies,
including U.S. dollars, or in multinational currency units. The
fund may purchase securities that are issued by the government or
a company or financial institution of one country but denominated
in the currency of another country (or a multinational currency
unit). The fund is designed for investors who wish to accept the
risks entailed in such investments, which are different from those
associated with a portfolio consisting entirely of securities of
U.S. issuers denominated in U.S. dollars.
The subadviser selectively will allocate the assets of the fund in
securities of issuers in countries and in currency denominations
where the combination of fixed income market returns, the price
appreciation potential of fixed income securities and currency
exchange rate movements will present opportunities primarily for
high current income and secondarily for capital appreciation. In
doing so, the subadviser intends to take full advantage of the
different yield, risk and return characteristics that investment
in the fixed income markets of different countries can provide for
U.S. investors. Fundamental economic strength, credit quality and
currency and interest rate trends will be the principal
determinants of the emphasis given to various country, geographic
and industry sectors within the fund. Securities held by the fund
may be invested in without limitation as to maturity.
The subadviser selects securities of particular issuers on the
basis of its views as to the best values then currently available
in the marketplace. Such values are a function of yield, maturity,
issue classification and quality characteristics, coupled with
expectations regarding the local and world economies, movements in
the general level and term of interest rates, currency values,
political developments and variations in the supply of funds
available for investment in the world bond market relative to the
demands placed upon it.
The subadviser generally evaluates currencies on the basis of
fundamental economic criteria (e.g., relative inflation and
interest rate levels and trends, growth rate forecasts, balance of
payments status and economic policies) as well as technical and
political data. If the currency in which a security is denominated
appreciates against the U.S. dollar, the dollar value of the
security will increase. Conversely, if the exchange rate of the
foreign currency declines, the dollar value of the security will
decrease. However, the fund may seek to protect itself against
such negative currency movements through the use of sophisticated
investment techniques that include currency, options and futures
transactions.
Selection of Debt Investments. In determining the appropriate
distribution of investments among various countries and geographic
regions for the fund, management ordinarily considers the
following factors: prospects for relative economic growth among
the different countries in which the fund 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 fund values assets daily in terms of U.S. dollars,
the fund does not intend to convert holdings of foreign currencies
into U.S. dollars on a daily basis. The fund 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 fund at one rate, while offering a lesser rate of
exchange should the fund desire to sell that currency to the
dealer.
The fund 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 fund 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.
According to the subadviser, more than 50% of the value of all
outstanding government debt obligations throughout the world is
represented by obligations denominated in currencies other than
the U.S. dollar. Moreover, from time to time, the debt securities
of issuers located outside the United States have substantially
outperformed the debt obligations of U.S. issuers. Accordingly,
the subadviser believes that the fund's policy of investing in
debt securities throughout the world may enable the achievement of
results superior to those produced by mutual funds with similar
objectives to those of the fund that invest solely in debt
securities of U.S. issuers. The fund may also purchase securities
on a "when-issued basis" and may purchase or sell securities on a
"forward commitment" basis in order to hedge against anticipated
changes in interest rates and prices.
The fund may invest up to 15% of its net assets in illiquid
securities and is authorized to borrow money from banks in an
amount up to 33 1/3% of its total assets (including the amount
borrowed), less all liabilities and indebtedness other than the
borrowings and may use the proceeds for investment purposes. The
fund will borrow for investment purposes only when the subadviser
believes that such borrowings will benefit the fund, after taking
into account considerations such as the cost of the borrowing and
the likely investment returns on the securities purchased with the
borrowed monies. In addition, the fund may borrow money for
temporary or emergency purposes or payments in an amount not
exceeding 5% of the value of its total assets (not including the
amount borrowed) provided that the total amount borrowed by the
fund for any purpose does not exceed 33 1/3% of its total assets.
The fund may also enter into repurchase agreements, reverse
repurchase agreements and dollar roll transactions and may make
loans of its portfolio securities, invest in zero-coupon and other
deep discount securities, invest in commercial paper that is
indexed to certain specific foreign currency exchange rates, enter
into interest rate, currency and index swaps and may purchase or
sell related caps, floors and collars and other derivative
instruments. The fund may enter into reverse repurchase
agreements with up to 33 1/3% of its total assets, so long as the
total amount of the fund's borrowings do not exceed 33 1/3% of its
total assets.
Nondiversification. As a "non-diversified" company under the 1940
Act, the fund will have the ability to invest more than 5% of its
assets in the securities of any issuer. However, the fund intends
to comply with Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"), which requires (among other things) that
at least 50% of the fund's assets consist of U.S. Government
securities, cash and cash items, securities of other regulated
investment companies, and other securities, with such other
securities limited in respect of any one issuer to not more than
5% of the value of the fund's total assets and not more than 10%
of the outstanding voting securities of such issuer. Also,
holdings of a single issuer (with the same exceptions) may not
exceed 25% of the fund's total assets. These limits are measured
at the end of each quarter of the fund's taxable year. Under the
Subchapter M limits, "non-diversification" allows up to 50% of a
fund's total assets to be invested in as few as two single
issuers. In the event of decline of creditworthiness or default
upon the obligations of one or more such issuers exceeding 5%, an
investment in the fund will entail greater risk than in a
portfolio having a policy of "diversification" because a high
percentage of the fund's assets may be invested in securities of
one or two issuers. Furthermore, a high percentage of investments
among few issuers may result in a greater degree of fluctuation in
the market value of the assets of the fund, and consequently a
greater degree of fluctuation of the fund's net asset value,
because the fund will be more susceptible to economic, political
or regulatory developments affecting these securities than would
be the case with a portfolio composed of varied obligations of
more issuers. The fund also intends to satisfy the
diversification requirements of Section 817(h) of the Code, as
described generally in the prospectus.
Travelers Managed Income Portfolio
Under normal market conditions, (1) at least 65% of the fund's
total assets will be invested in U.S. government securities and in
investment-grade corporate debt obligations rated within the four
highest ratings of Moody's or S&P or in unrated obligations of
comparable quality; and (2) at least 65% of the fund's total
assets will be invested in debt obligations having durations of 10
years or less. The fund may only invest in U.S. government
securities that are issued or guaranteed as to both principal and
interest by the U.S. government or backed by the full faith and
credit of the U.S. government or its agencies or
instrumentalities.
Obligations rated in the lowest of the top four ratings (Baa by
Moody's or BBB by S&P) are considered to have some speculative
characteristics. Unrated securities will be considered of
investment-grade if deemed by the subadviser to be comparable in
quality to instruments so rated, or if other outstanding
obligations of the issuers of such securities are rated Baa/BBB or
better. For a description of the ratings referred to above, see
Appendix A.
The fund may invest up to 35% of its total assets in obligations
rated below the four highest ratings of Moody's or S&P, with no
minimum rating required. Such securities, which are considered to
have speculative characteristics, include securities rated in the
lowest rating categories of Moody's or S&P (commonly referred to
as "junk bonds"), which are extremely speculative and may be in
default with respect to payment of principal or interest.
The fund may also invest up to 35% of its total assets in fixed-
income obligations having durations longer than 10 years, up to
25% of its total assets in convertible debt obligations and
preferred stocks, and up to 20% of its total assets in securities
of foreign issuers, including foreign governments. The fund will
not invest in common stocks, and any common stocks received
through conversion of convertible debt obligations will be sold in
an orderly manner. Changes in interest rates will affect the value
of the fund's portfolio investments.
Bank certificates of deposit and bankers' acceptances in which the
fund may invest are limited to U.S. dollar-denominated instruments
of domestic banks, including their branches located outside the
United States, and of domestic branches of foreign banks. In
addition, the fund may invest in U.S. dollar-denominated, non-
negotiable time deposits issued by foreign branches of domestic
banks and London branches of foreign banks; and negotiable
certificates of deposit issued by London branches of foreign
banks. The foregoing investments may be made provided that the
bank has capital, surplus and undivided profits (as of the date of
its most recently published annual financial statements) in excess
of $100 million as of the date of investment. Investments in
obligations of foreign branches of domestic banks, foreign banks,
and domestic branches of foreign banks involve risks that are
different from investments in securities of domestic banks, and
are discussed in more detail under "Risk Factors."
The fund is permitted to enter into repurchase agreements with
respect to U.S. government securities, to purchase portfolio
securities on a when-issued basis, to purchase or sell portfolio
securities for delayed-delivery, and to lend its portfolio
securities. In addition, the fund may invest up to 25% of its
total assets in securities representing interests in pools of
assets such as mortgage loans, motor vehicle installment purchase
obligations and credit card receivables ("asset backed
securities"), which include classes of obligations collateralized
by mortgage loans or mortgage-pass through certificates ("CMOs").
The fund is authorized to borrow money for temporary
administrative purposes and to pledge its assets in connection
with such borrowings. Finally, the fund may invest up to 15% of
its net assets in illiquid securities (excluding Rule 144A
Securities).
Putnam Diversified Income Portfolio
The subadviser believes that diversifying the fund's investments
among the U.S. Government Sector, The High Yield Sector and the
International Sector, as opposed to investing in any one sector,
will better enable the fund to preserve capital while pursuing its
investment objective. Historically, the markets for U.S.
government securities, lower-rated, high yielding U.S. corporate
fixed-income securities, and debt securities of foreign issuers
have tended to behave independently and have at times moved in
opposite directions. For example, U.S. government securities have
generally been affected negatively by inflationary concerns
resulting from increased economic activity. High yield U.S.
corporate fixed-income securities, on the other hand, have
generally benefitted from increased economic activity due to
improvement in the credit quality of corporate issuers. The
reverse has generally been true during periods of economic
decline. Similarly, U.S. government securities have often been
negatively affected by a decline in the value of the dollar
against foreign currencies, while the bonds of foreign issuers
held by U.S. investors have generally benefitted from such
decline. The subadviser believes that, when financial markets
exhibit such a lack of correlation, a pooling of investments among
these markets may produce greater preservation of capital and
lower volatility over the long term than would be obtained by
investing exclusively in any one of the markets.
The subadviser will continuously review the allocation of assets
and make such adjustments as it deems appropriate, although there
are no fixed limits on allocations among sectors, including
investment in the High Yield Sector. Because of the importance of
sector diversification to the fund's investment policies, the Sub-
Adviser expects that a substantial portion of the fund's assets
will normally be invested in each of the three market sectors
described below. The fund's assets allocated to each of these
market sectors will be managed in accordance with particular
investment policies, which are described below. At times, the fund
may hold a portion of its assets in cash and money market
instruments.
U.S. Government Sector. The fund will invest assets allocated to
the U.S. Government Sector primarily in U.S. government securities
and may engage in options, futures, and repurchase transactions
with respect to such securities. The fund may also enter into
forward commitments for the purchase of U.S. government securities
and make secured loans of its portfolio securities with respect to
U.S. government securities. In purchasing securities for the U.S.
Government Sector, the subadviser may take full advantage of the
entire range of maturities of U.S. government securities and may
adjust the average maturity of the investments held in the
portfolio from time to time, depending on its assessment of
relative yields of securities of different maturities and its
expectations of future changes in interest rates. Under normal
market conditions, the fund will invest at least 20% of its net
assets in U.S. government securities. The fund may also invest
assets allocated to the U.S. Government Sector in a variety of
debt securities, including asset-backed and mortgage-backed
securities, such as CMOs, that are issued by private U.S. issuers.
With respect to the U.S. Government Sector, the fund will only
invest in privately issued debt securities that are rated at the
time of purchase at least Baa by Moody's, or BBB by S&P or the
equivalent by any other nationally recognized statistical rating
agency, or in unrated securities that the subadviser determines
are of comparable quality. Securities rated Baa or BBB are
considered to have some speculative characteristics. The rating
services' descriptions of these rating categories are included in
Appendix A. The fund will not necessarily dispose of a security if
its rating is reduced below these levels, although the subadviser
will monitor the investment to determine whether continued
investment in the security will assist in meeting the fund's
investment objective.
High Yield Sector. The fund will invest assets allocated to the
High Yield Sector primarily in high yielding, lower-rated higher
risk U.S. and foreign corporate fixed-income securities, including
debt securities, convertible securities and preferred stocks.
Subject to the foregoing sentence, the fund may also purchase
equity securities. As described below, however, the fund may
invest all or any part of the High Yield Sector portfolio in
higher-rated and unrated fixed-income securities. The fund will
not necessarily invest in the highest yielding securities
available if in the subadviser's opinion the differences in yield
are not sufficient to justify the higher risks involved. In
addition, the fund may invest up to 15% of its net assets in
securities that are not publicly traded and for which market
quotations are not readily available. The fund may also invest in
zero-coupon bonds and payment-in-kind bonds.
At times, a substantial portion of the fund's assets may be
invested in securities as to which the fund, by itself or together
with other funds and accounts managed by the subadviser and its
affiliates, holds a major portion or all of such securities. Under
adverse market or economic conditions or in the event of adverse
changes in the financial condition of the issuer, the fund could
find it more difficult to sell such securities when the subadviser
believes it advisable to do so or may be able to sell such
securities only at prices lower than if such securities were more
widely held. Under such circumstances, it may also be more
difficult to determine the fair value of such securities for
purposes of computing the fund's net asset value. In order to
enforce its rights in the event of a default under such
securities, the fund may be required to take possession of and
manage assets securing the issuer's obligations on such
securities, which may increase the fund's operating expenses and
adversely affect the fund's net asset value.
The High Yield Sector may invest in any security which is rated,
at the time of purchase, at least Caa as determined by Moody's or
CCC as determined by S&P's (or, the equivalent by another,
nationally recognized statistical rating agency) or in any unrated
security which the subadviser determines is at least of comparable
quality, although up to 5% of the net assets of the fund (whether
they are allocated to the High Yield Sector or the International
Sector) may be invested in securities rated below such quality, or
in unrated securities that the subadviser determines are of
comparable quality. Securities rated below Caa by Moody's or CCC
by S&P's are of poor standing and may be in default. The rating
services' descriptions of these rating categories, including the
speculative characteristics of the lower categories, are included
in Appendix A.
International Sector. The fund will invest the assets allocated to
the International Sector in debt obligations and other fixed-
income securities denominated in any currency including the U.S.
dollar. These securities include:
* debt obligations issued or guaranteed by foreign (including
emerging markets), national, provincial, state or other
governments with taxing authority, or by their agencies or
instrumentalities;
* debt obligations of supranational entities (described below);
and
* debt obligations and other fixed-income securities of foreign
and U.S. corporate issuers.
In the past, yields available from securities denominated in
foreign currencies have often been higher than those of securities
denominated in U.S. dollars. The subadviser will consider expected
changes in foreign currency exchange rates in determining the
anticipated returns of securities denominated in foreign
currencies.
The obligations of foreign governmental entities, including
supranational issuers, have various kinds of government support.
Obligations of foreign governmental entities include obligations
issued or guaranteed by national, provincial, state or other
governments with taxing power or by their agencies. These
obligations may or may not be supported by the full faith and
credit of a foreign government.
Supranational entities include international organizations
designated or supported by governmental entities to promote
economic reconstruction or development and international banking
institutions and related government agencies. Examples include the
International Bank for Reconstruction and Development (the World
Bank), the European Steel and Coal Community, the Asian
Development Bank, and the Inter-American Development Bank. The
governmental members or "stockholders" usually make initial
capital contributions to the supranational entity and in many
cases are committed to make additional capital contributions if
the supranational entity is unable to repay its borrowing. Each
supranational entity's leading activities are limited to a
percentage of its total capital (including "callable capital"
contributed by members at the entity's call), reserves, and net
income.
Defensive Strategies. At times, the subadviser may judge that
conditions in the securities market make pursuing the fund's basic
investment strategy inconsistent with the best interests of its
shareholders. At such times, the subadviser may temporarily use
alternative strategies, primarily designed to reduce fluctuations
in the value of the fund's assets. In implementing these
"defensive" strategies, depending on the circumstances, the fund
may temporarily reduce or suspend its option writing activities,
shift its portfolio emphasis to higher-rated securities in the
High Yield Sector, hedge currency risks in the International
Sector, or generally reduce the average maturity of its holdings
in any or all of the Sectors.
The fund may also purchase securities of issuers located in
emerging markets, invest in sovereign debt, Brady Bonds, loan
participations and assignments and enter into dollar roll
transactions. It may also engage in the writing of covered call
and put options with respect to foreign fixed-income securities,
foreign currencies, and related futures in order to supplement the
fund's portfolio income.
Smith Barney High Income Portfolio
The fund seeks to achieve its investment objectives by investing,
under normal circumstances, at least 65% of its assets in high-
yielding corporate debt obligations and preferred stock. The
fund's manager may adjust the fund's average maturity when, based
on interest rate trends and other market conditions, it deems it
appropriate to do so. Up to 35% of the fund's assets may be
invested in common stock or common stock equivalents, including
convertible securities, options, warrants and rights. The fund's
equity investments may be made in securities of companies of any
size depending on the relative attractiveness of the company and
the economic sector in which it operates. Fixed income securities
purchased by the fund will generally be rated in the lower rating
categories of nationally recognized securities rating
organizations, as low as C by Moody's or D by S&P, or in non-rated
income securities that the fund's manager determines to be of
comparable quality. The fund will not purchase securities rated
lower than B by both Moody's and S&P, if, immediately after such
purchase, more than 10% of the fund's total assets are invested in
such securities.
The fund's investments in lower rated and unrated corporate debt
securities, commonly known as "junk bonds", are subject to a
greater risk of loss of principal and interest. Purchasers should
carefully assess the risks associated with an investment in this
fund. See "Risk Factors."
The fund may invest in securities rated higher than Ba by Moody's
and BB by S&P without limitation when the difference in yields
between quality classifications is relatively narrow.
The fund may lend portfolio securities equal in value to not more
than 20% of its total assets and purchase or sell securities on a
when-issued or delayed-delivery basis. The fund may hedge against
possible declines in the value of its investments by entering into
interest rate futures contracts and related options, swaps and
other financial instruments.
In connection with the investment objectives and policies
described above, the fund may, but is not required to, utilize
various investment techniques to earn income, facilitate portfolio
management and mitigate risk. These investment techniques utilize
interest rate and currency futures contracts, put and call options
on such futures contracts, currency exchange transactions,
illiquid securities, mortgage-backed and asset-backed securities,
securities of unseasoned issuers and securities of foreign
governments and corporations including those of developing
countries. Any or all of such investment techniques available to
the fund's subadviser may be used at any time and there is no
particular strategy that dictates the use of one technique rather
than another, since the use of any investment technique is a
function of numerous variables including market conditions.
Smith Barney Money Market Portfolio
In order to minimize fluctuations in market price the fund will
not purchase a security with a remaining maturity of greater than
13 months (or that is deemed to have a remaining maturity of
greater than 13 months) or maintain a dollar-weighted average
portfolio maturity in excess of 90 days (securities used as
collateral for repurchase agreements are not subject to these
restrictions).
The fund's investments are limited to dollar denominated
instruments the Board of Directors determines present minimal
credit risks and which are Eligible Securities at the time
acquired by the fund. The term Eligible Securities includes
securities rated by the "Requisite NRSROs" in one of the two
highest short-term rating categories, securities of issuers that
have received such ratings with respect to other short-term debt
securities and comparable unrated securities. "Requisite NRSROs"
means (a) any two nationally recognized statistical rating
organizations ("NRSROs") that have issued a rating with respect to
a security or class of debt obligations of an issuer, or (b) one
NRSRO, if only one NRSRO has issued such a rating at the time that
the Portfolio acquires the security. The NRSROs currently
designated as such by the Securities and Exchange Commission (the
"SEC") are S&P, Moody's, Fitch IBCA, Inc., Duff and Phelps Inc.,
and Thomson BankWatch. See Appendix A for a discussion of the
ratings categories of the NRSROs.
The fund may enter into repurchase agreements collateralized by
U.S. government securities with any broker/dealer or other
financial institution that is deemed creditworthy by the Manager,
under guidelines approved by the fund's Board of Directors. The
fund will not enter into a repurchase agreement on behalf of the
fund if, as a result thereof, more than 10% of the fund's net
assets (taken at current value) at that time would be subject to
repurchase agreements maturing in more than seven days.
The following are also permitted investments for the fund:
High Quality Commercial Paper. The fund's purchase of commercial
paper is restricted to direct obligations of issuers that at the
time of purchase are Eligible Securities that are rated by at
least one NRSRO in the highest category for short-term debt
securities or comparable unrated securities. The fund may invest
without limit in the dollar-denominated commercial paper of
foreign issuers.
High Quality Corporate Obligations. Obligations of corporations
that are: (1) rated AA or better by S&P or Aa or better by Moody's
or (2) issued by an issuer that has a class of short-term debt
obligations that are comparable in priority and security with the
obligation and that have been rated in one of the two highest
rating categories for short-term debt obligations. The fund will
only invest in corporate obligations with remaining maturities of
13 months or less.
Bank Obligations. Obligations (including certificates of deposit,
bankers' acceptances and fixed time deposits) and securities
backed by letters of credit of U.S. banks or other U.S. financial
institutions that are members of the Federal Reserve System or the
Federal Deposit Insurance Corporation ("FDIC") (including
obligations of foreign branches of such members) if either: (a)
the principal amount of the obligation is insured in full by the
FDIC, or (b) the issuer of such obligation has capital, surplus
and undivided profits in excess of $100 million or total assets of
$1 billion (as reported in its most recently published financial
statements prior to the date of investment). Under current FDIC
regulations, the maximum insurance payable as to any one
certificate of deposit is $100,000; therefore, certificates of
deposit in denominations greater than $100,000 that are purchased
by the fund will not be fully insured. The fund currently intends
to limit its investment in fixed time deposits with an ultimate
maturity of from two business days to six months and will invest
in such time deposits only if, when combined with other illiquid
assets of the fund, not more than 10% of its assets would be
invested in all such instruments. The fund may also invest in
securities of foreign branches of U.S. banks. Such investments
involve considerations that are not ordinarily associated with
investing in domestic certificates of deposit. The fund may invest
in instruments issued by domestic banks, including those issued by
their branches outside the United States and subsidiaries located
in Canada, and instruments issued by foreign banks through their
branches located in the United States and the United Kingdom. In
addition, the fund may invest in fixed time deposits of foreign
banks issued through their branches located in Grand Cayman
Island, London, Nassau, Tokyo and Toronto.
The purchase of obligations of foreign banks will involve similar
investment and risk considerations that are applicable to
investing in obligations of foreign branches of U.S. banks. These
factors will be carefully considered by the Manager in selecting
investments for the fund. See "Risk Factors."
High Quality Municipal Obligations. Debt obligations of states,
cities, counties, municipalities, municipal agencies and regional
districts rated SP-1+ or A-1 or AA or better by S&P or MIG 2, VMIG
2, or Prime-1 or Aa or better by Moody's or, if not rated, are
determined by the Manager to be of comparable quality. At certain
times, supply/demand imbalances in the tax-exempt market cause
municipal obligations to yield more than taxable obligations of
equivalent credit quality and maturity length. The purchase of
these securities could enhance the fund's yield. The fund will not
invest more than 10% of its total assets in municipal obligations.
The fund may, to a limited degree, engage in short-term trading to
attempt to take advantage of short-term market variations, or may
dispose of the portfolio security prior to its maturity if it
believes such disposition advisable or it needs to generate cash
to satisfy redemptions. In such cases, the fund may realize a gain
or loss.
As a matter of fundamental policy, the fund may borrow money from
banks for temporary purposes but only in an amount up to 10% of
the value of its total assets and may pledge its assets in an
amount up to 10% of the value of its total assets only to secure
such borrowings. The fund will borrow money only to accommodate
requests for the redemption of shares while effecting an orderly
liquidation of portfolio securities or to clear securities
transactions and not for leveraging purposes. The fund may also
lend its portfolio securities to brokers, dealers and other
financial organizations. Such loans, if and when made, may not
exceed 20% of the fund's total assets, taken at value.
Notwithstanding any of the foregoing investment policies, the fund
may invest up to 100% of its assets in U.S. government securities.
INVESTMENT PRACTICES
Each of the following investment practices is subject to the
limitations set forth under "Investment Restrictions."
EQUITY SECURITIES
Common Stocks (each fund except Smith Barney Money Market
Portfolio). Each fund may purchase common stocks. Common stocks
are shares of a corporation or other entity that entitle the
holder to a pro rata share of the profits of the corporation, if
any, without preference over any other shareholder or class of
shareholders, including holders of the entity's preferred stock
and other senior equity. Common stock usually carries with it the
right to vote and frequently an exclusive right to do so.
Convertible Securities (each fund except Smith Barney Money Market
Portfolio). Each fund may invest in convertible securities which
are fixed-income securities that may be converted at either a
stated price or stated rate into underlying shares of common
stock. Convertible securities have general characteristics similar
to both fixed-income and equity securities. Although to a lesser
extent than with fixed-income securities, the market value of
convertible securities tends to decline as interest rates increase
and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the
market value of the underlying common stocks and, therefore, also
will react to variations in the general market for equity
securities.
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.
Synthetic Convertible Securities (each fund except Smith Barney
Money Market Portfolio). Each fund may invest in synthetic
convertible securities. 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.
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 fund 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.
Illiquid and Restricted Securities. Each fund may purchase
securities that are not registered ("restricted securities") under
the Securities Act of 1933, as amended (the "1933 Act"), but can
be offered and sold to "qualified institutional buyers" under Rule
144A. Each fund may also invest a portion of its assets in
illiquid investments, which include repurchase agreements maturing
in more than seven days and restricted securities. The Board of
Directors may determine, based upon a continuing review of the
trading markets for the specific restricted security, that such
restricted securities are liquid. The Board of Directors has
adopted guidelines and delegated to management the daily function
of determining and monitoring liquidity of restricted securities
available pursuant to Rule 144A. The Board, however, retains
sufficient oversight and is ultimately responsible for the
determinations. Since it is not possible to predict with assurance
exactly how the market for Rule 144A restricted securities will
develop, the Board will carefully monitor each fund's investments
in these securities, focusing on such important factors, among
others, as valuation, liquidity and availability of information.
Investments in restricted securities could have the effect of
increasing the level of illiquidity in a fund to the extent that
qualified institutional buyers become for a time uninterested in
purchasing these restricted securities. The funds may also
purchase restricted securities that are not registered under Rule
144A.
Warrants or Rights (AIM Capital Appreciation, Smith Barney Large
Capitalization Growth and GT Global Strategic Income Portfolios).
Warrants or rights may be acquired by each fund in connection with
other securities or separately and provide the fund with the right
to purchase at a later date other securities of the issuer. Each
fund 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 fund in units or attached to securities will be deemed to be
without value for purposes of this restriction.
Investments in Other Investment Companies (GT Global Strategic
Income Portfolio). With respect to certain countries, investments
by the fund presently may be made only by acquiring shares of
other investment companies with local governmental approval to
invest in those countries. The fund 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
fund may purchase shares of a closed-end investment company unless
(a) such a purchase would cause the fund 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 fund
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 fund 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 fund will
anticipate investing directly in these markets.
Real Estate Investment Trusts ("REITs") (Alliance Growth and Smith
Barney High Income Portfolios). The fund 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 may also include
operating or finance companies. 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"). A mortgage
trust can make construction, development or long-term mortgage
loans, which are sensitive to the credit quality of the borrower.
Mortgage trusts derive their income from interest payments. Hybrid
trusts combine the characteristics of both equity and mortgage
trusts, generally by holding both ownership interests and mortgage
interests in real estate.
Depositary Receipts (each fund except Smith Barney Money Market
Portfolio). For many foreign securities, there are U.S. dollar-
denominated 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. Global
Depositary Receipts ("GDRs") are receipts issued by either a U.S.
or non-U.S. banking institution evidencing ownership of the
underlying foreign securities. Although investment in the form of
ADRs, EDRs or GDRs facilitates trading in foreign securities, it
does not mitigate the risks associated with investing in foreign
securities. By investing in depositary receipts rather than
directly in foreign issuers' stock, a fund can avoid currency
risks during the settlement period for either purchases or sales.
In general, there is a large, liquid market for many depositary
receipts. The information available for depositary receipts 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.
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 GDRs, EDRs, and CDRs in bearer form, are
designed for use in European securities markets.
FIXED INCOME SECURITIES
Corporate Debt Obligations (each fund). Each fund may invest in
corporate debt obligations and zero coupon securities issued by
financial institutions and corporations. Corporate debt obligation
are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligations and may also be subject
to price volatility due to such facts as market interest rates,
market perception of the creditworthiness of the issuer and
general market liquidity. Zero coupon securities are securities
sold at a discount to par value and on which interest payments are
not made during the life of the security.
U.S. Government Securities (each fund). Each fund may invest in
U.S. government securities, which are debt obligations issued or
guaranteed as to payment of principal and interest by the U.S.
Government (including Treasury bills, notes and bonds, certain
mortgage participation certificates and collateralized mortgage
obligations) or by its agencies and instrumentalities (such as
GNMA, the Student Loan Marketing Association, the Tennessee Valley
Authority, the Bank for Cooperatives, the Farmers Home
Administration, Federal Farm Credit Banks, Federal Home Loan
Banks, Federal Intermediate Credit Banks, Federal Land Banks, the
Export-Import Bank of the U.S., the Federal Housing
Administration, FHLMC, the U.S. Postal Service, the Federal
Financing Bank and FNMA). Some of these securities (such as
Treasury bills) are supported by the full faith and credit of the
U.S. Treasury; others (such as obligations of the Federal Home
Loan Bank) are supported by the right of the issuer to borrow from
the Treasury; while still others (such as obligations of FNMA and
the Student Loan Marketing Association) are supported only by the
credit of the instrumentality.
Zero Coupon, Pay-In-Kind and Delayed Interest Securities (Alliance
Growth, MFS Total Return, GT Global Strategic Income, Travelers
Managed Income Smith Barney High Income and Putnam Diversified
Income Portfolios). A fund 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. Zero-coupon and delayed interest securities are issued at a
significant discount from their principal amount. While zero-
coupon bonds do not require the periodic payment of interest,
deferred interest bonds provide for a period of delay before the
regular payment of interest begins. Payment-in-kind bonds allow
the issuer, at its option, to make current interest payments on
the bonds either in cash or in additional bonds. 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. See "Risk Factors."
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 fund
is typically authorized to assert its rights directly against the
issuer of the underlying obligation, the fund 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 fund may be
subject to delays, expenses and risks that are greater than those
that would have been involved if the fund 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.
Synthetic Security Positions (GT Global Strategic Income and
Putnam Diversified Income Portfolios). A fund may utilize
combinations of futures on bonds and forward currency contracts to
create investment positions that have substantially the same
characteristics as bonds of the same type on which the futures
contracts are written. Investment positions of this type are
generally referred to as "synthetic securities."
For example, in order to establish a synthetic security position
for the fund that is comparable to owning a Japanese government
bond, the relevant subadviser might purchase futures contracts on
Japanese government bonds in the desired principal amount and
purchase forward currency contracts for Japanese Yen in an amount
equal to the then current purchase price for such bonds in the
Japanese cash market, with each contract having approximately the
same delivery date.
The subadviser might roll over the futures and forward currency
contract positions before taking delivery in order to continue the
fund's investment position, or the subadviser might close out
those positions, thus effectively selling the synthetic security.
Further, the amount of each contract might be adjusted in response
to market conditions and the forward currency contract might be
changed in amount or eliminated in order to hedge against currency
fluctuations.
Further, while these futures and currency contracts remain open, a
fund will comply with applicable SEC guidelines to set aside cash,
debt securities of any grade or equity securities, in a segregated
account with its custodian in an amount sufficient to cover its
potential obligations under such contracts; provided such
securities have been determined by the subadviser to be liquid and
unencumbered pursuant to guidelines established by the directors.
A subadviser would create synthetic security positions for a fund
when it believes that it can obtain a better yield or achieve cost
savings in comparison to purchasing actual bonds or when
comparable bonds are not readily available in the market.
Synthetic security positions are subject to the risk that changes
in the value of purchased futures contracts may differ from
changes in the value of the bonds that might otherwise have been
purchased in the cash market. Also, while a subadviser believes
that the cost of creating synthetic security positions generally
will be materially lower than the cost of acquiring comparable
bonds in the cash market, the subadviser will incur transaction
costs in connection with each purchase of a futures or a forward
currency contract. The use of futures contracts and forward
currency contracts to create synthetic security positions also is
subject to substantially the same risks as those that exist when
these instruments are used in connection with hedging strategies.
See "Investment Risks."
Mortgage-Backed Securities (MFS Total Return, Travelers Managed
Income, Putnam Diversified Income and Smith Barney High Income
Portfolios). A fund 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 fund may be
different than the quoted yield on the securities. Mortgage
prepayments generally increase with falling interest rates and
decrease with rising interest rates. Additional payment may be
made out of unscheduled repayments of principal resulting from the
sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs that may be incurred.
Prepayments of principal on mortgage-backed securities may tend to
increase due to refinancing of mortgages as interest rates
decline. 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 interest 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 fund may also buy mortgage-related
securities without insurance or guarantees.
Collateralized mortgage obligations are a type of bond secured by
an underlying pool of mortgages or mortgage pass-through
certificates that are structured to direct payments on underlying
collateral to different series of classes of the obligations.
Asset-Backed Securities (MFS Total Return, Travelers Managed
Income, Putnam Diversified Income and Smith Barney High Income
Portfolios). A fund may invest in 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. Asset-backed securities arise through the
grouping by governmental, government-related and private
organizations of loans, receivables and other assets originated by
various lenders. Interests in pools of these assets differ from
other forms of debt securities, which normally provide for
periodic payment of interest in fixed amounts with principal paid
at maturity or specified call dates. Instead, asset-backed
securities provide periodic payments which generally consist of
both interest and principal payments.
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 fund 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.
Foreign Investments
Emerging Markets
Sovereign Debt Obligations. (Putnam Diversified Income, MFS Total
Return and GT Global Strategic Income Portfolios). A fund may
purchase sovereign debt instruments issued or guaranteed by
foreign governments or their agencies, including debt of
developing countries. Sovereign debt may be in the form of
conventional securities or other types of debt instruments such as
loans or loan participations. Sovereign debt of developing
countries may involve a high degree of risk, and may be in default
or present the risk of default. Governmental entities responsible
for repayment of the debt may be unable or unwilling to repay
principal and interest when due, and may require renegotiation or
rescheduling of debt payments. In addition, prospects for
repayment of principal and interest may depend on political as
well as economic factors. Although some sovereign debt, such as
Brady Bonds, is collateralized by U.S. Government securities,
repayment of principal interest is not guaranteed by the U.S.
Government.
Brady Bonds (Putnam Diversified Income, MFS Total Return and GT
Global Strategic Income Portfolios). A fund may invest in Brady
Bonds which are debt restructurings that provide for the exchange
of cash and loans for newly issued bonds. Brady Bonds have been
issued by the governments of Albania, Argentina, Brazil, Bulgaria,
Costa Rica, Croatia, Dominican Republic, Ecuador, Ivory Coast,
Jordan, Mexico, Morocco, Nigeria, Panama, Peru, Philippines,
Poland, Slovenia, Uruguay, Venezuela and Vietnam and are expected
to be issued by other emerging market countries. Investors should
recognize that Brady Bonds do not have a long payment history. In
addition, Brady Bonds are often rated below investment grade.
Brady Bonds may be collateralized or uncollateralized, are issued
in various currencies (primarily the U.S. dollar) and are actively
traded in the secondary market for Latin American debt. The
Salomon Brothers Brady Bond Index provides a benchmark that can be
used to compare returns of emerging market Brady Bonds with
returns in other bond markets, e.g., the U.S. bond market.
The funds may invest in either collateralized or uncollateralized
Brady Bonds. U.S. dollar-denominated, collateralized Brady Bonds,
which may be fixed rate par bonds or floating rate discount bonds,
are collateralized in full as to principal by U.S. Treasury zero
coupon bonds having the same maturity as the bonds. Interest
payments on such bonds generally are collateralized by cash or
securities in an amount that, in the case of fixed rate bonds, is
equal to at least one year of rolling interest payments or, in the
case of floating rate bonds, initially is equal to at least one
year's rolling interest payments based on the applicable interest
rate at that time and is adjusted at regular intervals thereafter.
Samurai and Yankee Bonds (GT Global Strategic Income and Putnam
Diversified Income Portfolios). Subject to their fundamental
investment restrictions, these funds 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
funds to invest in Samurai or Yankee bond issues only after taking
into account considerations of quality and liquidity, as well as
yield.
Loan Participations, Assignments and Other Direct Indebtedness
(Putnam Diversified Income, GT Global Strategic Income and MFS
Total Return Portfolios). A fund may invest a portion of its
assets in loan participations ("Participations") and other direct
claims against a borrower. By purchasing a Participation, a fund
acquires some or all of the interest of a bank or other lending
institution in a loan to a corporate or government borrower. The
Participations typically will result in the fund having a
contractual relationship only with the lender not the borrower. A
fund will have the right to receive payments of principal,
interest and any fees to which it is entitled only from the lender
selling the Participation and only upon receipt by the lender of
the payments from the borrower. 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 fund
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 fund would assume all of the rights
of the lending institution in a loan, or as an assignment,
pursuant to which the fund 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 fund 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.
Each fund will acquire Participations only if the lender
interpositioned between the fund and the borrower is determined by
management to be creditworthy.
Putnam Diversified Income and GT Global Strategic Income
Portfolios may also invest in assignments of portions of loans
from third parties ("Assignments"). When a fund purchases
Assignments from lenders, the fund will acquire direct rights
against the borrower on the loan. However, since Assignments are
arranged through private negotiations between potential assignees
and assignors, the rights and obligations acquired by the fund as
the purchaser of an Assignment may differ from, and be more
limited than, those held by the assigning lender.
MONEY MARKET SECURITIES
Commercial Bank Obligations (each fund). For the purposes of each
fund'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 fund to investment risks that are
different in some respects from those of investments in
obligations of domestic issuers. See "Investment Risks." Although
a fund 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 fund. 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 (each fund). With respect to each fund'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 fund, except 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 fund's total assets would be invested in such notes and other
illiquid securities. 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.
Indexed Commercial Paper (GT Global Strategic Income Portfolio).
The fund may invest without limitation in commercial paper which
is indexed to certain specific foreign currency exchange rates.
The terms of such commercial paper provide that its principal
amount is adjusted upwards or downwards (but not below zero) at
maturity to reflect changes in the exchange rate between two
currencies while the obligation is outstanding. The fund will
purchase such commercial paper with the currency in which it is
denominated and, at maturity, will receive interest and principal
payments thereon in that currency, but the amount of principal
payable by the issuer at maturity will change in proportion to the
change (if any) in the exchange rate between the two specified
currencies between the date the instrument is issued and the date
the instrument matures. While such commercial paper entails the
risk of loss of principal, the potential for realizing gains as a
result of changes in foreign currency exchange rates enables the
fund to hedge against a decline in the U.S. dollar value of
investments denominated in foreign currencies while seeking to
provide an attractive money market rate of return. The fund will
not purchase such commercial paper for speculation.
Other Investment Strategies
Repurchase Agreements (each fund). Each fund may enter into
repurchase agreements, wherein the seller agrees to repurchase a
security from the fund 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 fund holds the security and which is not related to the
coupon rate on the purchased security. Each fund 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 fund may
be delayed or limited or the fund 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 fund 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 fund (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 fund
amount to more than 15% of that fund'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.
Reverse Repurchase Agreements (Smith Barney Pacific Basin, Smith
Barney International Equity and GT Global Strategic Income
Portfolio). The fund may enter into reverse repurchase agreements
with the same parties with whom it may enter into repurchase
agreements. Repurchase agreements involve the sale of fund
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 fund can recover all or most of the
cash invested in the fund 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 fund
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 fund intends to use the
reverse repurchase technique only when management believes it will
be advantageous to the fund. The use of reverse repurchase
agreements may exaggerate any interim increase or decrease in the
value of the participating fund's assets. The fund's custodian
bank will maintain a separate account for the fund with securities
having a value equal to or greater than such commitments.
At the time the fund enters into a reverse repurchase agreement,
it will establish and maintain a segregated account with an
approved custodian containing cash or liquid securities that have
a value no less than the repurchase price, including accrued
interest. Reverse repurchase agreements will be treated as
borrowings and will be considered in the fund's overall borrowing
limitation.
"Dollar Roll" Transactions (MFS Total Return, GT Global Strategic
Income, Travelers Managed Income and Putnam Diversified Income
Portfolios). A fund may enter into "dollar roll" transactions
pursuant to which the fund sells fixed income securities for
delivery in the current month and simultaneously contracts to
repurchase substantially similar (i.e., same type, coupon and
maturity) securities on a specified future date. The MFS Total
Return Portfolio may enter in similar transactions pursuant to
which the fund sells mortgage-backed securities for delivery in
the future and simultaneously contracts to repurchase
substantially similar securities on a specified future date
(generally within 30 days). During the roll period, a fund forgoes
principal and interest paid on the securities. The fund 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 fund may also
be compensated by receipt of a commitment fee.
Since a fund will receive interest on the securities in which it
invests the transaction proceeds, such transactions may involve
leverage. However, since such securities must satisfy the quality
requirements of the fund and will mature on or before the
settlement date on the transaction, management believes that such
transactions do not present the risks to the funds that are
associated with other types of leverage. MFS Total Return
Portfolio will only enter into covered rolls, where there is an
offsetting cash position or a cash equivalent security position
which matures on or before the forward settlement date of the
dollar roll transaction. Dollar roll transactions are considered
borrowings by the funds and will be subject to each fund's overall
borrowing limitation. Dollar roll transactions are considered
speculative.
Securities Lending (each fund except Smith Barney Large
Capitalization Growth, Van Kampen American Capital Enterprise and
Smith Barney Money Market Portfolios). A fund 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 fund
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 fund may pay reasonable finders,
administrative and custodial fees.
Management will limit such lending to not more than the
percentages shown below:
Fund
Limit as a %
of Total Assets
Smith Barney Pacific Basin
Portfolio
15%
Smith Barney International Equity
Portfolio
15%
Smith Barney Large Cap Value
Portfolio
20%
Alliance Growth Portfolio
25%
AIM Capital Appreciation Portfolio
33 1/3%
MFS Total Return Portfolio
30%
GT Global Strategic Income
Portfolio
30%
Travelers Managed Income Portfolio
33 1/3%
Putnam Diversified Income
Portfolio
25%
Smith Barney High Income Portfolio
20%
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 fund'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 funds 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 fund 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 fund will
adhere to the following conditions whenever it lends its
securities: (1) the fund 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 fund must be able to terminate the loan at any
time; (4) the fund 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 fund
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 fund's Board
of Directors must terminate the loan and regain the fund's right
to vote the securities.
When-Issued, Delayed Delivery and Forward Commitment Securities
(Smith Barney International Equity, Smith Barney Large Cap Value,
Smith Barney Large Capitalization Growth, Alliance Growth, MFS
Total Return, GT Global Strategic Income, Travelers Managed
Income, Putnam Diversified Income and Smith Barney High Income
Portfolios). A fund may purchase or sell securities on a when-
issued, delayed delivery or forward commitment basis. Such
transactions arise when securities are purchased or sold by a fund
with payment and delivery taking place in the future in order to
secure what is considered to be an advantageous price and yield to
the fund at the time of entering into the transaction. 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 fund prior to the actual delivery or
payment by the other party to the transaction. A fund will not
accrue income with respect to a when-issued or delayed-delivery
security prior to its stated delivery date.
Purchasing such securities involves the risk of loss if the value
of the securities declines prior to settlement date. The sale of
securities for delayed delivery involves the risk that the prices
available in the market on the delivery date may be greater than
those obtained in the sale transaction. Each fund's custodian will
maintain, in a segregated account on behalf of the fund, cash,
U.S. government securities or other liquid securities having a
value equal to or greater than the fund's purchase commitments;
the custodian will likewise segregate securities sold on a delayed
basis. Placing securities rather than cash in the segregated
account may have a leveraging effect on the fund's net asset value
per share. To the extent that the fund 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.
Short Sales Against the Box (AIM Capital Appreciation, Van Kampen
American Capital Enterprise, GT Global Strategic Income, and Smith
Barney High Income Portfolios). A fund may 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, (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 fund 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
fund. 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 fund will segregate the securities
against which short sales against the box have been made in a
special account with its custodian.
DERIVATIVE CONTRACTS
Futures, Options and Currency Transactions (Smith Barney Pacific
Basin, Smith Barney International Equity, Alliance Growth, AIM
Capital Appreciation, Van Kampen American Capital Enterprise, MFS
Total Return, GT Global Strategic Income, Putnam Diversified
Income and Smith Barney High Income Portfolios). The following
information on options, futures contracts and related options
applies to the funds as described in the Prospectus. In addition,
new options and futures contracts and various combinations thereof
continue to be developed and the funds may invest in any such
options and contracts as may be developed to the extent consistent
with its investment objective and regulatory and tax requirements
applicable to investment companies.
A fund may enter into contracts for the purchase or sale for
future delivery of equity or fixed-income securities, foreign
currencies or contracts based on financial indices including
interest rates or an index of U.S. government or foreign
government securities or equity or fixed-income securities
("futures contracts"), and may buy and write put and call options
to buy or sell futures contracts ("options on futures contracts");
provided, however, that the AIM Capital Appreciation Portfolio may
only write covered call options. When a fund buys or sells a
futures contract it incurs a contractual obligation to receive or
deliver the underlying instrument (or a cash payment based on the
difference between the underlying instrument's closing price and
the price at which the contract was entered into) at a specified
price on a specified date. An option on a futures contract gives a
fund the right (but not the obligation) to buy or sell a futures
contract at a specified price on or before a specified date.
The funds will not enter into transactions in futures contracts
and options on futures contracts for speculation and will not
enter into such transactions other than to hedge against potential
changes in interest or currency exchange rates or the price of a
security or a securities index which might correlate with or
otherwise adversely affect either the value of the fund's
securities or the prices of securities which the fund is
considering buying at a later date. The Smith Barney Pacific
Basin, Smith Barney International Equity, MFS Total Return and
Smith Barney High Income Portfolios, however, may enter into
futures contracts and options on futures contracts for non-hedging
purposes, provided that the aggregate initial margin and premiums
on such non-hedging positions does not exceed 5% of the
liquidation value of a fund's assets.
Although futures contracts by their terms call for the delivery or
acquisition of the underlying commodities or a cash payment based
on the value of the underlying commodities, in most cases the
contractual obligation is offset before the delivery date of the
contract by buying, in the case of a contractual obligation to
sell, or selling, in the case of a contractual obligation to buy,
an identical futures contract on a commodities exchange. Such a
transaction cancels the obligation to make or take delivery of the
commodities. Since all transactions in the futures market are made
through a member of, and are offset or fulfilled through a
clearinghouse associated with, the exchange on which the contracts
are traded, a fund will incur brokerage fees when it buys or sells
futures contracts.
A fund will not (1) enter into any futures contracts or options on
futures contracts if immediately thereafter the aggregate margin
deposits on all outstanding futures contracts positions held by
the fund and premiums paid on outstanding options on futures
contracts, after taking into account unrealized profits and
losses, would exceed 5% of the market value of the total assets of
the fund or (2) enter into any futures contracts or options on
futures contracts if the aggregate amount of the fund's
commitments under outstanding futures contracts positions and
options on futures contracts written by the fund would exceed the
market value of the total assets of the fund.
Writing Covered Call Options (Smith Barney Pacific Basin, Smith
Barney International Equity, Smith Barney Large Cap Value,
Alliance Growth, AIM Capital Appreciation, Van Kampen American
Capital Enterprise, MFS Total Return, GT Global Strategic Income
Portfolio, Putnam Diversified Income and Smith Barney High Income
Portfolios). A fund may write (sell) covered call options. A fund
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 fund. (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 funds will
not do.
Fund securities or currencies on which call options may be written
will be purchased solely on the basis of investment considerations
consistent with each fund's investment objective. When writing a
covered call option, the fund, 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 fund 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 fund has written expires, the fund 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 fund 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 fund's custodian. The fund does not consider a
security or currency covered by a call option to be "pledged" as
that term is used in the fund's policy which limits the pledging
or mortgaging of its assets.
The premium the fund receives for writing a call option is deemed
to constitute the market value of an option. The premium the fund
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 fund for writing covered call options will be
recorded as a liability in the fund's statement of assets and
liabilities. This liability will be adjusted daily to the option's
current market value. 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 fund to write another call option on
the underlying security or currency with either a different
exercise price, expiration date or both. If the fund 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 fund will be able to effect such closing transactions at
a favorable price. If the fund 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 fund 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 fund 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 fund 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 fund 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 fund.
Purchasing Call Options (Smith Barney Pacific Basin, Smith Barney
International Equity, Smith Barney Large Cap Value, Alliance
Growth, Van Kampen American Capital Enterprise, MFS Total Return,
GT Global Strategic Income, Putnam Diversified Income and Smith
Barney High Income Portfolios). A fund may purchase call options.
As the holder of a call option, a fund has the right to purchase
the underlying security or currency at the exercise price at any
time during the option period. The fund 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 fund
for the purpose of acquiring the underlying security or currency
for its portfolio. Utilized in this fashion, the purchase of call
options enables the fund 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 fund
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 fund 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 fund 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. Call options may also be
purchased at times to avoid realizing losses that would result in
a reduction of the fund'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 fund's total assets
at the time of purchase.
Purchasing Put Options (Smith Barney Pacific Basin, Smith Barney
International Equity, Smith Barney Large Cap Value, Alliance
Growth, Van Kampen American Capital Enterprise, MFS Total Return,
GT Global Strategic Income, Putnam Diversified Income and Smith
Barney High Income Portfolios). A fund may purchase put options.
As the holder of a put option, the fund has the right to sell the
underlying security or currency at the exercise price at any time
during the option period. The fund may enter into closing sale
transactions with respect to such options, exercise them or permit
them to expire.
Each fund may purchase a put option on an underlying security or
currency (a "protective put") owned by the fund 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 fund, 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. The premium paid for the put option and any
transaction costs would reduce any gains otherwise available for
distribution when the security or currency is eventually sold.
Each fund may also purchase put options at a time when the fund
does not own the underlying security or currency. By purchasing
put options on a security or currency it does not own, the fund
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 fund
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 fund when purchasing a put option will be
recorded as an asset in the fund'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.
Options on Securities and on Foreign Currencies (each fund). In an
effort to reduce fluctuations in net asset value or to increase
portfolio return, the funds may write covered put and call options
and may buy put and call options and warrants on securities traded
on U.S. and foreign securities exchanges. AIM Capital
Appreciation Portfolio may write (sell) only covered call options.
The purpose of such transactions is to hedge against changes in
the market value of portfolio securities caused by fluctuating
interest rates, fluctuating currency exchange rates and changing
market conditions, and to close out or offset existing positions
in such options or futures contracts as described below. A fund
may write and buy options on the same types of securities that the
fund could buy directly and may buy options on financial indices
as described above with respect to futures contracts. There are no
specific limitations on the writing and buying of options on
securities.
A put option gives the holder the right, upon payment of a
premium, to deliver a specified amount of a security to the writer
of the option on or before a fixed date at a predetermined price.
A call option gives the holder the right, upon payment of a
premium, to call upon the writer to deliver a specified amount of
a security on or before a fixed date at a predetermined price.
A call option is "covered" if a fund owns the underlying security
covered by the call. If a "covered" call option expires
unexercised, the writer realizes a gain in the amount of the
premium received. If the covered call option is exercised, the
writer realizes either a gain or loss from the sale or purchase of
the underlying security with the proceeds to the writer being
increased by the amount of the premium. Prior to its expiration, a
call option may be closed out by means of a purchase of an
identical option. Any gain or loss from such transaction will
depend on whether the amount paid is more or less than the premium
received for the option plus related transaction costs. A fund
also may write a covered call option to cross-hedge if the fund
does not own the underlying security. The option is designed to
provide a hedge against a decline in value in another security
which the fund owns or has the right to acquire.
In purchasing an option, the fund would be in a position to
realize a gain if, during the option period, the price of the
underlying security increased (in the case of a call) or decreased
(in the case of a put) by an amount in excess of the premium paid
and would realize a loss if the price of the underlying security
did not increase (in the case of a call) or decrease (in the case
of a put) during the period by more than the amount of the
premium. If a put or call option bought by the fund were permitted
to expire without being sold or exercised, the fund would lose the
amount of the premium.
Although they entitle the holder to buy equity securities,
warrants on and options to purchase equity securities do not
entitle the holder to dividends or voting rights with respect to
the underlying securities, nor do they represent any rights in the
assets of the issuer of those securities.
If a put or call option written by a fund were exercised, the fund
would be obligated to buy or sell the underlying security at the
exercise price. Writing a put option involves the risk of a
decrease in the market value of the underlying security, in which
case the option could be exercised and the underlying security
would then be sold by the option holder to the fund at a higher
price than its current market value. Writing a call option
involves the risk of an increase in the market value of the
underlying security, in which case the option could be exercised
and the underlying security would then be sold by the fund to the
option holder at a lower price than its current market value.
Those risks could be reduced by entering into an offsetting
transaction. The fund retains the premium received from writing a
put or call option whether or not the option is exercised.
A fund may buy put and call options and may write covered put and
call options on foreign currencies to hedge against declines in
the U.S. dollar value of foreign currency-denominated securities
held by the fund and against increases in the U.S. dollar cost of
foreign currency-denominated securities being considered for
purchase by the fund. As in the case of other options, however,
the writing of an option on a foreign currency will constitute
only a partial hedge, up to the amount of the premium received,
and the fund could be required to buy or sell foreign currencies
at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on a foreign currency may constitute an
effective hedge against fluctuations in exchange rates, although,
in the event of rate movements adverse to the fund's options
position, the option may expire worthless and the fund will lose
the amount of the premium. There is no specific percentage
limitation on a fund's investments in options on foreign
currencies.
A fund may buy or write options in privately negotiated
transactions on the types of securities and indices based on the
types of securities in which the fund is permitted to invest
directly. The fund will effect such transactions only with
investment dealers and other financial institutions (such as
commercial banks or savings and loan institutions) deemed
creditworthy, and only pursuant to procedures adopted by
management for monitoring the creditworthiness of those entities.
To the extent that an option bought or written by the fund in a
negotiated transaction is illiquid, the value of an option bought
or the amount of the fund's obligations under an option written by
the fund, as the case may be, will be subject to the fund's
limitation on illiquid investments. In the case of illiquid
options, it may not be possible for the fund to effect an
offsetting transaction at a time when management believes it would
be advantageous for the fund to do so.
Options on Securities Indices (Smith Barney Pacific Basin, Smith
Barney International Equity, Alliance Growth, Van Kampen American
Capital Enterprise, MFS Total Return, GT Global Strategic Income,
Putnam Diversified Income and Smith Barney High Income
Portfolios). A fund may enter into options on securities indices.
Through the writing or purchase of index options, a fund 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 fund 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
fund writes a call option on a securities index at a time when the
contract value exceeds the exercise price, the fund 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 fund may expire
worthless, in which case the fund would lose the premium paid
therefor.
Except as provided below, each fund 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 fund has in place with such primary
dealers will provide that each fund 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 fund 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 fund will treat
all or a part of the formula price as illiquid for purposes of the
SEC illiquidity ceiling. Each fund 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.
Forward Currency Transactions (Smith Barney Pacific Basin, Smith
Barney International Equity, Alliance Growth, MFS Total Return, GT
Global Strategic Income, Putnam Diversified Income and Smith
Barney High Income Portfolios). A fund may enter into forward
foreign currency exchange contracts ("forward currency contracts")
to attempt to minimize the risk to the fund from adverse changes
in the relationship between the U.S. dollar and other currencies.
A forward currency contract is an obligation to buy or sell an
amount of a specified currency for an agreed price (which may be
in U.S. dollars or a foreign currency) at a future date which is
individually negotiated between currency traders and their
customers. A fund may enter into a forward currency contract, for
example, when it enters into a contract to buy or sell a security
denominated in a foreign currency in order to "lock in" the U.S.
dollar price of the security ("transaction hedge"). Additionally,
when a fund believes that a foreign currency in which the
portfolio securities are denominated may suffer a substantial
decline against the U.S. dollar, the fund may enter into a forward
currency contract to sell an amount of that foreign currency
approximating the value of some or all of the portfolio securities
denominated in that currency, or, when the fund believes that the
U.S. dollar may suffer a substantial decline against a foreign
currency, the fund may enter into a forward currency contract to
buy that foreign currency for a fixed U.S. dollar amount
("position hedge"). A fund also may enter into a forward currency
contract with respect to a currency where the fund is considering
the purchase of investments denominated in that currency but has
not yet done so ("anticipatory hedge"). In any of these
circumstances the fund may, alternatively, enter into a forward
currency contract with respect to a different foreign currency
when the fund believes that the U.S. dollar value of that currency
will correlate with the U.S. dollar value of the currency in which
portfolio securities of, or being considered for purchase by, the
fund are denominated ("cross hedge"). A fund may invest in forward
currency contracts with stated contract values of up to the value
of the fund's assets. The MFS Total Return and Putnam Diversified
Income Portfolios may also enter into forward currency contracts
for non-hedging purposes, subject to applicable law.
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 fund may not
always be able to enter into foreign currency forward contracts at
attractive prices and this will limit the fund's ability to use
such contract to hedge or cross-hedge its assets. Also, with
regard to the fund'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 fund's cross-hedges and the movements in the
exchange rates of the foreign currencies in which the fund's
assets that are the subject of such cross-hedges are denominated.
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 fund, however, may enter into forward contracts with deposit
requirements or commissions.
A put option on currency gives the fund, 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 fund, as purchaser, the right (but not the
obligation) to purchase a specified amount of currency at the
exercise price until its expiration. The fund 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 fund 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 fund anticipates purchasing securities.
A fund'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 fund 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 fund would have to exercise
those options which it has purchased in order to realize any
profit. Any OTC options acquired by each fund and assets used as
"cover" for OTC options written by the fund would be considered
illiquid and subject to each fund's limitation on investing in
such securities.
A fund also may enter into forward contracts to buy or sell at a
later date instruments in which the fund may invest directly or on
financial indices based on those instruments. The market for those
types of forward contracts is developing and it is not currently
possible to identify instruments on which forward contracts might
be created in the future.
A fund may also enter into currency swaps where each party
exchanges one currency for another on a particular date and agrees
to reverse the exchange on a later date at a specific exchange
rate.
Interest Rate, Securities Index, Financial Futures and Currency
Futures Contracts (Smith Barney Pacific Basin, Smith Barney
International Equity, Alliance Growth, MFS Total Return, GT Global
Strategic Income, Putnam Diversified Income Portfolio and Smith
Barney High Income Portfolios). A fund may enter into interest
rate, securities index, financial futures and currency futures
contracts ("Futures" or "Futures Contracts"). AIM Capital
Appreciation Portfolio may enter into stock index futures
contracts and Van Kampen American Capital Enterprise Portfolio may
enter in stock index and interest rate futures contracts. A fund
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
fund. A fund's hedging may include holding Futures as an offset
against anticipated changes in interest or currency exchange
rates. A fund 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 fund's exposure to interest
rate and currency exchange rate fluctuations, the fund 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 fund realizes a gain; if it is more, the fund realizes
a loss. Conversely, if the offsetting sale price is more than the
original purchase price, the fund realizes a gain; if it is less,
the fund realizes a loss. The transaction costs must also be
included in these calculations. There can be no assurance,
however, that the fund will be able to enter into an offsetting
transaction with respect to a particular Futures Contract at a
particular time. If the fund is not able to enter into an
offsetting transaction, the fund 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 fund.
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 fund'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 fund owns, or Futures Contracts will be
purchased to protect a fund against an increase in the price of
securities or currencies it has committed to purchase or expects
to purchase. Smith Barney International Equity, Smith Barney
Pacific Basin, MFS Total Return and Smith Barney High Income
Portfolios 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 fund's assets.
"Margin" with respect to Futures Contracts is the amount of funds
that must be deposited by the fund with a broker in order to
initiate Futures trading and to maintain the fund's open positions
in Futures Contracts. A margin deposit made when the Futures
Contract is entered into ("initial margin") is intended to assure
the fund'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 fund. In computing daily net
asset values, the fund will mark to market the current value of
its open Futures Contracts. Each fund expects to earn interest
income on its margin deposits.
Options on Futures Contracts (Smith Barney Pacific Basin, Smith
Barney International Equity, Alliance Growth, Van Kampen American
Capital Enterprise, MFS Total Return, GT Global Strategic Income,
Putnam Diversified Income and Smith Barney High Income
Portfolios). A fund 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 fund 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 fund or
to reduce or eliminate the hedge position then currently held by
the fund, the fund 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 funds 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 fund 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 fund's assets.
Yield Curve Options (MFS Total Return Portfolio). The fund may
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 fund may purchase or
write such options for hedging purposes. For example, the fund 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 fund 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 fund 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 fund will
be "covered". A call (or put) option is covered if the fund 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 fund's
net liability under the two options. Therefore, the fund's
liability for such a covered option is generally limited to the
difference between the amount of the fund's liability under the
option written by the fund less the value of the option held by
the fund. 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 (Smith Barney Pacific Basin, Smith
Barney International Equity, MFS Total Return, GT Global Strategic
Income and Smith Barney High Income Portfolios). As one way of
managing its exposure to different types of investments, a fund
may enter into interest rate swaps, currency swaps and other types
of available swap agreements, such as caps, collars and floors.
Swaps involve the exchange by a fund with another party of cash
payments based upon different interest rate indexes, currencies,
and other prices or rates, such as the value of mortgage
prepayment rates. For example, in the typical interest rate swap,
a fund might exchange a sequence of cash payments based on a
floating rate index for cash payments based on a fixed rate.
Payments made by both parties to a swap transaction are based on a
principal amount determined by the parties.
A fund may also purchase and sell caps, floors and collars. In a
typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment
of a fee by the counterparty. For example, the purchase of an
interest rate cap entitles the buyer, to the extent that a
specified index exceeds a predetermined interest rate, to receive
payments of interest on a contractually-based principal amount
from the counterparty selling such interest rate cap. The sale of
an interest rate floor obligates the seller to make payments to
the extent that a specified interest rate falls below an agreed-
upon level. A collar arrangement combines elements of buying a cap
and selling a floor.
Swap agreements will tend to shift a fund's investment exposure
from one type of investment to another. For example, if a fund
agreed to exchange payments in dollars for payments in foreign
currency, in each case based on a fixed rate, the swap agreement
would tend to decrease the fund's exposure to U.S. interest rates
and increase its exposure to foreign currency and interest rates.
Caps and floors have an effect similar to buying or writing
options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a fund's
investments and its share price and yield.
Swap agreements are sophisticated hedging instruments that
typically involve a small investment of cash relative to the
magnitude of risks assumed. As a result, swaps can be highly
volatile and may have a considerable impact on a fund's
performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. A fund may also
suffer losses if it is unable to terminate outstanding swap
agreements or reduce its exposure through offsetting transactions.
Each fund 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 fund anticipates purchasing at a later date.
Each fund 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 fund'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 fund is not limited to any
particular form or variety of swap agreement if management
determines it is consistent with the fund's investment objective
and policies.
A fund 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 with the fund 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 funds 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 fund'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
fund 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 fund's accrued obligations under the agreement. The
funds 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 fund 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 fund the
fund 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 fund's risk of loss
consists of the net amount of payments that the fund is
contractually entitled to receive. The fund 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.
RISK FACTORS
General. Investors should realize that risk of loss is inherent in
the ownership of any securities and that the fund's net asset
value will fluctuate, reflecting the fluctuations in the market
value of its portfolio positions.
Fixed Income Securities. Investments in fixed income securities
may subject the funds to risks, including the following.
Interest Rate Risk. When interest rates decline, the market
value of fixed income securities tends to increase. Conversely,
when interest rates increase, the market value of fixed income
securities tends to decline. The volatility of a security's
market value will differ depending upon the security's duration,
the issuer and the type of instrument.
Default Risk/Credit Risk. Investments in fixed income
securities are subject to the risk that the issuer of the security
could default on its obligations, causing a fund to sustain losses
on such investments. A default could impact both interest and
principal payments.
Call Risk and Extension Risk. Fixed income securities may
be subject to both call risk and extension risk. Call risk exists
when the issuer may exercise its right to pay principal on an
obligation earlier than scheduled, which would cause cash flows to
be returned earlier than expected. This typically results when
interest rates have declined and a fund will suffer from having to
reinvest in lower yielding securities. Extension risk exists when
the issuer may exercise its right to pay principal on an
obligation later than scheduled, which would cause cash flows to
be returned later than expected. This typically results when
interest rates have increased, and a fund will suffer from the
inability to invest in higher yield securities.
Foreign Securities (each fund). Each fund may invest its assets in
the securities of foreign issuers as described in the prospectus.
Smith Barney Money Market Portfolio may also purchase securities
of foreign branches of U.S. banks and of domestic and foreign
branches of foreign banks. Investments in foreign securities
involve risks that are different in some respects from investments
in securities of U.S. issuers, such as the risk of fluctuations in
the value of the currencies in which they are denominated, the
risk of adverse political, social, economic and diplomatic
developments, the possible imposition of exchange controls or
other foreign governmental laws or restrictions and, with respect
to certain countries, the possibility of expropriation of assets,
nationalization or confiscatory taxation or limitations on the
removal of funds or other assets of the funds. Securities of some
foreign companies and banks are less liquid and more volatile than
securities of comparable domestic companies and banks. Non-U.S.
securities markets, while growing in volume have, for the most
part, substantially less volume than U.S. markets, and there is
generally less government supervision and regulation of exchanges,
brokers and issuers than there is in the U.S. Dividend and
interest income (and, in some cases, capital gains) from non-U.S.
securities will generally be subject to withholding or other taxes
by the country in which the issuer is located and may not be
recoverable by the fund or the investors. There also may be less
publicly available information about foreign issuers than domestic
issuers, and foreign issuers generally are not subject to the
uniform accounting, auditing and financial reporting standards,
practices and requirements applicable to domestic issuers. Delays
may be encountered in settling securities transactions in certain
foreign markets, and the funds will incur costs in converting
foreign currencies into U.S. dollars. 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. There is also a risk of
the adoption of government regulations that might adversely affect
the payment of principal and interest on securities held by a
fund. In addition, a fund may encounter greater difficulties in
invoking legal processes abroad than would be the case in the U.S.
Finally, changes in foreign currency exchange rates will, to the
extent a fund does not adequately hedge against such fluctuations,
affect the value of securities in its portfolio and the unrealized
appreciation or depreciation of investments so far as U.S.
investors are concerned.
Emerging Markets Securities. Because of the special risks
associated with investing in emerging markets, an investment in
the Smith Barney International Equity, Smith Barney Pacific Basin,
Putnam Diversified Income, GT Global Strategic Income, Smith
Barney High Income or MFS Total Return Portfolios, may be
considered speculative. Investors are strongly advised to consider
carefully the special risks involved in emerging markets, which
are in addition to the usual risks of investing in developed
foreign markets around the world.
Emerging market countries include any country determined by the
manager or subadviser, as the case may be, to have an emerging
market economy, taking into account a number of factors, including
the country's foreign currency debt rating, its political and
economic stability and the development of its financial and
capital markets. The manager or subadviser determines an issuer's
principal trading market for its securities and the source of its
revenues and assets. The issuer's principal activities generally
are deemed to be located in a particular country if: (a) the
security is issued or guaranteed by the government of that country
or any of its agencies, authorities or instrumentalities; (b) the
issuer is organized under the laws of, and maintains a principal
office in, that country; (c) the issuer has its principal
securities trading market in that country; or (d) the issuer has
50% or more of its assets in that country.
Investing in 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
fund'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 funds. 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 funds will not also be expropriated,
nationalized, or otherwise confiscated. If such confiscation were
to occur, the funds could lose a substantial portion of their
investments in such countries. Each fund's investments would
similarly be adversely affected by exchange control regulation in
any of those countries.
Certain countries in which the funds 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 funds' 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.
Investing in emerging markets involves risks relating to potential
political and economic instability within such markets and the
risks of expropriation, nationalization, confiscation of assets
and property, the imposition of restrictions on foreign
investments and the repatriation of capital invested. In Eastern
Europe, for example, upon the accession to power of Communist
regimes in the past, the governments of a number of Eastern
European countries expropriated a large amount of property. The
claims of many property owners against those governments were
never finally settled. There can be no assurance that any
investments that a Portfolio might make in an emerging market
would not be expropriated, nationalized or otherwise confiscated
at some time in the future. In the event of such expropriation,
nationalization or other confiscation in any emerging market, each
fund could lose its entire investment in that market. Many
emerging market countries have also experienced substantial, and
in some periods extremely high, rates of inflation for many years.
Inflation and rapid fluctuations in inflation rates have had and
may continue to have negative effects on the economies and
securities of certain emerging market countries.
Economies in emerging markets generally are dependent heavily upon
international trade and, accordingly, have been and may continue
to be affected adversely by trade barriers, exchange controls,
managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by the countries with
which they trade. These economies also have been and may continue
to be affected adversely by economic conditions in the countries
in which they trade.
The securities markets of emerging countries are substantially
smaller, less developed, less liquid and more volatile than the
securities markets of the United States and other more developed
countries. Disclosure and regulatory standards in many respects
are less stringent than in the United States and other major
markets. There also may be a lower level of monitoring and
regulation of emerging securities markets and the activities of
investors in such markets, and enforcement of existing regulations
has been extremely limited.
In addition, brokerage commissions, custodial services and other
costs relating to investment in foreign markets generally are more
expensive than in the United States, particularly with respect to
emerging markets. Such markets have different settlement and
clearance procedures. In certain markets there have been times
when settlements have been unable to keep pace with the volume of
securities transactions, making it difficult to conduct such
transactions. The inability of a fund to make intended securities
purchases due to settlement problems could cause it to miss
attractive investment opportunities. Inability to dispose of a
portfolio security caused by settlement problems could result
either in losses to a fund due to subsequent declines in value of
the portfolio security or, if the fund has entered into a contract
to sell the security, could result in possible liability to the
purchaser.
The risk also exists that an emergency situation may arise in one
or more emerging markets as a result of which trading of
securities may cease or may be substantially curtailed and prices
for the portfolio securities in such markets may not be readily
available. Section 22(e) of the 1940 Act permits a registered
investment company to suspend redemption of its shares for any
period during which an emergency exists, as determined by the SEC.
Accordingly, if a fund believes that appropriate circumstances
warrant, it will promptly apply to the SEC for a determination
that an emergency exists within the meaning of Section 22(a) of
the 1940 Act. During the period commencing from a fund's
identification of such conditions until the date of SEC action,
the portfolio securities in the affected markets will be valued at
fair value as determined in good faith by or under the direction
of the Board of Directors.
Sovereign Debt. Investments in such securities involve special
risks. The issuer of the debt or the governmental authorities that
control the repayment of the debt may be unable or unwilling to
repay principal or interest when due in accordance with the terms
of such debt. Periods of economic uncertainty may result in the
volatility of market prices of sovereign debt obligations, and in
turn a fund's net asset value, to a greater extent than the
volatility inherent in domestic fixed income securities.
A sovereign debtor's willingness or ability to repay principal and
pay interest in a timely manner may be affected by, among other
factors, its cash flow situation, the extent of its foreign
reserves, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of the debt service
burden to the economy as a whole, the sovereign debtor's policy
toward principal international lenders and the political
constraints to which a sovereign debtor may be subject. Emerging
market governments could default on their sovereign debt. Such
sovereign debtors also may be dependent on expected disbursements
from foreign governments, multilateral agencies and other entities
abroad to reduce principal and interest arrearages on their debt.
The commitment on the part of these governments, agencies and
others to make such disbursements may be conditioned on a
sovereign debtor's implementation of economic reforms and/or
economic performance and the timely service of such debtor's
obligations. Failure to implement such reforms, achieve such
levels of economic performance or repay principal or interest when
due, may result in the cancellation of such third parties'
commitments to lend funds to the sovereign debtor, which may
further impair such debtor's ability or willingness to timely
service its debts.
The occurrence of political, social or diplomatic changes in one
or more of the countries issuing sovereign debt could adversely
affect a fund's investments. Emerging markets are faced with
social and political issues and some of them have experienced high
rates of inflation in recent years and have extensive internal
debt. Among other effects, high inflation and internal debt
service requirements may adversely affect the cost and
availability of future domestic sovereign borrowing to finance
governmental programs, and may have other adverse social,
political and economic consequences. Political changes or a
deterioration of a country's domestic economy or balance of trade
may affect the willingness of countries to service their sovereign
debt. Although management intends to manage each fund in a manner
that will minimize the exposure to such risks, there can be no
assurance that adverse political changes will not cause a fund to
suffer a loss of interest or principal on any of its holdings.
In recent years, some of the emerging market countries in which
each fund expects to invest have encountered difficulties in
servicing their sovereign debt obligations. Some of these
countries have withheld payments of interest and/or principal of
sovereign debt. These difficulties have also led to agreements to
restructure external debt obligations in particular, commercial
bank loans, typically by rescheduling principal payments, reducing
interest rates and extending new credits to finance interest
payments on existing debt. In the future, holders of emerging
market sovereign debt securities may be requested to participate
in similar rescheduling of such debt. Certain emerging market
countries are among the largest debtors to commercial banks and
foreign governments. Currently, Brazil, Russia and Mexico are
among the largest debtors among developing countries. At times
certain emerging market countries have declared moratoria on the
payment of principal and interest on external debt; such a
moratorium is currently in effect in certain emerging market
countries. There is no bankruptcy proceeding by which a creditor
may collect in whole or in part sovereign debt on which an
emerging market government has defaulted.
The ability of emerging market governments to make timely payments
on their sovereign debt securities is likely to be influenced
strongly by a country's balance of trade and its access to trade
and other international credits. A country whose exports are
concentrated in a few commodities could be vulnerable to a decline
in the international prices of one or more of such commodities.
Increased protectionism on the part of a country's trading
partners could also adversely affect its exports. Such events
could diminish a country's trade account surplus, if any. To the
extent that a country receives payments for its exports in
currencies other than hard currencies, its ability to make hard
currency payments could be affected.
Investors should also be aware that certain sovereign debt
instruments in which the funds may invest involve great risk. As
noted above, sovereign debt obligations issued by emerging market
governments generally are deemed to be the equivalent in terms of
quality to securities rated below investment grade by Moody's and
S&P. Such securities are regarded as predominantly speculative
with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligations and
involve major risk exposure to adverse conditions. Some of such
securities, with respect to which the issuer currently may not be
paying interest or may be in payment default, may be comparable to
securities rated D by S&P or C by Moody's. The funds may have
difficulty disposing of and valuing certain sovereign debt
obligations because there may be a limited trading market for such
securities. Because there is no liquid secondary market for many
of these securities, each fund anticipates that such securities
could be sold only to a limited number of dealers or institutional
investors.
Currency Risks. The funds that invest substantially in securities
denominated in currencies other than the U.S. dollar, or that hold
foreign currencies, will be affected favorably or unfavorably by
exchange control regulations or changes in the exchange rates
between such currencies and the U.S. dollar. Changes in currency
exchange rates will influence the value of each fund's shares and
also may affect the value of dividends and interest earned by the
funds and gains and losses realized by the funds. Currencies
generally are evaluated on the basis of fundamental economic
criteria (e.g., relative inflation and interest rate levels and
trends, growth rate forecasts, balance of payments status and
economic policies) as well as technical and political data. The
exchange rates between the U.S. dollar and other currencies are
determined by supply and demand in the currency exchange markets,
the international balance of payments, governmental intervention,
speculation and other economic and political conditions. If the
currency in which a security is denominated appreciates against
the U.S. dollar, the dollar value of the security will increase.
Conversely, a decline in the exchange rate of the currency would
adversely affect the value of the security expressed in U.S.
dollars.
Real Estate Investment Trusts. The values of securities issued by
REITs are affected by tax and regulatory requirements and by
perceptions of management skill. They are also subject to heavy
cash flow dependency, defaults by borrowers or tenants, self-
liquidation, the possibility of failing to qualify for the ability
to avoid tax by satisfying distribution requirements under the
Internal Revenue Code of 1986, as amended, and failing to maintain
exemption from the 1940 Act. Also, the fund will indirectly bear
its proportionate share of expenses incurred by REITs in which the
fund invests. REITs are also sensitive to factors such as changes
in real estate values and property taxes, interest rates,
overbuilding and creditworthiness of the issuer.
Zero Coupon, Pay-In-Kind and Delayed Interest Securities. The
values of these securities may be highly volatile as interest
rates rise or fall. In addition, the fund'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 fund each year. The value
of zero-coupon bonds is subject to greater fluctuation in market
value in response to changes in market interest rates than bonds
of comparable maturity which pay interest currently. Both zero-
coupon and payment-in-kind bonds allow an issuer to avoid the need
to generate cash to meet current interest payments. Accordingly,
such bonds may involve greater credit risks than bonds that pay
interest currently. Even though such bonds do not pay current
interest in cash, the fund is nonetheless required to accrue
interest income on such investments and to distribute such amounts
at least annually to shareholders. Accordingly, for a fund to
continue to qualify for tax treatment as a regulated investment
company and to avoid income and possibly excise tax, the fund may
be required to distribute as a dividend an amount that is greater
than the total amount of cash it actually receives. These
distributions must be made from the fund's cash assets or, if
necessary, from the proceeds of sales of portfolio securities. The
fund will not be able to purchase additional income-producing
securities with cash used to make such distributions and its
current income ultimately may be reduced as a result.
Lower-Quality and Non-Rated Securities (Alliance Growth, Travelers
Managed Income, Putnam Diversified Income, GT Global Strategic
Income, Smith Barney High Income and MFS Total Return Portfolios).
A fund may invest in lower-quality securities. Investments in
lower-rated securities are subject to special risks, including a
greater risk of loss of principal and non-payment of interest. An
investor should carefully consider the following factors before
investing in these funds.
Generally, lower-quality securities offer a higher return
potential than higher-rated securities but involve greater
volatility of price and greater risk of loss of income and
principal, including the possibility of default or bankruptcy of
the issuers of such securities. Lower-quality securities and
comparable non-rated securities will likely have large
uncertainties or major risk exposure to adverse conditions and are
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of
the obligation. The occurrence of adverse conditions and
uncertainties would likely reduce the value of securities held by
a fund, with a commensurate effect on the value of the fund's
shares.
The markets in which lower-quality securities or comparable non-
rated securities are traded generally are more limited than those
in which higher-quality securities are traded. The existence of
limited markets for these securities may restrict the availability
of securities for a fund to purchase and also may restrict the
ability of a fund to obtain accurate market quotations for
purposes of valuing securities and calculating net asset value or
to sell securities at their fair value. The public market for
lower-quality securities and comparable non-rated securities is
relatively new and has not fully weathered a major economic
recession. Any such economic downturn could adversely affect the
ability of issuers of lower-quality securities to repay principal
and pay interest thereon.
While the market values of lower-quality securities and comparable
non-rated securities tend to react less to fluctuations in
interest rate levels than do those of higher-quality securities,
the market values of certain of these securities also tend to be
more sensitive to individual corporate developments and changes in
economic conditions than higher-quality securities. In addition,
lower-quality securities and comparable non-rated securities
generally present a higher degree of credit risk. Issuers of
lower-quality securities and comparable non-rated securities are
often highly leveraged and may not have more traditional methods
of financing available to them so that their ability to service
their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The
risk of loss due to default by such issuers is significantly
greater because lower-quality securities and comparable non-rated
securities generally are unsecured and frequently are subordinated
to the prior payment of senior indebtedness. A Portfolio may incur
additional expenses to the extent that it is required to seek
recovery upon a default in the payment of principal or interest on
its portfolio holdings.
Fixed-income securities, including lower-quality securities and
comparable non-rated securities, frequently have call and buy-back
features that permit their issuers to call or repurchase the
securities from their holders, such as the funds. If an issuer
exercises these rights during periods of declining interest rates,
a fund may have to replace the security with a lower yielding
security, resulting in a decreased return to the fund.
In general, the ratings of nationally recognized statistical
rating organizations represent the opinions of these agencies as
to the quality of securities that they rate. Such ratings,
however, are relative and subjective, and are not absolute
standards of quality and do not evaluate the market value risk of
the securities. It is possible that an agency might not change its
rating of a particular issue to reflect subsequent events. These
ratings will be used by each Portfolio as initial criteria for the
selection of portfolio securities, but each fund also will rely
upon the independent advice of the Manager or the subadviser, as
the case may be, to evaluate potential investments.
In light of these risks, management will take various factors into
consideration in evaluating the creditworthiness of an issue,
whether rated or non-rated. These factors may include, among
others, the issuer's financial resources, its sensitivity to
economic conditions and trends, the operating history of and the
community support for the facility financed by the issue, the
ability of the issuer's management and regulatory matters.
Securities of Unseasoned Issuers. Securities in which Smith Barney
High Income Portfolio may invest may lack a significant operating
history and be dependent on products or services without an
established market share.
Borrowing and Leverage. Each fund may borrow from banks, on a
secured or unsecured basis. If the fund borrows and uses the
proceeds to make additional investments, income and appreciation
from such investments will improve its performance if they exceed
the associated borrowing costs but impair its performance if they
are less than such borrowing costs. This speculative factor is
known as "leverage." Only Smith Barney Pacific Basin, Smith
Barney International Equity, and GT Global Strategic Income
Portfolios will utilize leverage. In addition, AIM Capital
Appreciation Portfolio may, but has no current intention to,
engage in leverage. Should any fund engage in leverage,
immediately after such borrowing the value of its assets,
including the amount borrowed, less liabilities, must be equal to
at least 300% of the amount borrowed, plus all outstanding
borrowings.
Leverage creates an opportunity for increased returns to
shareholders of a fund but, at the same time, creates special risk
considerations. For example, leverage may exaggerate changes in
the net asset value of a fund's shares and in the fund's yield.
Although the principal or stated value of such borrowings will be
fixed, the portfolio assets may change in value during the time
the borrowing is outstanding. By leveraging the fund, changes in
net asset values, higher or lower, may be greater in degree than
if leverage was not employed. Leverage will create interest or
dividend expenses for a fund which can exceed the income from the
assets retained. To the extent the income or other gain derived
from securities purchased with borrowed funds exceeds the interest
and other charges the fund will have to pay in respect thereof,
the fund's net income or other gain will be greater than if
leverage had not been used. Conversely, if the income or other
gain from the incremental assets is not sufficient to cover the
cost of leverage, the net income or other gain of the fund will be
less than if leverage had not been used. If the amount of income
from the incremental securities is insufficient to cover the cost
of borrowing, securities might have to be liquidated to obtain
required funds. Depending on market or other conditions, such
liquidations could be disadvantageous to a fund.
Reverse Repurchase Agreements. Reverse repurchase agreements
involve the risk that the market value of the securities retained
in lieu of sale by the fund may decline below the price of the
securities the fund has sold but is obliged to repurchase. In the
event the buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or its
trustee or receiver may receive an extension of time to determine
whether to enforce the fund's obligation to repurchase the
securities, and the fund's use of the proceeds of the reverse
repurchase agreements may effectively be restricted pending such
decision.
Loan Participations. The funds may have difficulty disposing of
assignments and Loan Participations. The liquidity of such
securities is limited, and each fund anticipates that such
securities could be sold only to a limited number of institutional
investors. The lack of a liquid secondary market could have an
adverse impact on the value of such securities and on each fund's
ability to dispose of particular assignments or Participations
when necessary to meet the fund's liquidity needs or in response
to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary
market for assignments and Participations also may make it more
difficult for the fund to assign a value to those securities for
purposes of valuing the fund's portfolio and calculating its net
asset value.
Certain of the loan participations acquired by a fund may involve
revolving credit facilities or other standby financing commitments
which obligate the fund to pay additional cash on a certain date
or on demand. These commitments may have the effect of requiring a
fund 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 fund 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 fund'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 fund will
purchase, management will rely upon its own credit analysis (and
not that of the original lending institution's) of the borrower.
As a fund 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 fund from receiving such amounts. In such cases, a
fund 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 fund's portfolio investments. In connection
with purchasing Participations, a fund generally will have no
right to enforce compliance by the borrower with the terms of the
loan agreement relating to the loan, nor any rights of set-off
against the borrower, and a fund may not directly benefit from any
collateral supporting the loan in which it has purchased the
Participation. As a result, a fund will assume the credit risk of
both the borrower and the lender that is selling the
Participation.
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 fund. For example, if a loan is foreclosed, a fund 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 fund 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 fund relies on management's research in an attempt to
avoid situations where fraud or misrepresentation could adversely
affect the fund. 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 fund 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
fund will include them in the investment limitations described
below.
Derivative Instruments. In accordance with its investment
policies, each fund may invest in certain derivative instruments
which are securities or contracts that provide for payments based
on or "derived" from the performance of an underlying asset, index
or other economic benchmark. Essentially, a derivative instrument
is a financial arrangement or a contract between two parties (and
not a true security like a stock or a bond). Transactions in
derivative instruments can be, but are not necessarily, riskier
than investments in conventional stocks, bonds and money market
instruments. A derivative instrument is more accurately viewed as
a way of reallocating risk among different parties or substituting
one type of risk for another. Every investment by a fund,
including an investment in conventional securities, reflects an
implicit prediction about future changes in the value of that
investment. Every fund investment also involves a risk that the
portfolio manager's expectations will be wrong. Transactions in
derivative instruments often enable a fund to take investment
positions that more precisely reflect the portfolio manager's
expectations concerning the future performance of the various
investments available to the fund. Derivative instruments can be
a legitimate and often cost-effective method of accomplishing the
same investment goals as could be achieved through other
investment in conventional securities.
Derivative contracts include options, futures contracts, forward
contracts, forward commitment and when-issued securities
transactions, forward foreign currency exchange contracts and
interest rate, mortgage and currency swaps. The following are the
principal risks associated with derivative instruments.
Market risk: The instrument will decline in value or that
an alternative investment would have appreciated more, but this is
no different from the risk of investing in conventional
securities.
Leverage and associated price volatility: Leverage causes
increased volatility in the price and magnifies the impact of
adverse market changes, but this risk may be consistent with the
investment objective of even a conservative fund in order to
achieve an average portfolio volatility that is within the
expected range for that type of fund.
Credit risk: The issuer of the instrument may default on
its obligation to pay interest and principal.
Liquidity and valuation risk: Many derivative instruments
are traded in institutional markets rather than on an exchange.
Nevertheless, many derivative instruments are actively traded and
can be priced with as much accuracy as conventional securities.
Derivative instruments that are custom designed to meet the
specialized investment needs of a relatively narrow group of
institutional investors such as the funds are not readily
marketable and are subject to a fund's restrictions on illiquid
investments.
Correlation risk: There may be imperfect correlation
between the price of the derivative and the underlying asset. For
example, there may be price disparities between the trading
markets for the derivative contract and the underlying asset.
Each derivative instrument purchased for a fund's portfolio is
reviewed and analyzed by the fund's portfolio manager to assess
the risk and reward of each such instrument in relation the fund's
portfolio investment strategy. The decision to invest in
derivative instruments or conventional securities is made by
measuring the respective instrument's ability to provide value to
the fund and its shareholders.
Special Investment Considerations and Risks With Respect to
Futures, Options and Currency Transactions and Swaps and Swap-
Related Products. The successful use of the investment practices
described above with respect to futures contracts, options on
futures contracts, forward contracts, options on securities and on
foreign currencies, and swaps and swap-related products draws upon
skills and experience which are different from those needed to
select the other instruments in which the fund invests. Should
interest or exchange rates or the prices of securities or
financial indices move in an unexpected manner, a fund may not
achieve the desired benefits of futures, options, swaps and
forwards or may realize losses and thus be in a worse position
than if such strategies had not been used. Unlike many exchange-
traded futures contracts and options on futures contracts, there
are no daily price fluctuation limits with respect to options on
currencies, forward contracts and other negotiated or over-the-
counter instruments, and adverse market movements could therefore
continue to an unlimited extent over a period of time. In
addition, the correlation between movements in the price of the
securities and currencies hedged or used for cover will not be
perfect and could produce unanticipated losses.
With respect to interest rate swaps, each fund recognizes that
such arrangements are relatively illiquid and will include the
principal amount of the obligations owed to it under a swap as an
illiquid security for purposes of the fund's investment
restrictions except to the extent a third party (such as a large
commercial bank) has guaranteed the fund's ability to offset the
swap at any time.
A fund's ability to dispose of its positions in the foregoing
instruments will depend on the availability of liquid markets in
the instruments. Markets in a number of the instruments are
relatively new and still developing, and it is impossible to
predict the amount of trading interest that may exist in those
instruments in the future. Particular risks exist with respect to
the use of each of the foregoing instruments and could result in
such adverse consequences to the fund as the possible loss of the
entire premium paid for an option bought by the fund, and the
inability of the fund, as the writer of a covered call option, to
benefit from the appreciation of the underlying securities above
the exercise price of the option. As a result, no assurance can be
given that the fund will be able to use those instruments
effectively for the purposes set forth above. See the Statement of
Additional Information for a further discussion of the use, risks
and costs of these instruments.
In connection with its transactions in futures, options, swaps and
forwards, each fund may be required to place assets in a
segregated account with the fund's custodian bank to ensure that
the fund will be able to meet its obligations under these
instruments. Assets held in a segregated account generally may not
be disposed of for so long as the fund maintains the positions
giving rise to the segregation requirement. Segregation of a large
percentage of the fund's assets could impede implementation of the
fund's investment policies or the fund's ability to meet
redemption requests or other current obligations.
Mortgage-Backed Securities. To the extent that each fund purchases
mortgage-related securities at a premium, mortgage foreclosures
and prepayments of principal (which may be made at any time
without penalty) may result in some loss of the fund's principal
investment to the extent of the premium paid. The yield of a fund
that invests in mortgage-related securities may be affected by
reinvestment of prepayments at higher or lower rates than the
original investment. In addition, like other debt securities, the
values of mortgage-related securities, including government and
government related mortgage pools, generally will fluctuate in
response to market interest rates.
Other Asset-Backed Securities. The estimated life of an asset-
backed security varies with the prepayment experience with respect
to the underlying debt instruments. The rate of such prepayments,
and hence the life of an asset-backed security, will be primarily
a function of current market interest rates, although other
economic and demographic factors may be involved. For example,
falling interest rates generally result in an increase in the rate
of prepayments of mortgage loans while rising interest rates
generally decrease the rate of prepayments. An acceleration in
prepayments in response to sharply falling interest rates will
shorten the security's average maturity and limit the potential
appreciation in the security's value relative to a conventional
debt security. Consequently, asset-backed securities are not as
effective in locking in high long-term yields. Conversely, in
periods of sharply rising rates, prepayments generally slow,
increasing the security's average life and its potential for price
depreciation.
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 fund,
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.
Furthermore, in the case of a futures contract purchase, in order
to be certain that the fund has sufficient assets to satisfy its
obligations under a futures contract, the fund 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
fund 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 fund 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 fund's assets to cover could impede portfolio
management or the fund'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.
INVESTMENT RESTRICTIONS tc \l1 "INVESTMENT RESTRICTIONS
The funds 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 fund
affected by the change as defined in the 1940 Act and Rule 18f-2
thereunder (see "Voting"). If a fund 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 Pacific Basin, Smith Barney International
Equity and Smith Barney Large Cap Value 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 fund 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
funds' investment objective and policies); or (d) investing in
real estate investment trust securities.
4. With respect to Smith Barney Large Cap Value
Portfolio, borrow money, except that (a) the fund 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 fund
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 fund 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 Smith Barney Pacific Basin and
Smith Barney International Equity Portfolios, borrow money,
except that (a) the fund may borrow from banks under certain
circumstances where the fund's Manager reasonably believes that
(i) the cost of borrowing and related expenses will be exceeded by
the fund's return from investments of the proceeds of the
borrowing in fund 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
fund'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 fund 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 fund 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 fund 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 Smith Barney
Pacific Basin Portfolio, Smith Barney International Equity
Portfolio or Smith Barney Large Cap Value Portfolio, each such
fund 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
Smith Barney Pacific Basin Portfolio, Smith Barney International
Equity Portfolio and Smith Barney Large Cap Value Portfolio but
are not fundamental and accordingly may be changed by approval of
the Board of Directors. The funds 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 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.
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 fund 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 fund if, immediately after and as a result, the value of such
securities would exceed, in the aggregate, 15% of the fund's net
assets. Subject to this limitation, the Company's Board of
Directors has authorized the fund to invest in restricted
securities if such investment is consistent with the fund'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 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 fund 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 fund
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 fund 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 fund 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 fund 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
funds' 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 fund 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
Smith Barney Large Capitalization Growth Portfolio, but are not
fundamental and accordingly may be changed by approval of the
Board of Directors. The fund 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 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.
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
fund'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 fund 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.
The Alliance Growth Portfolio may not:
1. Borrow money, except that (a) the fund 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 fund
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 fund 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 fund 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
funds' 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 fund 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 Alliance
Growth Portfolio, the fund may invest all of its investable assets
in an open-end management investment company having the same
investment objective and restrictions as the fund.
In addition, the following policies have also been adopted by
Alliance Growth Portfolio, but are not fundamental and accordingly
may be changed by approval of the Board of Directors. The fund 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 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.
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 fund 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 fund'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 fund 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 fund 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 fund 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 fund 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
funds' 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 fund 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, AIM Capital Appreciation Portfolio treats as
fundamental its policy concerning borrowing. In accordance with
this policy, the fund 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 fund'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 fund'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 fund 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 fund's assets should fail
to meet the 300% asset coverage requirement, the fund will, within
three days, reduce its borrowings to the extent necessary. The
fund 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 AIM
Capital Appreciation Portfolio, but are not fundamental and
accordingly may be changed by approval of the Board of Directors.
The fund 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 fund 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 fund 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 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 fund 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
funds' 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 fund 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 fund but includes the fund's pro rata
portion of the securities and other assets owned by any such
company.
6. Borrow money, except that (a) the fund 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 fund
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 fund 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 Van Kampen
American Capital Enterprise Portfolio, the fund may invest all of
its investable assets in an open-end management investment company
having the same investment objective and restrictions as the fund.
In addition, the following policies have also been adopted by Van
Kampen American Capital Enterprise Portfolio, but are not
fundamental and accordingly may be changed by approval of the
Board of Directors. The fund 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 fund but includes the
fund'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 fund, as determined at the time
the fund 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 fund
but includes the fund'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 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.
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 fund 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 fund or which would subject the fund 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 fund
from the limitations imposed by Section 12(d)(1) of the 1940 Act.
The MFS Total Return Portfolio may not:
1. Borrow money, except that (a) the fund 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 fund
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 fund 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. 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 fund 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
funds' 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 fund 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 MFS Total
Return Portfolio, the fund may invest all of its investable assets
in an open-end management investment company having the same
investment objective and restrictions as the fund.
In addition, the following policies have also been adopted by MFS
Total Return Portfolio, but are not fundamental and accordingly
may be changed by approval of the Board of Directors. The fund 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 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. 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 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 fund
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 fund) 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 fund 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
funds' 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 fund 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 fund 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 fund may not exceed 1/3
of its total assets. In the event that the asset coverage for the
fund's borrowings falls below 300%, the fund 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 GT Global Strategic Income Portfolio's
concentration policy contained in limitation (1) above, the fund
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
Company's Board of Directors without shareholder approval. The
fund 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 fund to own more than 10% of any class of
securities of any one issuer (provided, however, that the fund 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 fund).
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 fund 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 fund).
5. Invest in companies for the purpose of exercising
control or management (provided, however, that the fund 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 fund).
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 fund 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 fund).
The Travelers 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 fund 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 fund 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
funds' 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 fund 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 fund 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 fund
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 fund 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 Travelers
Managed Income Portfolio, the fund may invest all of its
investable assets in an open-end management investment company
having the same investment objective and restrictions as the fund.
In addition, the following policies have also been adopted by
Travelers Managed Income Portfolio, but are not fundamental and
accordingly may be changed by approval of the Board of Directors.
The fund 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 fund'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 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 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 fund 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 fund 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 fund
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 fund 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 fund 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
funds' 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 fund 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 fund 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 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.
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 Putnam
Diversified Income Portfolio, the fund may invest all of its
investable assets in an open-end management investment company
having the same investment objective and restrictions as the fund.
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 fund 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 fund
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 fund 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 fund 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 fund 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
funds' 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 fund 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 and 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 fund may invest all of its
investable assets in an open-end management investment company
having the same investment objective and restrictions as the fund.
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 fund 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 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.
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 Smith Barney Money Market Portfolio may not:
1. Borrow money, except that (a) the fund 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 fund
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 fund 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 fund 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
funds' 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 fund 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 fund 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 Smith Barney
Money Market Portfolio, the fund may invest all of its investable
assets in an open-end management investment company having the
same investment objective and restrictions as the fund.
In addition, the following policies have also been adopted by
Smith Barney Money Market Portfolio but are not fundamental and
accordingly may be changed by approval of the Board of Directors.
The fund 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 fund's total assets.
Subject to this limitation, the fund's Board of Directors has
authorized the fund to invest in restricted securities if such
investment is consistent with the fund'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 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.
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.
PORTFOLIO TURNOVER
Although it is anticipated that most investments of each fund
(except Smith Barney Money Market Portfolio) will be long-term in
nature, the rate of portfolio turnover will depend upon market and
other conditions, and it will not be a limiting factor when
management believes that portfolio changes are appropriate. The
historical portfolio turnover rates for each fund (except Smith
Barney Money Market Portfolio) are included in the Financial
Highlights tables in the Prospectus. A higher rate of portfolio
turnover may result in higher transaction costs, including
brokerage commissions. Portfolio turnover rates for Smith Barney
Money Market Portfolio are not shown because of the short-term
nature of the investments owned by the fund.
PERFORMANCE INFORMATION
From time to time the Company may include a fund's total return,
average annual total return, yield and current distribution return
in advertisements and/or other types of sales literature. These
figures are based on historical earnings and are not intended to
indicate future performance. In addition, these figures will not
reflect the deduction of the charges that are imposed on the
Contracts by the Separate Account (see Contract prospectus) which,
if reflected, would reduce the performance quoted.
Total Return. Total return is computed for a specified period of
time assuming reinvestment of all income dividends and capital
gains distributions at net asset value on the ex-dividend dates at
prices calculated as stated in the Prospectus, then dividing the
value of the investment at the end of the period so calculated by
the initial amount invested and subtracting 100%. The standard
average annual total return, as prescribed by the SEC, is derived
from this total return, which provides the ending redeemable
value. Such standard total return information may also be
accompanied with nonstandard total return information over
different periods of time by means of aggregate, average, year-by-
year, or other types of total return figures. The standard total
return shows what an investment in the fund would have earned over
a specified period of time (one, five or ten years) assuming that
all distributions and dividends by the fund were invested on the
reinvestment dates during the period less all recurring fees.
Yield. The yield of a fund refers to the net investment income
earned by investments in the fund over a thirty-day period. Each
fund'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. This net
investment income is then annualized, i.e., the amount of income
earned by the investments during that thirty-day period is assumed
to be earned each 30-day period for twelve periods and is
expressed as a percentage of the investments. The yield quotation
is calculated according to a formula prescribed by the SEC to
facilitate comparison with yields quoted by other investment
companies.
Current Distribution Return. The Company calculates current
distribution return for each fund by dividing the distributions
from gross investment income declared during the most recent
period by the net asset value per share on the last day of the
period for which current distribution return is presented. A
fund's current distribution return may vary from time to time
depending on market conditions, the composition of its investment
portfolio and operating expenses. These factors and possible
differences in the methods used in calculating current
distribution return, and the charges that are imposed on the
Contracts by the Separate Account, should be considered when
comparing the fund's current distribution return to yields
published for other investment companies and other investment
vehicles. From time to time, a fund may include its current
distribution return in information furnished to present or
prospective shareowners.
Current distribution return should also be considered relative to
changes in the value of the fund's shares and to the risks
associated with the fund'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 fund and for
providing a basis for comparison with other financial
alternatives. Since the performance of each fund changes in
response to fluctuations in market conditions, interest rate and
fund expenses, no performance quotation should be considered a
representation as to the fund's performance for any future period.
DETERMINATION OF NET ASSET VALUE tc \l1 "DETERMINATION OF NET
ASSET VALUE
The net asset value of each fund'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.
Net asset value is determined by dividing the fund's net assets by
the number of its shares outstanding. Securities owned by a fund
for which market quotations are readily available are valued at
current market value or, in their absence, at fair value.
Securities traded on an exchange are valued at last sales price on
the principal exchange on which each such security is traded, or
if there were no sales on that exchange on the valuation date, the
last quoted sale, up to the time of valuation, on the other
exchanges. If instead there were no sales on the valuation date
with respect to these securities, such securities are valued at
the mean of the latest published closing bid and asked prices.
Over-the-counter securities are valued at last sales price or, if
there were no sales that day, at the mean between the bid and
asked prices. Options, futures contracts and options thereon that
are traded on exchanges are also valued at last sales prices as of
the close of the principal exchange on which each is listed or if
there were no such sales on the valuation date, the last quoted
sale, up to the time of valuation, on other exchanges. In the
absence of any sales on the valuation date, valuation shall be the
mean of the latest closing bid and asked prices. Fixed income
obligations are valued at the mean of bid and asked prices based
on market quotations for those securities or if no quotations are
available, then for securities of similar type, yield and
maturity. Securities with a remaining maturity of 60 days or less
are valued at amortized cost where the Board of Directors has
determined that amortized cost is fair value. Premiums received on
the sale of call options will be included in the fund's net
assets, and current market value of such options sold by a fund
will be subtracted from that fund's net assets. Any other
investments of a fund, including restricted securities and listed
securities for which there is a thin market or that trade
infrequently (i.e., securities for which prices are not readily
available), are valued at a fair value determined by the Board of
Directors in good faith. This value generally is determined as the
amount that a fund could reasonably expect to receive from an
orderly disposition of these assets over a reasonable period of
time but in no event more than seven days. The value of any
security or commodity denominated in a currency other than U.S.
dollars will be converted into U.S. dollars at the prevailing
market rate as determined by management.
Foreign securities trading may not take place on all days on which
the NYSE is open. Further, trading takes place in various foreign
markets on days on which the NYSE is not open. Accordingly, the
determination of the net asset value of a fund may not take place
contemporaneously with the determination of the prices of
investments held by such fund. Events affecting the values of
investments that occur between the time their prices are
determined and 4:00 P.M. on each day that the NYSE is open will
not be reflected in a fund's net asset value unless management
under the supervision of the Company's Board of Directors,
determines that the particular event would materially affect the
net asset value. As a result, a fund's net asset value may be
significantly affected by such trading on days when a shareholder
has no access to such fund.
AVAILABILITY OF THE FUNDS
Investment in the Company is only available to owners of either
variable annuity or variable life insurance contracts issued by
insurance companies through their separate accounts. It is
possible that in the future it may become disadvantageous for both
variable annuity and variable life insurance separate accounts to
be invested simultaneously in the Company. However, the Company
does not currently foresee any disadvantages to the contractowners
of the different contracts which are funded by such separate
accounts. The Board monitors events for the existence of any
material irreconcilable conflict between or among such owners, and
each insurance company will take whatever remedial action may be
necessary to resolve any such conflict. Such action could include
the sale of fund shares by one or more of the insurance company
separate accounts which fund these contracts, which could have
adverse consequences to the fund. Material irreconcilable
conflicts could result from, for example: (a) changes in state
insurance laws; (b) changes in U.S. federal income tax laws; or
(c) differences in voting instructions between those given by
variable annuity contractowners and those given by variable life
insurance contractowners. If the Board were to conclude that
separate series of the Company should be established for variable
annuity and variable life separate accounts, each insurance
company would bear the attendant expenses. Should this become
necessary, contractowners would presumably no longer have the
economies of scale resulting from a larger combined mutual fund.
REDEMPTION OF SHARES tc \l1 "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 fund 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.
MANAGEMENT tc \l1 "MANAGEMENT
The Investment Managers.
MMC. MMC serves as the investment adviser to Smith Barney Pacific
Basin Portfolio, Smith Barney International Equity Portfolio,
Smith Barney Large Cap Value Portfolio, Smith Barney Large
Capitalization Growth Portfolio, Smith Barney High Income
Portfolio and Smith Barney Money Market Portfolio. MMC manages the
day to day operations of each such fund pursuant to a management
agreement entered into by the Company on behalf of each fund.
Under each management agreement, MMC will (a) manage the fund's
assets in accordance with the fund's investment objective(s) and
policies as stated in the Prospectus and the SAI; (b) make
investment decisions for the fund; (c) place purchase and sale
orders for portfolio transactions on behalf of the fund; (d)
employ professional portfolio managers and securities analysts who
provide research services to the fund; (e) administer the fund's
corporate affairs and, in connection therewith, furnish the fund
with office facilities and with clerical, bookkeeping and
recordkeeping services at such office facilities; and (f) prepare
reports to shareholders and reports to and filings with the SEC
and state blue sky authorities if applicable. In providing these
services, MMC will conduct a continual program of investment,
evaluation and, if appropriate, sale and reinvestment of each
fund's assets.
By written agreement, research and other departments and staff of
Salomon Smith Barney will furnish MMC with information, advice and
assistance and will be available for consultation on the Company's
funds. Thus, Salomon Smith Barney may also be considered an
investment adviser to the Company. Salomon Smith Barney's services
are paid for by MMC; there is no charge to the Company for such
services.
TIA. Travelers Investment Adviser, Inc. ("TIA" or the "Manager"),
an affiliate of MMC, manages the investment operations of Alliance
Growth Portfolio, AIM Capital Appreciation Portfolio, Putnam
Diversified Income Portfolio, MFS Total Return Portfolio, GT
Global Strategic Income Portfolio and Van Kampen American Capital
Enterprise Portfolio (each, a "TIA Portfolio") pursuant to
management agreements entered into by the Company on behalf of
each TIA Portfolio.
TIA and the Company have entered into a subadvisory agreement on
behalf of each TIA Portfolio. Pursuant to each subadvisory
agreement, each subadviser is responsible for the day to day
operations and investment decisions for the respective fund and is
authorized, in its discretion and without prior consultation with
TIA, to: (a) manage the fund's assets in accordance with the
fund's investment objective(s) and policies as stated in the
Prospectus and the SAI; (b) make investment decisions for the
fund; (c) place purchase and sale orders for portfolio
transactions on behalf of the fund; and (d) employ professional
portfolio managers and securities analysts who provide research
services to the fund.
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 TIA Portfolio's operations; (b) supply each
TIA Portfolio with office facilities, statistical and research
services, data processing services, clerical, accounting and
bookkeeping services; and (c) prepare reports to each TIA
Portfolio's shareholders and prepare reports to and filings with
the 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.
Subject to the provisions of any applicable subadvisory agreement,
the Manager will also manage the investment operations of each
fund and will be responsible for furnishing or causing to be
furnished to each fund advice and assistance with respect to the
purchase, retention and disposition of investments, in accordance
with each fund's investment objectives, policies and restrictions
as stated in the Prospectus and SAI.
TAMIC. Travelers Asset Management International Corporation, an
affiliate of MMC, manages the investment operations of Travelers
Managed Income Portfolio pursuant to a management agreement
entered into by the Company on behalf of Travelers Managed Income
Portfolio. Under the agreement,. TAMIC furnishes investment
information and advice and makes recommendations with respect to
the purchase and sale of investments based upon the fund's
investment policies. TAMIC has responsibility for the investment
decisions of the fund, subject to the supervision, direction and
approval of the Board of Directors.
Under each management agreement MMC, TIA or TAMIC, as the case may
be, will administer the Company's corporate affairs, and, in
connection therewith, is responsible for furnishing or causing to
be furnished to each applicable fund advice and assistance with
respect to the acquisition, holding or disposal of investments and
recommendations with respect to other aspects and affairs of the
fund, bookkeeping, accounting and administrative services, office
space and equipment, and the services of the officers and
employees of the Company. Each fund receives discretionary
advisory services provided by the Manager or by a subadviser
(pursuant to a Subadvisory Agreement) who is identified, retained,
supervised and compensated by the Manager.
Each management agreement further provides that all other expenses
not specifically assumed by MMC, TIA or TAMIC under the management
agreement on behalf of a fund are borne by the Company. Expenses
payable by the Company include, but are not limited to, all
charges of custodians and shareholder servicing agents, expenses
of preparing, printing and distributing all prospectuses, proxy
material, reports and notices to shareholders, all expenses of
shareholders' and directors' meetings, filing fees and expenses
relating to the registration and qualification of the Company's
shares and the Company under federal and state securities laws and
maintaining such registrations and qualifications (including the
printing of the Company's registration statements), fees of
auditors and legal counsel, costs of performing portfolio
valuations, out-of-pocket expenses of directors and fees of
directors who are not "interested persons" as defined in the 1940
Act, interest, taxes and governmental fees, fees and commissions
of every kind, expenses of issue, repurchase or redemption of
shares, insurance expense, association membership dues, all other
costs incident to the Company's existence and extraordinary
expenses such as litigation and indemnification expenses. Direct
expenses are charged to each of the Company's funds; general
corporate expenses are allocated on the basis of relative net
assets.
MMC, TIA, TAMIC and each subadviser are subject to the supervision
and direction of the Company's Board of Directors and manage the
applicable fund in accordance with its investment objective and
policies, make investment decisions for the fund, place orders to
purchase and sell securities and employ professionals who provide
research services. All orders for transactions in securities on
behalf of a fund are made by management, with broker-dealers
selected by management, including affiliated brokers. In placing
orders management will seek to obtain the most favorable price and
execution available. In selecting broker-dealers, management may
consider research and brokerage services furnished to it and its
affiliates.
Each Management Agreement shall continue for an initial two-year
term and shall be continued thereafter from year to year if
specifically approved at least annually as required by the 1940
Act. Each Management 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.
Management Fees. The Manager has agreed to waive its fee to the
extent that the aggregate expenses of any of Smith Barney Large
Cap Value Portfolio, Alliance Growth Portfolio, AIM Capital
Appreciation Portfolio, Van Kampen American Capital Enterprise
Portfolio, Travelers Managed Income Portfolio, Putnam Diversified
Income Portfolio, Smith Barney High Income Portfolio, MFS Total
Return Portfolio and 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 fund. The Manager has agreed to waive its fee to the extent
that the aggregate expenses of each of Smith Barney International
Equity Portfolio, Smith Barney Pacific Basin Portfolio and 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 fund. 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 Prospectus and SAI.
Each management agreement also provides that MMC, TIA or TAMIC
shall not be liable to the Company for any error of judgment or
mistake of law or for any loss suffered by the Company 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 subadviser shall not be liable to MMC, TIA, TAMIC or the
fund for any error of judgment or mistake of law or for any loss
suffered by MMC, TIA, TAMIC or 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
subadvisory agreement.
For the periods shown, each fund paid the following management
fee:
Fund
Fiscal Year
Ended
October 31,
1996
Fiscal Year
Ended
October 31,
1997
Fiscal
Year
Ended
October 31
, 1998
Smith Barney Pacific Basin
Portfolio+
$117,581
$175,112
Smith Barney International
Equity Portfolio
887,397
1,692,179
Smith Barney Large Cap Value
Portfolio
564,232
1,399,650
Smith Barney Large
Capitalization Growth Portfolio
n/a
n/a
Alliance Growth Portfolio
1,624,602
3,268,019
AIM Capital Appreciation
Portfolio
503,898
1,294,096
Van Kampen American Capital
Enterprise Portfolio
482,803
1,045,925
MFS Total Return Portfolio
744,834
1,556,167
GT Global Strategic Income
Portfolio++
109,949
201,225
Travelers Managed Income
Portfolio
123,774
176,499
Putnam Diversified Income
Portfolio
428,803
753,736
Smith Barney High Income
Portfolio
262,657
558,996
Smith Barney Money Market
Portfolio+++
425,361
650,916
+ The Manager waived $30,849 in 1996 of the management fees
shown.
++ The Manager waived $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 Subadvisers.
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 fund's average
daily net assets, paid monthly.
Alliance Capital is a leading international investment manager
supervising client accounts with assets as of September 30, 1998
of more than $241.9 billion (of which approximately $99.5 billion
representing the assets of investment companies). Alliance Capital
clients are primarily major corporate employee benefit funds,
public employee retirement systems, investment companies,
foundations and endowment funds and include employee benefit
plans, as of September 30, 1998, 34 of the Fortune 100 Companies.
As of that date, Alliance Capital and its subsidiaries employed
more than 1,700 employees who operated out of six domestic offices
and the overseas offices of subsidiaries in Chennai, Istanbul,
London, Mumbai, New Delhi, Paris, Sydney, Tokyo, Toronto, Bahrain,
Luxembourg and Singapore as well as affiliate offices in
Bangalore, Cairo, Johannesburg, 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"), is the general
partner of Alliance Capital and conducts no active business.
Alliance Capital, is an indirect wholly owned subsidiary of The
Equitable Life Assurance Society of the United States
("Equitable"), one of the largest life insurance companies in the
United States 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,
1998, beneficially owned approximately 58.5% of the outstanding
voting shares of ECI. As of September 30, 1998, ACMC and Equitable
Capital Management Corporation, each a wholly owned direct or
indirect subsidiary of Equitable, together with Equitable, owned
in the aggregate approximately 56.8% of the issued and outstanding
units representing assignments of beneficial ownership of limited
partnership interests in Alliance Capital ("Units").
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
fund's average daily net assets, paid monthly.
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 fund's average daily net assets, paid
monthly.
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 fund's average daily net assets, paid monthly.
GT Global Strategic Income Portfolio is advised by AMVESCAP PLC
("AMVESCAP"). AMVESCAP is a holding company formed in 1997 by the
merger of INVESCO PLC and AIM Management Group, Inc.
For the services provided by AMVESCAP, the Manager pays to
AMVESCAP an annual fee calculated at the rate of 0.375% of the
fund's average daily net assets, paid monthly.
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 at a rate equal to 0.375% of the fund's
average daily net assets, paid monthly.
Portfolio Transactions and Distribution
CFBDS, Inc., located at 21 Milk Street, Boston MA 02109-5408 (the
"Distributor"), distributes shares of the Funds as their principal
underwriter. The Company's Board of Directors has determined that
transactions for the Company may be executed through Salomon Smith
Barney or any broker-dealer affiliate of Salomon 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 Company as those obtainable
through other qualified broker-dealers, and if, in the
transaction, the Affiliated Broker charges the Company a fair and
reasonable rate consistent with that charged to comparable
unaffiliated customers in similar transactions. The Company will
not deal with Salomon Smith Barney in any transactions in which
Salomon 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 Company for
the fiscal years ended October 31, 1996, October 31, 1997 and
October 31, 1998 on behalf of the funds, the portion paid to
Salomon 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, 1996 the total
amount of commissionable transactions was $948,677,922,
$86,585,294 (9.13%) of which was directed to Salomon 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
Salomon Smith Barney and executed by unaffiliated brokers and
$1,502,978,641 (92.89%) of which was directed to other brokers.
During the fiscal year ended October 31, 1998 the total amount of
commissionable transactions was $_______________,
$________________ (____%) of which was directed to Salomon Smith
Barney and executed by unaffiliated brokers and $___________
(____%) of which was directed to other brokers.
Commissions:
Fiscal Year
Ended
Total
To Salomon
Smith Barney
To Others (for execution
only)
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
%)
October 31, 1998
The Company 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 Company 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 Company takes into consideration the fact that a
particular broker may, in addition to execution capability,
provide other services to the Company 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
Company.
The Board of Directors of the Company 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.
OTHER INFORMATION ABOUT THE COMPANY
The Company, an open-end managed investment company, was
incorporated in Maryland on February 22, 1994. The Company has an
authorized capital of 6,000,000,000 shares with a par value of
$.00001 per share. The Board of Directors has authorized the
issuance of thirteen series of shares, each representing shares in
one of thirteen separate funds - Smith Barney Pacific Basin
Portfolio, Smith Barney International Equity Portfolio, Smith
Barney Large Cap Value Portfolio, Smith Barney Large
Capitalization Growth Portfolio, Alliance Growth Portfolio, AIM
Capital Appreciation Portfolio, Van Kampen American Capital
Enterprise Portfolio, MFS Total Return Portfolio, GT Global
Strategic Income Portfolio, Travelers Managed Income Portfolio,
Putnam Diversified Income Portfolio, Smith Barney High Income
Portfolio and Smith Barney Money Market Portfolio. The directors
also have the power to create additional series of shares. The
assets of each fund will be segregated and separately managed and
a shareowner's interest is in the assets of the fund in which he
or she holds shares.
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
funds would be established by the directors at the time such funds
were established and may differ from those set forth in the
Prospectus and this SAI. In the event of liquidation or
dissolution of a fund or of the Company, shares of a fund are
entitled to receive the assets belonging to that fund and a
proportionate distribution, based on the relative net assets of
the respective funds, of any general assets not belonging to any
particular fund 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 Company
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 Company
shall indemnify its directors, officers and employees against any
liability to the Company 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 Company.
The Company 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.
Voting Rights. The Company offers its shares only for purchase by
insurance company separate accounts. Thus, the insurance company
is technically the shareholder of the Company and, under the 1940
Act, is deemed to be in control of the Company. Nevertheless, with
respect to any Company shareholder meeting, an insurance company
will solicit and accept timely voting instructions from its
contractowners who own units in a separate account investment
division which corresponds to shares in the Company in accordance
with the procedures set forth in the accompanying prospectus for
the applicable contract issued by the insurance company and to the
extent required by law. Shares of the Company attributable to
contractowner interests for which no voting instructions are
received will be voted by an insurance company in proportion to
the shares for which voting instructions are received.
Each share of a fund represents an equal proportionate interest in
that fund with each other share of the same fund and is entitled
to such dividends and distributions out of the net income of that
fund as are declared in the discretion of the directors.
Shareowners are entitled to one vote for each share held and will
vote by individual fund except to the extent required by the 1940
Act. The Company is not required to hold annual shareowner
meetings, although special meetings may be called for the Company
as a whole, or a specific fund, for purposes such as electing or
removing directors, changing fundamental policies or approving a
management contract. Shareowners may cause a meeting of
shareowners to be held upon a vote of 10% of the Company's
outstanding shares for the purpose of voting on the removal of
directors.
Shares of the Company 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 fund
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 fund would be voted upon only by
shareowners of the fund involved. Additionally, approval of an
amendment to a fund's advisory or subadvisory agreement is a
matter to be determined separately by that fund. Approval of a
proposal by the shareowners of one fund is effective as to that
fund whether or not enough votes are received from the shareowners
of the other funds to approve the proposal as to that fund.
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 Company.
Shares do not have cumulative voting rights and therefore the
owners of more than 50% of the outstanding shares of the Company
may elect all of the directors irrespective of the votes of other
shareowners.
Custodians. Portfolio securities and cash owned by the Company on
behalf of Smith Barney Large Cap Value Portfolio, Smith Barney
Large Capitalization Growth Portfolio, Alliance Growth Portfolio,
AIM Capital Appreciation Portfolio, Van Kampen American Capital
Enterprise Portfolio, MFS Total Return Portfolio, Travelers
Managed Income Portfolio, Putnam Diversified Income Portfolio,
Smith Barney High Income Portfolio, and Smith Barney Money Market
Portfolio are held in the custody of PNC Bank, National
Association, 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103 (foreign securities, if any, will be held in the custody of
The Barclays Bank, PLC).
Portfolio securities and cash owned by the Company on behalf of
Smith Barney Pacific Basin Portfolio, Smith Barney International
Equity Portfolio and GT Global Strategic Income Portfolio are held
in the custody of Chase Manhattan Bank, Chase MetroTech Center,
Brooklyn, New York 11245.
Independent Auditors. KPMG LLP, 345 Park Avenue, New York, New
York 10154, has been selected as the Company's independent
auditors for its fiscal year ending October 31, 1999, to examine
and report on the financial statements and financial highlights of
the Company.
FINANCIAL STATEMENTS tc \l1 "FINANCIAL STATEMENTS
The financial information contained under the following headings is
hereby incorporated by reference to the Company's 1998 Annual
Reports to Shareholders:
Annual Report of:
Pages(s)in:
Smith Barney Pacific Basin Portfolio
Smith Barney International Equity Portfolio
Smith Barney Large Cap Value Portfolio
Smith Barney Large Capitalization Growth Portfolio
Alliance Growth Portfolio
AIM Capital Appreciation Portfolio
Schedule of Investments
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Financial Highlights (for a share of capital stock
of each series outstanding through each year)
Independent Auditors' Report
Van Kampen American Capital Enterprise Portfolio
Schedule of Investments
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Financial Highlights (for a share of capital stock
of each series outstanding through each year)
Independent Auditors' Report
MFS Total Return Portfolio
GT Global Strategic Income Portfolio
Schedule of Investments
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Financial Highlights (for a share of capital stock of
each series outstanding through each year)
Independent Auditors' Report
Travelers Managed Income Portfolio
Putnam Diversified Income Portfolio
Schedule of Investments
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Financial Highlights (for a share of capital stock
of each series outstanding through each year)
Independent Auditors' Report
Smith Barney High Income Portfolio
Smith Barney Money Market Portfolio
Schedule of Investments
Statements of Assets and Liabilities
Statements of Operations
Statements of Changes in Net Assets
Notes to Financial Statements
Financial Highlights (for a share of capital stock of
each series outstanding through each year)
Independent Auditors' Report
APPENDIX A
RATINGS ON DEBT OBLIGATIONS BOND (AND NOTES) RATINGS
Moody's Investors Service, Inc.
Aaa - Bonds that are rated "Aaa" are judged to be of the best
quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa - Bonds that are rated "Aa" are judged to be of high quality by
all standards. Together with the "Aaa" group they comprise what
are generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in "Aaa" securities or fluctuation of protective elements may
be of greater amplitude or there may be other elements present
that make the long term risks appear somewhat larger than in "Aaa"
securities.
A - Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa - Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba - Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds
in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa - Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca - Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C - Bonds which are rated C are the lowest class of bonds and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Note: The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
Standard & Poor's
AAA - Debt rated "AAA" has the highest rating assigned by Standard
& Poor's. Capacity to pay interest and repay principal is
extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues only
in small degree.
A- Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB - Debt rated "BBB" is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for debt in this
category than in higher rated categories.
BB, B, CCC, CC, C - Debt rated 'BB', 'B', 'CCC', 'CC' or 'C' is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with
the terms of the obligation. 'BB' indicates the lowest degree of
speculation and 'C' the highest degree of speculation. While such
debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
Plus (+) or Minus (-): The ratings from 'AA' to 'B' may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful
completion of the project being financed by the debt being rated
and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of
the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise judgment with respect to
such likelihood and risk.
L - The letter "L" indicates that the rating pertains to the
principal amount of those bonds where the underlying deposit
collateral is fully insured by the Federal Savings & Loan
Insurance Corp. or the Federal Deposit Insurance Corp.
+ - Continuance of the rating is contingent upon S&P's receipt
of closing documentation confirming investments and cash
flow.
* - Continuance of the rating is contingent upon S&P's receipt
of an executed copy of the escrow agreement.
NR - Indicates no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P
does not rate a particular type of obligation as a matter of
policy.
Fitch IBCA, Inc.
AAA - Bonds rated AAA by Fitch have the lowest expectation of
credit risk. The obligor has an exceptionally strong capacity for
timely payment of financial commitments which is highly unlikely
to be adversely affected by foreseeable events.
AA - Bonds rated AA by Fitch have a very low expectation of credit
risk. They indicate very strong capacity for timely payment of
financial commitment. This capacity is not significantly
vulnerable to foreseeable events.
A - Bonds rated A by Fitch are considered to have a low
expectation of credit risk. The capacity for timely payment of
financial commitments is considered to be strong, but may be more
vulnerable to changes in economic conditions and circumstances
than bonds with higher ratings.
BBB - Bonds rated BBB by Fitch currently have a low expectation of
credit risk. The capacity for timely payment of financial
commitments is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to
impair this capacity. This is the lowest investment grade category
assigned by Fitch.
BB - Bonds rated BB by Fitch carry the possibility of credit risk
developing, particularly as the result of adverse economic change
over time. Business or financial alternatives may, however, be
available to allow financial commitments to be met. Securities
rated in this category are not considered by Fitch to be
investment grade.
B - Bonds rated B by Fitch carry significant credit risk, however,
a limited margin of safety remains. Although financial commitments
are currently being met, capacity for continued payment depends
upon a sustained, favorable business and economic environment.
CCC, CC, C - Default on bonds rated CCC, CC, and C by Fitch is a
real possibility. The capacity to meet financial commitments
depends solely on a sustained, favorable business and economic
environment. Default of some kind on bonds rated CC appears
probable, a C rating indicates imminent default.
Plus and minus signs are used by Fitch to indicate the relative
position of a credit within a rating category. Plus and minus
signs however, are not used in the AAA category.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-1" (or related supporting institutions) have
a superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment will normally be evidenced by the
following characteristics: leading market positions in well-
established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on
debt and ample asset protection; broad margins in earnings
coverage of fixed financial changes and high internal cash
generation; well-established access to a range of financial
markets and assured sources of alternate liquidity.
Issuers rated "Prime-2" (or related supporting institutions) have
strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the
characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample
alternate liquidity is maintained.
Standard & Poor's
A-1 - This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong.
Those issuers determined to possess overwhelming safety
characteristics will be denoted with a plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as high
as for issues designated A-1.
Fitch IBCA, Inc.
Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to
three years, including commercial paper, certificates of deposit,
medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term
rating on the existence of liquidity necessary to meet financial
commitment in a timely manner.
Fitch's short-term ratings are as follows:
F1+ - Issues assigned this rating are regarded as having the
strongest capacity for timely payments of financial commitments.
The "+" denotes an exceptionally strong credit feature.
F1 - Issues assigned this rating are regarded as having the
strongest capacity for timely payment of financial commitments.
F2 - Issues assigned this rating have a satisfactory capacity for
timely payment of financial commitments, but the margin of safety
is not as great as in the case of the higher ratings.
F3 - The capacity for the timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a
reduction to non investment grade.
Duff & Phelps Inc.
Duff 1+ - Indicates the highest certainty of timely payment:
short-term liquidity is clearly outstanding, and safety is just
below risk-free United States Treasury short-term obligations.
Duff 1 - Indicates a high certainty of timely payment.
Duff 2 - Indicates a good certainty of timely payment: liquidity
factors and company fundamentals are sound. The Thomson BankWatch
("TBW")
TBW-1 - Indicates a very high degree of likelihood that principal
and interest will be paid on a timely basis.
TBW-2 - While the degree of safety regarding timely repayment of
principal and interest is strong, the relative degree of safety is
not as high as for issues rated TBW-1.
U:\legal\funds\$sts\1998\secdocs\PEA10SAI
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A-4
PART C. Other Information
Item 23. Exhibits
a.1 Articles of Incorporation dated as of February 18,
1994 is incorporated by reference to Exhibit 1(a) to
the Registration Statement on February 23, 1994.
a.2 Amendment to Articles of Incorporation dated as of
May 26,1994 is incorporated by reference to Exhibit
1(b) to Pre-Effective Amendment No. 1 on June 10,
1994.
a.3 Amendment to Articles of Incorporation dated as of
June 7, 1994 is incorporated by reference to Exhibit
1(c) to Pre-Effective Amendment No. 1 on June 10,
1994.
b. Bylaws of the Fund are incorporated by reference to
Exhibit 2 to Pre-Effective Amendment No. 1 on June
10, 1994.
c. Not applicable
d.1 Management Agreement between Registrant on behalf of
the Smith Barney Large Cap Value Portfolio (formerly
known as Smith Barney Income and Growth Portfolio)
and Mutual Management Corp. ("MMC") is incorporated
by reference to Exhibit 5(a) to Pre-Effective
Amendment No. 1 on June 10, 1994.
d.2 Management Agreement between Registrant on behalf of
the Alliance Growth Portfolio and MMC is incorporated
by reference to Exhibit 5(b) to Pre-Effective
Amendment No. 1 on June 10, 1994. Transfer and
Assumption of Management Agreement to Travelers
Investment Adviser, Inc. ("TIA").
d.3 Management Agreement between Registrant on behalf of
the Van Kampen American Capital Enterprise Portfolio
and MMC is incorporated by reference to Exhibit 5(c)
to Pre-Effective Amendment No. 1 on June 10, 1994.
Transfer and Assumption of Management Agreement to
TIA.
d.4 Management Agreement between Registrant on behalf of
the Smith Barney International Equity Portfolio and
MMC is incorporated by reference to Exhibit 5(d) to
Pre-Effective Amendment No. 1 on June 10, 1994.
d.5 Management Agreement between Registrant on behalf of
the Smith Barney Pacific Basin Portfolio and MMC is
incorporated by reference to Exhibit 5(e) to Pre-
Effective Amendment No. on June 10, 1994.
d.6 Management Agreement between Registrant on behalf of
the TBC Managed Income Portfolio and MMC is
incorporated by reference to Exhibit 5(f) to Pre-
Effective Amendment No. 1 on June 10, 1994 to TIA.
Transfer and Assumption of Management Agreement to
TIA.
d.7 Management Agreement between Registrant on behalf of
the Putnam Diversified Income Portfolio and MMC is
incorporated by reference to Exhibit 5(g) to Pre-
Effective Amendment No. 1 on June 10, 1994. Transfer
and Assumption of Management Agreement to TIA.
d.8 Management Agreement between Registrant on behalf of
the GT Global Strategic Income Portfolio and MMC is
incorporated by reference to Exhibit 5(h) to Pre-
Effective Amendment No. 1 on June 10, 1994. Transfer
and Assumption of Management Agreement to TIA.
d.9 Management Agreement between Registrant on behalf of
the Smith Barney High Income Portfolio and MMC is
incorporated by reference to Exhibit 5(i) to Pre-
Effective Amendment No. 1 on June 10, 1994.
d.10 Management Agreement between Registrant on behalf of
the MFS Total Return Portfolio and MMC is
incorporated by reference to Exhibit 5(j) to Pre-
Effective Amendment No. 1 on June 10, 1994. Transfer
and Assumption of Management Agreement to TIA.
d.11 Management Agreement between Registrant on behalf of
the Smith Barney Money Market Portfolio and MMC is
incorporated by reference to Exhibit 5(k) to Pre-
Effective Amendment No. 1 on June 10, 1994.
d.12 Subadvisory Agreement among Registrant, MMC and
Alliance Capital Management L.P. is incorporated by
reference to Exhibit 5(l) to Pre-Effective Amendment
No. 1 on June 10, 1994. Transfer and Assumption of
Subadvisory Agreement to TIA.
d.13 Subadvisory Agreement among Registrant, MMC and
American Capital Asset Management, Inc. is
incorporated by reference to Exhibit 5(m) to Pre-
Effective Amendment No. 1 on June 10, 1994. Transfer
and Assumption of Subadvisory Agreement to TIA.
d.14 Subadvisory Agreement among Registrant, MMC and The
Boston Company Asset Management, Inc. is incorporated
by reference to Exhibit 5(n) to Pre-Effective
Amendment No. 1 on June 10, 1994. Transfer and
Assumption of Subadvisory Agreement to TIA.
d.15 Subadvisory Agreement among Registrant, MMC and
Putnam Investment Management, Inc. is incorporated by
reference to Exhibit 5(o) to Pre-Effective Amendment
No. 1 on June 10, 1994. Transfer and Assumption of
Subadvisory Agreement to TIA.
d.16 Subadvisory Agreement among Registrant, MMC and G.T.
Capital Management, Inc. is incorporated by reference
to Exhibit 5(p) to Pre-Effective Amendment No. 1 on
June 10, 1994. Transfer and Assumption of
Subadvisory Agreement to TIA.
d.17 Subadvisory Agreement among Registrant, MMC and
Massachusetts Financial Services Company is
incorporated by reference to Exhibit 5(q) to Pre-
Effective Amendment No. 1 on June 10, 1994. Transfer
and Assumption of Subadvisory Agreement to TIA.
d.18 Subadvisory Agreement between MMC and Smith Barney
Inc. is incorporated by reference to Exhibit 5(r) to
Pre-Effective Amendment No. 1 on June 10, 1994.
Transfer and Assumption of Subadvisory Agreement to
TIA.
d.19 Management Agreement among Registrant, MMC and AIM
Capital Management, Inc. is incorporated by reference
to Post-Effective Amendment No. 4 filed on February
28, 1996. Transfer and Assumption of Subadvisory
Agreement to TIA.
d.20 Subadvisory Agreement among Registrant, MMC and AIM
Capital Management, Inc. is incorporated by reference
to Post-Effective Amendment No. 4 filed on February
28, 1996.
d.21 Form of Management Agreement between Registrant on
behalf of its Smith Barney Large Capitalization
Growth Portfolio and MMC is incorporated by reference
to Exhibit 5(u) to Post-Effective Amendment No. 9
filed on February 27, 1998..
d.22 Form of Management Agreement between Registrant on
behalf of Travelers Managed Income Portfolio and
Travelers Asset Management International Corporation
files herewith.
e. Distribution Agreement between Registrant and Smith
Barney Inc. is incorporated by reference to Exhibit 6
to Pre-Effective Amendment No. 1.
f. Not applicable.
g.1 Custodian Agreement between Registrant and PNC Bank,
National Association.**
g.2 Global Custody Agreement between Barclays Bank PLC
and PNC Bank.**
g.3 Custodian Agreement between Registrant and Morgan
Guaranty Trust Company of New York is incorporated by
reference to Exhibit 8(c) to Post-Effective Amendment
No. 4 filed on February 28, 1996.
g.4 Global Custody Agreement between The Chase Manhattan
Bank and the Customer.
h.1 Transfer Agency Agreement between Registrant and
First Data Investor Services Group, Inc., (formerly
The Shareholder Services Group Inc.) is incorporated
by reference to Exhibit (9) to Post-Effective
Amendment No. 4 filed on February 28, 1996.
h.2 Transfer Agency Agreement between Travelers Series
Fund Inc. and First Data Investor Services Group,
Inc.
i. Opinion and Consent of Sullivan & Cromwell is
incorporated by reference to Exhibit 10 to Pre-
Effective Amendment No. 1 on June 10, 1994.
j. Auditors' Consent filed herewith.
k. Not applicable.
l. Subscription Agreement between Registrant and The
Travelers, Inc.**
m.1 Form of Distribution Agreement between the Registrant
and CFBDS, Inc dated October 8, 1998 filed herewith.
m.2 not applicable
n. Financial Data Schedule.**
o. not applicable
_________________________
** To be filed by Amendment.
Item 24. Persons Controlled by or under Common Control with
Registrant.
The Registrant is not controlled directly or indirectly by
any person. Information with respect to
the Registrant's investment manager and each subadviser is
set forth under the caption
"Management" in the prospectus included in Part A of this
Amendment to
the Registration Statement on Form N-1A.
Item 25. Indemnification.
Reference is made to ARTICLE IX of Registrant's Charter for
a complete statement of its terms.
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant
to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant
in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed
by the final adjudication of such issue."
Item 26. Business and other Connections of the Manager and each
Subadviser.
See the material under the caption "Management" included in
Part A (Prospectus) of this Registration Statement and the
material appearing under the caption "Management
Agreements" included in Part B (Statement of Additional
Information) of this Registration Statement.
Information as to the Directors and Officers of Mutual
Management Corp. (formerly known as Smith Barney Mutual
Funds Management Inc.) is included in its Form ADV (File
No. 801-8314), filed with the Commission, which is
incorporated herein by reference thereto.
Information as to the Directors and Officers of Travelers
Investment Adviser is included in its Form ADV (File No.
801-52365), filed with the Commission, which is
incorporated herein by reference thereto.
Information as to the Directors and Officers of Travelers
Asset Management International Corporation is included in
its Form ADV File No. 801-17003, filed with the Commission,
which is incorporated herein by reference thereto.
Information as to the Directors and Officers of Alliance
Capital Management L.P. is included in its Form ADV (File
No. 801-32361), filed with the Commission, which is
incorporated herein by reference thereto.
Information as to the Directors and Officers of The Boston
Company Asset Management Inc. is included in its Form ADV
(File No. 801-6829), filed with the Commission, which is
incorporated herein by reference thereto.
Information as to the Directors and Officers of Putnam
Investment Management, Inc. is included in its Form ADV
(File No. 801-07974), filed with the Commission, which is
incorporated herein by reference thereto.
Information as to the Directors and Officers of INVESCO
(NY), Inc. (formerly known as LGT Capital Management, Inc.)
is included in its Form ADV (File No. 801-10254), filed
with the Commission, which is incorporated herein by
reference thereto.
Information as to the Directors and Officers of Van Kampen
American Capital Asset Management, Inc. is included in its
Form ADV (File No. 801-01669), filed with the Commission,
which is incorporated herein by reference thereto.
Information as to the Directors and Officers of
Massachusetts Financial Services Company is included in its
Form ADV (File No. 801-07352 and 801-17352), filed with the
Commission, which is incorporated herein by reference
thereto.
Information as to the Directors and Officers of AIM Capital
Management, Inc. is included in its Form ADV (File No. 801-
15211), with the Commission, which is incorporated herein
by reference thereto.
Item 27. Principal Underwriters
(a) CFBDS, Inc. the Registrant's Distributor, is also
the distributor for
CitiFundsSM International Growth & Income Portfolio,
CitiFundsSM International Equity Portfolio,
CitiFundsSM Large Cap Growth Portfolio,
CitiFundsSM Intermediate Income Portfolio,
CitiFundsSM Short-Term U.S. Government Income
Portfolio,
CitiFundsSM Emerging Asian Markets Equity Portfolio,
CitiFundsSM U.S. Treasury Reserves, CitiFundsSM Cash
Reserves,
CitiFundsSM Premium U.S. Treasury Reserves,
CitiFundsSM Premium Liquid Reserves, CitiFundsSM
Institutional U.S.
Treasury Reserves, CitiFundsSM Institutional Liquid
Reserves,
SM Institutional Cash Reserves, CitiFundsSM Tax Free
Reserves,
CitiFundsSM Institutional Tax Free Reserves,
CitiFundsSM California Tax Free Reserves,
CitiFundsSM Connecticut Tax Free Reserves,
CitiFundsSM New York Tax Free Reserves, CitiFundsSM
Balanced Portfolio,
CitiFundsSM Small Cap Value Portfolio, CitiFundsSM
Growth & Income
Portfolio,
CitiFundsSM Small Cap Growth Portfolio, CitiFundsSM
National
Tax Free Income Portfolio, CitiFundsSM New York Tax
Free Income
Portfolio,
CitiSelect VIP Folio 200, Citiselect VIP Folio 300,
CitiSelect VIP Folio 400, CitiSelect VIP Folio 500,
CitiFundsSM Small Cap Growth VIP Portfolio,
CitiSelect Folio 200,
CitiSelect Folio 300, CitiSelect Folio 400, and
CitiSelect Folio 500.
CFBDS is also the placement agent for Large Cap Value
Portfolio,
International Portfolio, Foreign Bond Portfolio,
Intermediate Income Portfolio, Short-Term Portfolio,
Growth & Income Portfolio, Large Cap Growth
Portfolio,
Small Cap Growth Portfolio, International Equity
Portfolio,
Balanced Portfolio, Government Income Portfolio,
Emerging
Asian Markets Equity Portfolio, Tax Free Reserves
Portfolio,
Cash Reserves Portfolio and U.S. Treasury Reserves
Portfolio.
CFBDS, Inc. is also the distributor for the
following
Smith Barney Mutual Fund registrants:
Concert Investment Series
Consulting Group Capital Markets Funds
Greenwich Street Series Fund
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Concert Allocation Series Inc.
Smith Barney Equity Funds
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.
Smith Barney Income Funds
Smith Barney Institutional Cash Management Fund, Inc.
Smith Barney Investment Trust
Smith Barney Investment Funds Inc.
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc.
Smith Barney Muni Funds
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Natural Resources Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund Inc.
Smith Barney Principal Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust
Smith Barney Variable Account Funds
Smith Barney World Funds, Inc.
Travelers Series Fund Inc.
And various series of unit investment trusts.
CFBDS, Inc. is also the distributor for the following
Salomon Brothers funds;
Salomon Brothers Opportunity Fund Inc
Salomon Brothers Investors Fund Inc
Salomon Brothers Capital Fund Inc
Salomon Brothers Series Funds Inc
Salomon Brothers Institutional Series Funds Inc
Salomon Brothers Variable Series Funds Inc
(b) The information required by this Item 27 with
respect to each director, officer and partner of
CFBDS, Inc. is incorporated by reference to Schedule
A of Form BD filed by CFBDS, Inc. pursuant to the
Securities Exchange Act of 1934 (SEC File No. 8-
32417).
(c) Not applicable.
Item 28. Location of Accounts and Records.
PNC Bank, National Association, 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, will maintain the
custodian records for the Smith Barney Income and Growth
Portfolio, Alliance Growth Portfolio, AIM Capital
Appreciation Portfolio, Van Kampen American Capital
Enterprise Portfolio, Travelers Managed Income Portfolio,
Putnam Diversified Income Portfolio, Smith Barney High
Income Portfolio, MFS Total Return Portfolio, Smith Barney
Large Capitalization Growth Portfolio and Smith Barney
Money Market Portfolio and The Chase Manhattan Bank, Chase
MetroTech Center, Brooklyn, NY 11245 will maintain the
custodian records for the Smith Barney International Equity
Portfolio, Smith Barney Pacific Basin Portfolio and GT
Global Strategic Income Portfolio, each as required by
Section 31 (a) of the Investment Company Act of 1940, as
amended (the "1940 Act").
First Data Investor Services Group, Inc., (formerly The
Shareholder Services Group Inc.) 53 State Street, Boston,
Massachusetts 02109-2873, will maintain the shareholder
servicing agent records, required by Section 31 (a) of the
1940 Act.
All other records required by Section 31 (a) of the 1940
Act are maintained at the offices of the Registrant at 388
Greenwich Street, New York, New York 10013 (and preserved
for the periods specified by Rule 31a-2 of the 1940 Act).
Item 29. Management Services.
Not Applicable.
Item 30. Undertakings.
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, duly caused this Post-
Effective Amendment to its Registration Statement to be signed on
its behalf by the undersigned and where applicable, the true and
lawful attorney-in-fact, thereto duly authorized, in the City of
New York, and State of New York on the 23rd of December, 1998.
TRAVELERS SERIES FUND INC.
By: /s/Heath B. McLendon
Heath B. McLendon
Chairman of the Board,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been
signed below by the following persons in the capacities and on
the date indicated.
Signature
Title
Date
/s/Heath B.
McLendon
(Heath B.
McLendon)
Chairman of the
Board, President and
Chief Executive
Officer
December 23, 1998
/s/ Abraham E.
Cohen
Director
December 23, 1998
(Abraham E. Cohen
/s/ Victor K.
Atkins*
Director
December 23, 1998
(Victor K.
Atkins)
/s/ Robert A.
Frankel*
Director
December 23, 1998
(Robert A.
Frankel)
/s/ Rainer
Greeven*
Director
December 23, 1998
(Rainer Greeven)
/s/ Susan M.
Heilbron*
Director
December 23, 1998
(Susan M.
Heilbron)
/s/Lewis E.
Daidone
Treasurer
December 23, 1998
(Lewis E.
Daidone)
(Principal Financial
and Accounting
Officer)
_________________________________________________________________
___________________
*Signed by Lewis E. Daidone, their duly authorized attorney-in-
fact, pursuant to power of attorney dated June 8, 1994.
By: /s/Lewis E. Daidone December 23, 1998
Lewis E. Daidone
EXHIBIT INDEX
d.22 Management Agreement between Registrant and Travelers
Managed Income Portfolio and Travelers Asset Management
International Corporation.
j. Auditors' Consent
m.1 Form of Distribution Agreement between the Registrant and
CFBDS, Inc dated October 8, 1998.
n. Financial Data Schedules*
* To be filed by further amendment
FORM OF MANAGEMENT AGREEMENT
TRAVELERS SERIES FUND INC.
(TRAVELERS MANAGED INCOME PORTFOLIO)
November , 1998
TRAVELERS ASSET MANAGEMENT INTERNATIONAL CORP.
One Tower Square--10PB
Hartford, CT 06183
Dear Sirs:
Travelers Series Fund Inc. (the "Company"), a corporation organized under
the laws of the State of Maryland, on behalf of the Travelers Managed Income
Portfolio (the "Portfolio"), confirms its agreement with Travelers Asset
Management International Corp. (the "Manager"), as follows:
1. INVESTMENT DESCRIPTION; APPOINTMENT
The Company desires to employ its capital relating to the Portfolio by
investing and reinvesting in investments of the kind and in accordance with
the investment objective(s), policies and limitations specified in the
prospectus (the "Prospectus") and the statement of additional information
(the "Statement") filed with the Securities and Exchange Commission as part
of the Company's Registration Statement on Form N-1A on February 23, 1994 as
amended from time to time, and in the manner and to the extent as may from
time to time be approved by the Board of Directors of the Company (the
"Board"). Copies of the Prospectus and the Statement have been or will be
submitted to the Manager. The Company agrees promptly to provide copies of
all amendments to the Prospectus and the Statement to the Manager on an on-
going basis. The Company desires to employ and hereby appoints the Manager to
act as manager of the Portfolio. The Manager accepts the appointment and
agrees to furnish the services for the compensation set forth below.
2. SERVICES AS INVESTMENT MANAGER
Subject to the supervision, direction and approval of the Board of the
Company, the Manager shall (a) maintain compliance procedures for the
Portfolio that it reasonably believes are adequate to ensure the Portfolio's
compliance with (i) the Investment Company Act of 1940, as amended (the "1940
Act") and the rules and regulations promulgated thereunder and (ii) the
Portfolio's investment objective(s), policies and restrictions as stated in
the Prospectus and the Statement; (b) make investment decisions for the
Portfolio; (c) place purchase and sale orders for portfolio transactions on
behalf of the Portfolio; (d) employ professional portfolio managers and
securities analysts who provide research services to the Portfolio; and
(e) administer the Portfolio's corporate affairs and, in connection
therewith, furnish the Portfolio with office facilities and
with clerical, bookkeeping and recordkeeping services at such
office facilities. In providing those services, the Manager will conduct a
continual program of investment, evaluation and, if appropriate, sale and
reinvestment of the Portfolio's assets.
3. BROKERAGE
In selecting brokers or dealers (including, if permitted by applicable law,
Salomon Smith Barney Inc.) to execute transactions on behalf of the
Portfolio, the Manager will seek the best overall terms available. In
assessing the best overall terms available for any transaction, the Manager
will consider factors it deems relevant, including, but not limited to, the
breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the specific transaction and on
a continuing basis. In selecting brokers or dealers to execute a particular
transaction, and in evaluating the best overall terms available, the Manager
is authorized to consider the brokerage and research services (as those terms
are defined in Section 28(e) of the Securities Exchange Act of 1934),
provided to the Portfolio and/or other accounts over which the Manager or its
affiliates exercise investment discretion. Nothing in this paragraph shall be
deemed to prohibit the Manager from paying an amount of commission for
effecting a securities transaction in excess of the amount of commission
another member of an exchange, broker, or dealer would have charged for
effecting that transaction, if the Manager determined in good faith that
such amount of commission was reasonable in relation to the value of the
brokerage and research services provided by such member, broker, or dealer,
viewed in terms of either that particular transaction or its overall
responsibilities with respect to the Portfolio and/or other accounts
over which the Manager or its affiliates exercise investment discretion.
4. INFORMATION PROVIDED TO THE COMPANY
The Manager shall keep the Company informed of developments materially
affecting the Portfolio, and shall, on its own initiative, furnish the
Company from time to time with whatever information the Manager believes
is appropriate for this purpose.
5. STANDARD OF CARE
The Manager shall exercise its best judgment and shall act in good faith in
rendering the services listed in paragraphs 2 and 3 above. The Manager shall
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Company in connection with the matters to which this
Agreement relates, provided that nothing in this Agreement shall be deemed
to protect or purport to protect the Manager against any liability to the
Company or the shareholders of the Portfolio to which the Manager would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence on its part in the performance of its duties or by reason of the
Manager's reckless disregard of its obligations and duties under this
Agreement.
6. COMPENSATION
In consideration of the services rendered pursuant to this Agreement, the
Portfolio will pay the Manager an annual fee calculated at the rate of 0.65%
of the Portfolio's average daily net assets; the fee is calculated daily and
paid monthly. The fee for the period from the Effective Date (defined below)
of the Agreement to the end of the month during which the Effective Date
occurs shall be prorated according to the proportion that such period bears
to the full monthly period. Upon any termination of this Agreement before the
end of a month, the fee for such part of that month shall be prorated
according to the proportion that such period bears to the full monthly period
and shall be payable upon the date of termination of this Agreement. For the
purpose of determining fees payable to the Manager, the value of the
Portfolio's net assets shall be computed at the times and in the manner
specified in the Prospectus and/or the Statement.
7. EXPENSES
The Manager shall bear all expenses (excluding brokerage costs, custodian
fees, auditors fees or other expenses to be borne by the Portfolio or the
Company) in connection with the performance of its services under this
Agreement. The Portfolio shall bear certain other expenses to be incurred in
its operation, including, but not limited to investment advisory, any sub-
advisory and any administration fees; fees for necessary professional and
brokerage services; fees for any pricing service; the costs of regulatory
compliance; and pro rata costs associated with maintaining the Company's
legal existence and shareholder relations. All other expenses not
specifically assumed by the Manager hereunder on behalf of the Portfolio are
borne by the Company.
8. REDUCTION OF FEE
If in any fiscal year the aggregate expenses of the Portfolio (including
fees pursuant to this Agreement and the Portfolio's administration
agreements, if any, but excluding interest, taxes, brokerage and
extraordinary expenses) exceed the expense limitation of any state
having jurisdiction over the Portfolio, the Manager shall reduce its fee to
the Portfolio by the proportion of such excess expense
equal to the proportion that its fee hereunder bears to the aggregate of fees
paid by the Portfolio for investment management, advice and administration in
that year, to the extent required by state law. A fee reduction pursuant to
this paragraph 8, if any, shall be estimated, reconciled and paid on a
monthly basis. The Company confirms that, as of the date of this Agreement,
no such expense limitation is applicable to the Portfolio.
9. SERVICES TO OTHER COMPANIES OR ACCOUNTS
The Company understands that the Manager now acts, will continue to act and
may act in the future as investment manager or adviser to fiduciary and other
managed accounts, and as investment manager or adviser to other investment
companies, and the Company has no objection to the Manager's so acting,
provided that whenever the Portfolio and one or more other investment
companies or accounts managed or advised by the Manager have available funds
for investment, investments suitable and appropriate for each will be
allocated in accordance with a formula believed to be equitable to each
company and account. The Portfolio recognizes that in some cases this
procedure may adversely affect the size of the position obtainable for the
Portfolio. In addition, the Portfolio understands that the persons employed
by the Manager to assist in the performance of the Manager's duties under
this Agreement will not devote their full time to such service and nothing
contained in this Agreement shall be deemed to limit or restrict the right of
the Manager or any affiliate of the Manager to engage in and devote time and
attention to other businesses or to render services of whatever kind or
nature.
10. TERM OF AGREEMENT
This Agreement shall become effective December 1, 1998 (the "Effective
Date") and shall continue for an initial two-year term and shall continue
thereafter so long as such continuance is specifically approved at least
annually as required by the 1940 Act. This Agreement is terminable, without
penalty, on 60 days' written notice, by the Board of the Company or by vote
of holders of a majority (as defined in the 1940 Act and the rules hereunder)
of the outstanding voting securities of the Portfolio, or upon 60 days'
written notice, by the Manager. This Agreement will also terminate
automatically in the event of its assignment (as defined in the 1940 Act and
the rules thereunder).
11. REPRESENTATION BY THE COMPANY
The Company represents that a copy of the Articles of Incorporation is on
file with the Secretary of the State of Maryland.
If the foregoing is in accordance with your understanding, kindly indicate
your acceptance of this Agreement by signing and returning the enclosed copy
of this Agreement.
Very truly yours,
Travelers Series Fund Inc.
By:__________________________________
Name:
Title:
Accepted:
Travelers Asset Management International Corp.
By:__________________________________
Name:
Title:
A-4
TRAVELERS SERIES FUND INC.
DISTRIBUTION AGREEMENT
October 8, 1998
CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Dear Sirs:
This is to confirm that, in consideration of the agreements
hereinafter contained, the above-named investment company (the
"Fund") has agreed that you shall be, for the period of this
Agreement, the non-exclusive principal underwriter and distributor
of shares of the Fund and each Series of the Fund set forth on
Exhibit A hereto, as such Exhibit may be revised from time to time
(each, including any shares of the Fund not designated by series,
a "Series"). For purposes of this Agreement, the term "Shares"
shall mean shares of the each Series, or one or more Series, as
the context may require.
1. Services as Principal Underwriter and Distributor
1.1 You will act as agent for the distribution of
Shares covered by, and in accordance with, the registration
statement, prospectus and statement of additional information then
in effect under the Securities Act of 1933, as amended (the "1933
Act"), and the Investment Company Act of 1940, as amended (the
"1940 Act"), and will transmit or cause to be transmitted promptly
any orders received by you or those with whom you have sales or
servicing agreements for purchase or redemption of Shares to the
Transfer and Dividend Disbursing Agent for the Fund of which the
Fund has notified you in writing.
1.2 You agree to use your best efforts to solicit
orders for the sale of Shares. It is contemplated that you will
enter into sales or servicing agreements with registered
securities dealers and banks and into servicing agreements with
financial institutions and other industry professionals, such as
investment advisers, accountants and estate planning firms. In
entering into such agreements, you will act only on your own
behalf as principal underwriter and distributor. You will not be
responsible for making any distribution plan or service fee
payments pursuant to any plans the Fund may adopt or agreements it
may enter into.
1.3 You shall act as principal underwriter and
distributor of Shares in compliance with all applicable laws,
rules, and regulations, including, without limitation, all rules
and regulations made or adopted from time to time by the
Securities and Exchange Commission (the "SEC") pursuant to the
1933 Act or the 1940 Act or by any securities association
registered under the Securities Exchange Act of 1934, as amended.
1.4 Whenever in their judgment such action is
warranted for any reason, including, without limitation, market,
economic or political conditions, the Fund's officers may decline
to accept any orders for, or make any sales of, any Shares until
such time as those officers deem it advisable to accept such
orders and to make such sales and the Fund shall advise you
promptly of such determination.
2. Duties of the Fund
2.1 The Fund agrees to pay all costs and expenses in
connection with the registration of Shares under the 1933 Act, and
all expenses in connection with maintaining facilities for the
issue and transfer of Shares and for supplying information, prices
and other data to be furnished by the Fund hereunder, and all
expenses in connection with the preparation and printing of the
Fund's prospectuses and statements of additional information for
regulatory purposes and for distribution to shareholders; provided
however, that nothing contained herein shall be deemed to require
the Fund to pay any of the costs of advertising or marketing the
sale of Shares.
2.2 The Fund agrees to execute any and all documents
and to furnish any and all information and otherwise to take any
other actions that may be reasonably necessary in the discretion
of the Fund's officers in connection with the qualification of
Shares for sale in such states and other U.S. jurisdictions as the
Fund may approve and designate to you from time to time, and the
Fund agrees to pay all expenses that may be incurred in connection
with such qualification. You shall pay all expenses connected
with your own qualification as a securities broker or dealer under
state or Federal laws and, except as otherwise specifically
provided in this Agreement, all other expenses incurred by you in
connection with the sale of Shares as contemplated in this
Agreement.
2.3 The Fund shall furnish you from time to time, for
use in connection with the sale of Shares, such information
reports with respect to the Fund or any relevant Series and the
Shares as you may reasonably request, all of which shall be signed
by one or more of the Fund's duly authorized officers; and the
Fund warrants that the statements contained in any such reports,
when so signed by the Fund's officers, shall be true and correct.
The Fund also shall furnish you upon request with (a) the reports
of annual audits of the financial statements of the Fund for each
Series made by independent certified public accountants
retained by the Fund for such purpose; (b) semi-annual unaudited
financial statements pertaining to each Series; (c) quarterly
earnings statements prepared by the Fund; (d) a monthly itemized
list of the securities in each Series' portfolio; (e) monthly
balance sheets as soon as practicable after the end of each month;
(f) the current net asset value and offering price per share for
each Series on each day such net asset value is computed and (g)
from time to time such additional information regarding the
financial condition of each Series of the Fund as you may
reasonably request.
3. Representations and Warranties
The Fund represents to you that all registration statements,
prospectuses and statements of additional information filed by the
Fund with the SEC under the 1933 Act and the 1940 Act with respect
to the Shares have been prepared in conformity with the
requirements of said Acts and the rules and regulations of the SEC
thereunder. As used in this Agreement, the terms "registration
statement", "prospectus" and "statement of additional information"
shall mean any registration statement, prospectus and statement of
additional information filed by the Fund with the SEC and any
amendments and supplements thereto filed by the Fund with the SEC.
The Fund represents and warrants to you that any registration
statement, prospectus and statement of additional information,
when such registration statement becomes effective and as such
prospectus and statement of additional information are amended or
supplemented, will include at the time of such effectiveness,
amendment or supplement all statements required to be contained
therein in conformance with the 1933 Act, the 1940 Act and the
rules and regulations of the SEC; that all statements of material
fact contained in any registration statement, prospectus or
statement of additional information will be true and correct when
such registration statement becomes effective; and that neither
any registration statement nor any prospectus or statement of
additional information when such registration statement becomes
effective will include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading to a
purchaser of the Fund's Shares. The Fund may, but shall not be
obligated to, propose from time to time such amendment or
amendments to any registration statement and such supplement or
supplements to any prospectus or statement of additional
information as, in the light of future developments, may, in the
opinion of the Fund, be necessary or advisable. If the Fund shall
not propose such amendment or amendments and/or supplement or
supplements within fifteen days after receipt by the Fund of a
written request from you to do so, you may, at your option,
terminate this Agreement or decline to make offers of the Fund's
Shares until such amendments are made. The Fund shall not file
any amendment to any registration statement or supplement to any
prospectus or statement of additional information without giving
you reasonable notice thereof in advance; provided, however, that
nothing contained in this Agreement shall in any way limit the
Fund's right to file at any time such amendments to any
registration statement and/or supplements to any prospectus or
statement of additional information, of whatever character, as the
Fund may deem advisable, such right being in all respects absolute
and unconditional.
4. Indemnification
4.1 The Fund authorizes you to use any prospectus or
statement of additional information furnished by the Fund from
time to time, in connection with the sale of Shares. The Fund
agrees to indemnify, defend and hold you, your several officers
and directors, and any person who controls you within the meaning
of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including
the cost of investigating or defending such claims, demands or
liabilities and any such counsel fees incurred in connection
therewith) which you, your officers and directors, or any such
controlling person, may incur under the 1933 Act or under common
law or otherwise, arising out of or based upon any untrue
statement, or alleged untrue statement, of a material fact
contained in any registration statement, any prospectus or any
statement of additional information or arising out of or based
upon any omission, or alleged omission, to state a material fact
required to be stated in any registration statement, any
prospectus or any statement of additional information or necessary
to make the statements in any of them not misleading; provided,
however, that the Fund's agreement to indemnify you, your officers
or directors, and any such controlling person shall not be deemed
to cover any claims, demands, liabilities or expenses arising out
of any statements or representations made by you or your
representatives or agents other than such statements and
representations as are contained in any prospectus or statement of
additional information and in such financial and other statements
as are furnished to you pursuant to paragraph 2.3 of this
Agreement; and further provided that the Fund's agreement to
indemnify you and the Fund's representations and warranties herein
before set forth in paragraph 3 of this Agreement shall not be
deemed to cover any liability to the Fund or its shareholders to
which you would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of
your duties, or by reason of your reckless disregard of your
obligations and duties under this Agreement. The Fund's agreement
to indemnify you, your officers and directors, and any such
controlling person, as aforesaid, is expressly conditioned upon
the Fund's being notified of any action brought against you, your
officers or directors, or any such controlling person, such
notification to be given by letter or by telegram addressed to the
Fund at its principal office in New York, New York and sent to the
Fund by the person against whom such action is brought, within ten
days after the summons or other first legal process shall have
been served. The failure so to notify the Fund of any such action
shall not relieve the Fund from any liability that the Fund may
have to the person against whom such action is brought by reason
of any such untrue, or alleged untrue, statement or omission, or
alleged omission, otherwise than on account of the Fund's
indemnity agreement contained in this paragraph 4.1. The Fund
will be entitled to assume the defense of any suit brought to
enforce any such claim, demand or liability, but, in such case,
such defense shall be conducted by counsel of good standing chosen
by the Fund. In the event the Fund elects to assume the defense
of any such suit and retains counsel of good standing, the
defendant or defendants in such suit shall bear the fees and
expenses of any additional counsel retained by any of them; but if
the Fund does not elect to assume the defense of any such suit,
the Fund will reimburse you, your officers and directors, or the
controlling person or persons named as defendant or defendants in
such suit, for the fees and expenses of any counsel retained by
you or them. The Fund's indemnification agreement contained in
this paragraph 4.1 and the Fund's representations and warranties
in this Agreement shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of
you, your officers and directors, or any controlling person, and
shall survive the delivery of any of the Fund's Shares. This
agreement of indemnity will inure exclusively to your benefit, to
the benefit of your several officers and directors, and their
respective estates, and to the benefit of the controlling persons
and their successors. The Fund agrees to notify you promptly of
the commencement of any litigation or proceedings against the Fund
or any of its officers or Board members in connection with the
issuance and sale of any of the Fund's Shares.
4.2 You agree to indemnify, defend and hold the Fund,
its several officers and Board members, and any person who
controls the Fund within the meaning of Section 15 of the 1933
Act, free and harmless from and against any and all claims,
demands, liabilities and expenses (including the costs of
investigating or defending such claims, demands or liabilities and
any counsel fees incurred in connection therewith) that the Fund,
its officers or Board members or any such controlling person may
incur under the 1933 Act, or under common law or otherwise, but
only to the extent that such liability or expense incurred by the
Fund, its officers or Board members, or such controlling person
resulting from such claims or demands shall arise out of or be
based upon (a) any unauthorized sales literature, advertisements,
information, statements or representations or (b) any untrue, or
alleged untrue, statement of a material fact contained in
information furnished in writing by you to the Fund and used in
the answers to any of the items of the registration statement or
in the corresponding statements made in the prospectus or
statement of additional information, or shall arise out of or be
based upon any omission, or alleged omission, to state a material
fact in connection with such information furnished in writing by
you to the Fund and required to be stated in such answers or
necessary to make such information not misleading. Your agreement
to indemnify the Fund, its officers or Board members, and any such
controlling person, as aforesaid, is expressly conditioned upon
your being notified of any action brought against the Fund, its
officers or Board members, or any such controlling person, such
notification to be given by letter or telegram addressed to you at
your principal office in Boston, Massachusetts and sent to you by
the person against whom such action is brought, within ten days
after the summons or other first legal process shall have been
served. You shall have the right to control the defense of such
action, with counsel of your own choosing, satisfactory to the
Fund, if such action is based solely upon such alleged
misstatement or omission on your part or with the Fund's consent,
and in any event the Fund, its officers or Board members or such
controlling person shall each have the right to participate in the
defense or preparation of the defense of any such action with
counsel of its own choosing reasonably acceptable to you but shall
not have the right to settle any such action without your consent,
which will not be unreasonably withheld. The failure to so notify
you of any such action shall not relieve you from any liability
that you may have to the Fund, its officers or Board members, or
to such controlling person by reason of any such untrue, or
alleged untrue, statement or omission, or alleged omission,
otherwise than on account of your indemnity agreement contained in
this paragraph 4.2. You agree to notify the Fund promptly of the
commencement of any litigation or proceedings against you or any
of your officers or directors in connection with the issuance and
sale of any of the Fund's Shares.
5. Effectiveness of Registration
No Shares shall be offered by either you or the Fund under
any of the provisions of this Agreement and no orders for the
purchase or sale of such Shares under this Agreement shall be
accepted by the Fund if and so long as the effectiveness of the
registration statement then in effect or any necessary amendments
thereto shall be suspended under any of the provisions of the 1933
Act, or if and so long as a current prospectus as required by
Section 5(b) (2) of the 1933 Act is not on file with the SEC;
provided, however, that nothing contained in this paragraph 5
shall in any way restrict or have an application to or bearing
upon the Fund's obligation to repurchase its Shares from any
shareholder in accordance with the provisions of the Fund's
prospectus, statement of additional information or charter
documents, as amended from time to time.
6. Offering Price
Shares of any class of any Series of the Fund offered for
sale by you shall be offered for sale at a price per share (the
"offering price") equal to (a) their net asset value (determined
in the manner set forth in the Fund's charter documents and the
then-current prospectus and statement of additional information)
plus (b) a sales charge, if applicable, which shall be the
percentage of the offering price of such Shares as set forth in
the Fund's then-current prospectus relating to such Series. In
addition to or in lieu of any sales charge applicable at the time
of sale, Shares of any class of any Series of the Fund offered for
sale by you may be subject to a contingent deferred sales charge
as set forth in the Fund's then-current prospectus and statement
of additional information. You shall be entitled to receive any
sales charge levied at the time of sale in respect of the Shares
without remitting any portion to the Fund. Any payments to a
broker or dealer through whom you sell Shares shall be governed by
a separate agreement between you and such broker or dealer and the
Fund's then-current prospectus and statement of additional
information
7. Notice to You
The Fund agrees to advise you immediately in writing:
(a) of any request by the SEC
for amendments to the registration
statement, prospectus or statement of
additional information then in effect
or for additional information;
(b) in the event of the issuance
by the SEC of any stop order suspending
the effectiveness of the registration
statement, prospectus or statement of
additional information then in effect
or the initiation of any proceeding for
that purpose;
(c) of the happening of any
event that makes untrue any statement
of a material fact made in the
registration statement, prospectus or
statement of additional information
then in effect or that requires the
making of a change in such registration
statement, prospectus or statement of
additional
information in order to make the
statements therein not misleading; and
(d) of all actions of the SEC
with respect to any amendment to the
registration statement, or any
supplement to the prospectus or
statement of additional information
which may from time to time be filed
with the SEC.
8. Term of the Agreement
This Agreement shall become effective on the date hereof,
shall have an initial term of one year from the date hereof, and
shall continue for successive annual periods thereafter so long as
such continuance is specifically approved at least annually by (a)
the Fund's Board or (b) by a vote of a majority (as defined in the
1940 Act) of the Fund's outstanding voting securities, provided
that in either event the continuance is also approved by a
majority of the Board members of the Fund who are not interested
persons (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. This Agreement is terminable,
without penalty, on 30 days' notice by the Fund's Board or by vote
of holders of a majority of the relevant Series outstanding voting
securities, or on 90 days' notice by you. This Agreement will
also terminate automatically, as to the relevant Series, in the
event of its assignment (as defined in the 1940 Act and the rules
and regulations thereunder).
9. Arbitration
Any claim, controversy, dispute or deadlock arising
under this Agreement (collectively, a "Dispute") shall be settled
by arbitration administered under the rules of the American
Arbitration Association ("AAA") in New York, New York. Any
arbitration and award of the arbitrators, or a majority of them,
shall be final and the judgment upon the award rendered may be
entered in any state or federal court having jurisdiction. No
punitive damages are to be awarded.
10. Miscellaneous
So long as you act as a principal underwriter and
distributor of Shares, you shall not perform any services for any
entity other than investment companies advised or administered by
Citigroup Inc. or its subsidiaries. The Fund recognizes that the
persons employed by you to assist in the performance of your
duties under this Agreement may not devote their full time to such
service and nothing contained in this Agreement shall be deemed to
limit or restrict your or any of your affiliates right to engage
in and devote time and attention to other businesses or to render
services of whatever kind or nature. This Agreement and the
terms and conditions set forth herein shall be governed by, and
construed in accordance with, the laws of the State of New York.
11. Limitation of Liability (Massachusetts business
trusts only)
The Fund and you agree that the obligations of the Fund
under this Agreement shall not be binding upon any of the
Trustees, shareholders, nominees, officers, employees or agents,
whether past, present or future, of the Fund, individually, but
are binding only upon the assets and property of the Fund, as
provided in the Master Trust Agreement. The execution and
delivery of this Agreement have been authorized by the Trustees
and signed by an authorized officer of the Fund, acting as such,
and neither such authorization by such Trustees nor such execution
and delivery by such officer shall be deemed to have been made by
any of them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the Fund as
provided in its Master Trust Agreement.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance of this Agreement by signing and
returning to us the enclosed copy, whereupon this Agreement will
become binding on you.
Very truly yours,
TRAVELERS SERIES FUND INC.
By: _____________________
Authorized Officer
Accepted:
CFBDS, INC.
By: __________________________
Authorized Officer
EXHIBIT A
Travelers Series Fund Inc.
AIM Capital Appreciation Portfolio
Alliance Growth Portfolio
GT Global Strategic Income Portfolio
MFS Total Return Portfolio
Putnam Diversified Income Portfolio
Smith Barney High Income Portfolio
Smith Barney Large Cap Value Portfolio
Smith Barney International Equity Portfolio
Smith Barney Large Capitalization Growth Portfolio
Smith Barney Money Market Portfolio
Smith Barney Pacific Basin Portfolio
Travelers Managed Income Portfolio
Van Kampen American Capital Enterprise Portfolio
Page: 3
9
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Travelers Series Fund Inc.:
We consent to, with respect to the Travelers Series Fund Inc.,
the references to our Firm under the headings "Financial
Highlights" in the Prospectus and "Independent Auditors" in the
Statement of Additional Information.
KPMG Peat Marwick LLP
New York, New York
December 21, 1998
