As filed with the Securities and Exchange Commission on February
26, 1999
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. 11
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)
[ X ] On February 28, 1999 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] On date 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>
Travelers Series Fund Inc.
Prospectus
February 28, 1999
Equity 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 Enterprise Portfolio
Fixed Income Funds
- ---------------------------------------------------
GT Global Strategic Income Portfolio
Travelers Managed Income Portfolio
Putnam Diversified Income Portfolio
Smith Barney High Income Portfolio
MFS Total Return 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 or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Contents
Travelers Series Fund Inc. consists of 13 separate investment funds, each with
its own investment objective and policies. Each fund offers different levels of
potential return and involves different levels of risk.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fund Goals and Strategies Page
----------------------------------------------------------
<S> <C>
Smith Barney Pacific Basin Portfolio 2
Smith Barney International Equity Portfolio 4
Smith Barney Large Cap Value Portfolio 6
Smith Barney Large Capitalization Growth Portfolio 8
Alliance Growth Portfolio 10
AIM Capital Appreciation Portfolio 12
Van Kampen Enterprise Portfolio 14
MFS Total Return Portfolio 16
GT Global Strategic Income Portfolio 18
Travelers Managed Income Portfolio 20
Putnam Diversified Income Portfolio 22
Smith Barney High Income Portfolio 24
Smith Barney Money Market Portfolio 26
More on the Funds' Investments 28
Management 32
Share Transactions 38
Share Price 38
Dividends, Distributions and Taxes 39
Financial Highlights 40
</TABLE>
- --------------------------------------------------------------------------------
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.
<PAGE>
Fund Goals and Strategies
Smith Barney Pacific Basin Portfolio
Investment goal
Long-term capital appreciation.
Key investments
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
Travelers Series Fund
2
<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.
- --------------------------------------------------------------------------------
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"), a broad-based unmanaged
index of Asia-Pacific foreign stocks. 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. These
expenses will reduce performance. Please refer to the Separate Account
prospectus for more information on expenses.
% Total Return
[BAR CHART APPEARS HERE]
Calendar years ended December 31
1995 1996 1997 1998
---- ---- ------ ----
2.40% 9.34% -27.99% 7.32%
The bar chart shows the performance of the fund's shares for each of the full
calendar years since its inception on June 16, 1994.
Quarterly returns:
Highest:22.99% in 4th quarter 1998
Lowest:(25.00)% in 4th quarter 1997
Average Annual Total Returns
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Since
year inception
- --------------------------
<S> <C> <C>
Fund 7.32 (5.24)
MSCI Index 2.03 (8.59)*
- --------------------------
</TABLE>
* Index comparisons begin on June 30, 1994
Travelers Series Fund
3
<PAGE>
Fund Goals and Strategies
Smith Barney International Equity Portfolio
Investment goal
Total return on its assets from growth of capital and income.
Key investments
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:
. Above average earnings growth
. High relative return on invested capital
. Experienced and effective management
. Competitive advantages
. Strong financial condition
. 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
4
<PAGE>
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 began 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.
- --------------------------------------------------------------------------------
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"), a broad-based unmanaged index
of foreign stocks. 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. These expenses will reduce
performance. Please refer to the Separate Account prospectus for more
information on expenses.
% Total Return
[BAR CHART APPEARS HERE]
Calendar years ended December 31
1995 1996 1997 1998
----- ----- ---- ----
11.26% 17.72% 2.71% 6.51%
The bar chart shows the performance of the fund's shares for each of the full
calendar years since its inception on June 16, 1994.
Quarterly returns:
Highest:14.02% in 4th quarter 1998
Lowest:(19.72)% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Since
year inception
- ---------------------------
<S> <C> <C>
Fund 6.51 7.29
MSCI Index 27.12 11.37*
- ---------------------------
</TABLE>
* Index comparisons begin on June 30, 1994
Travelers Series Fund
5
<PAGE>
Fund Goals and Strategies
Smith Barney Large Cap Value Portfolio
Investment goal
Current income and long-term growth of income and capital.
Key investments
The fund invests primarily in common stocks of U.S. companies having market
capitalizations of at least $5 billion at the time of investment.
- --------------------------------------------------------------------------------
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. The manager looks for
the following:
. Low market valuations measured by the manager's valuation
models
. Above average dividend yields and established dividend
records
. High return on invested capital and strong cash flow
. Liquidity
Next, the manager looks for a positive catalyst in the
company's near term outlook which the manager believes would
accelerate earnings.
These catalysts include 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
Travelers Series Fund
6
<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.
- --------------------------------------------------------------------------------
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, a broad-based unmanaged index of U.S. stocks. 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. These expenses will reduce performance. Please
refer to the Separate Account prospectus for more information on expenses.
% Total Return
[BAR CHART APPEARS HERE]
Calendar years ended December 31
1995 1996 1997 1998
----- ----- ----- ----
30.08% 19.79% 26.63% 9.82%
The bar chart shows the performance of the fund's shares for each of the full
calendar years since its inception on June 16, 1994.
Quarterly returns:
Highest:13.92% in 4th quarter 1998
Lowest:(12.87)% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Since
year inception
- ------------------------------
<S> <C> <C>
Fund 9.82 18.84
S&P 500 Index 28.60 28.03*
- ------------------------------
</TABLE>
* Index comparisons begin on June 30, 1994
Travelers Series Fund
7
<PAGE>
Fund Goals and Strategies
Smith Barney Large Capitalization Growth Portfolio
Investment goal
Long-term growth of capital.
Key investments
The fund invests primarily in equity securities of
U.S. companies having a 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
Travelers Series Fund
8
<PAGE>
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.
- --------------------------------------------------------------------------------
Fund performance
As the fund has not been in operation for a full calendar year, no performance
information is included in this prospectus.
Travelers Series Fund
9
<PAGE>
Fund Goals and Strategies
Alliance Growth Portfolio
Investment goal
Long-term growth of capital.
Key investments
The fund invests primarily in equity securities of
U.S. companies. Equity securities include exchange
traded and over-the-counter common stocks and
preferred stock, debt securities convertible into
equity securities, and warrants and rights relating
to equity securities.
The fund may also invest in fixed income securities
for capital appreciation, including lower quality
fixed income securities.
- --------------------------------------------------------------------------------
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
Travelers Series Fund
10
<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.
- --------------------------------------------------------------------------------
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, a broad-based index of smaller capitalization stocks.
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. These expenses will reduce performance. Please
refer to the Separate Account prospectus for more information on expenses.
% Total Return
[BAR CHART APPEARS HERE]
Calendar years ended December 31
1995 1996 1997 1998
---- ---- ---- ----
34.87% 24.41% 29.02% 29.05%
The bar chart shows the performance of the fund's shares for each of the full
calendar years since its inception on June 16, 1994.
Quarterly returns:
Highest:31.22% in 4th quarter 1998
Lowest:(17.35)% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Since
year inception
- -----------------------------------
<S> <C> <C>
Fund 29.05 27.58
Russell 1000 Index 27.02 27.47*
- -----------------------------------
</TABLE>
* Index comparisons begin on June 30, 1994
Travelers Series Fund
11
<PAGE>
Fund Goals and Strategies
AIM Capital Appreciation Portfolio
Investment goal
Capital appreciation.
Key investments
The fund invests primarily in common stocks of U.S.
companies with an emphasis on medium-sized and
smaller growth companies.
- --------------------------------------------------------------------------------
Selection process
The subadviser emphasizes individual security selection while
diversifying the fund's investments across industries, which
may help to reduce risk. The subadviser seeks to identify
companies having a consistent record of long-term above
average growth in earnings as well as companies that are only
beginning to experience significant and sustainable earnings
growth.
In selecting individual companies for investment, the manager
looks for the following:
. New or innovative products, services or processes that
should enhance future earnings
. Increasing market share
. 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.
Travelers Series Fund
12
<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
- --------------------------------------------------------------------------------
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, a broad-based index of mid-cap stocks. 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. These expenses will reduce performance. Please
refer to the Separate Account prospectus for more information on expenses.
% Total Return
[BAR CHART APPEARS HERE]
Calendar years ended December 31
1996 1997 1998
---- ---- ----
15.01% 12.15% 17.21%
This bar chart shows the performance of the fund's shares for each of the full
calendar years since its inception on October 10, 1995.
Quarterly returns:
Highest:23.76% in 4th quarter 1998
Lowest:(15.52)% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Since
year inception
- ------------------------------------
<S> <C> <C>
Fund 17.21 12.27
Lipper Midcap Index 13.92 16.51*
- ------------------------------------
</TABLE>
* Index comparisons begin on October 31, 1995
Travelers Series Fund
13
<PAGE>
Fund Goals and Strategies
Van Kampen Enterprise Portfolio
Investment goal
Capital appreciation.
Key investments
The fund invests primarily in common stocks of U.S.
growth companies.
- --------------------------------------------------------------------------------
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 frequently meets with company managements to
help assess individual companies for potential investment.
The subadviser looks for companies with an attractive current
valuation and a combination of positive future fundamentals,
such as 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
14
<PAGE>
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.
- --------------------------------------------------------------------------------
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 returns of
the S&P 500 Index, a broad-based unmanaged index of U.S. stocks, and the Lipper
Growth Funds Index ("Lipper Index"), which shows average returns for funds
having an investment objective similar to that of the fund's. 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. These expenses will reduce performance. Please refer to the
Separate Account prospectus for more information on expenses.
% Total Return
[BAR CHART APPEARS HERE]
Calendar years ended December 31
1995 1996 1997 1998
----- ----- ----- -----
32.55% 23.04% 28.59% 25.12%
The bar chart shows the performance of the fund's shares for each of the full
calendar years since its inception on June 16, 1994.
Quarterly returns:
Highest:25.03% in 4th quarter 1998
Lowest:(14.75)% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Since
year inception
- ------------------------------
<S> <C> <C>
Fund 25.12 23.93
S&P 500 Index 28.60 28.03*
Lipper Index 25.69 23.68*
- ------------------------------
</TABLE>
* Index comparisons begin on June 30, 1994
Travelers Series Fund
15
<PAGE>
Fund Goals and Strategies
MFS Total Return Portfolio
Investment goals
Primary: Above average income (compared to a
portfolio invested entirely in equity securities)
consistent with the prudent employment of capital.
Secondary: Growth of capital and income.
Key investments
The fund invests in a broad range of equity and
fixed income securities of both U.S. and foreign
issuers.
The fund's equity securities include common and
preferred stock; bonds, warrants or rights
convertible into stock and depositary receipts for
those securities.
The fund's fixed income securities include
corporate debt obligations of any 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% . at least 25%
and 75% in in non-
equity convertible
securities 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 total Returns on U.S. Treasury securities
and on other types of fixed income securities and selects
those securities the subadviser believes will deliver
favorable returns.
Travelers Series Fund
16
<PAGE>
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.
- --------------------------------------------------------------------------------
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 returns of
the S&P 500 Index, a broad-based unmanaged index of U.S. stocks, and the Lehman
Brothers Government/Corporate Bond Index ("Lehman Brothers Index"), a broad-
based unmanaged index of bonds issued by the U.S. government and its agencies
as well as certain corporate issuers. 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. These
expenses will reduce performance. Please refer to the Separate Account
prospectus for more information on expenses.
% Total Return
[BAR CHART APPEARS HERE]
Calendar years ended December 31
1995 1996 1997 1998
----- ----- ----- -----
25.70% 14.51% 21.18% 11.67%
The bar chart shows the performance of the fund's shares for each of the full
calendar years since its inception on June 16, 1994.
Quarterly returns:
Highest: 9.87% in 2nd quarter 1997
Lowest:(4.06)% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Since
year inception
- --------------------------------------
<S> <C> <C>
Fund 11.67 15.26
S&P 500 Index 28.60 28.03*
Lehman Brothers Index 9.47 9.22*
- --------------------------------------
</TABLE>
* Index comparisons begin on June 30, 1994
Travelers Series Fund
17
<PAGE>
Fund Goals and Strategies
GT Global Strategic Income Portfolio
Investment goals
Primary: High current income Secondary: Capital appreciation
Key investments
The fund invests primarily in debt securities of
U.S. and foreign companies, banks and governments,
including those in emerging markets.
Credit Quality: At least 50% of the fund's assets
consist of debt securities that are investment
grade at the time of purchase. 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 gener-
ally 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, . Growth rate forecasts
inflation and . Fiscal policies
interest rate . Political outlook
trends
. Proprietary risk
measures
. Balance of
payments status
In selecting individual debt securities, the subadviser
evaluates the following:
. Yield . Issue classification
. Maturity . Credit quality
. Call or
prepayment risk
Travelers Series Fund
18
<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 began 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.
- --------------------------------------------------------------------------------
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"), a broad-based unmanaged
index of domestic and foreign bonds. 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. These
expenses will reduce performance. Please refer to the Separate Account
prospectus for more information on expenses.
% Total Return
[BAR CHART APPEARS HERE]
Calendar years ended December 31
1995 1996 1997 1998
----- ----- ----- -----
20.09% 18.70% 7.41% -1.54%
The bar chart shows the performance of the fund's shares for each of the full
calendar years since its inception on June 16, 1994.
Quarterly returns:
Highest:7.64% in 3rd quarter 1996
Lowest:(5.35)% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Since
year inception
- ------------------------------
<S> <C> <C>
Fund (1.54) 8.24
Morgan Index 15.31 9.1* *
- ------------------------------
</TABLE>
* Index comparison begins on June 30, 1994.
Travelers Series Fund
19
<PAGE>
Fund Goals and Strategies
Travelers Managed Income Portfolio
Investment goal
High current income consistent with prudent risk of capital.
Key investments
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
Travelers Series Fund
20
<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 began in 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.
- --------------------------------------------------------------------------------
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"), a broad-based index of bonds issued by the U.S. government and its
agencies as well as certain corporate issuers. Prior to 1998, the fund compared
its performance with the Lehman Aggregate Bond Index. The manager believes that
the Lehman Intermediate Government/Corporate Index is a more appropriate
benchmark because it more closely parallels the fund's holdings. 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. These expenses will affect performance. Please
refer to the Separate Account prospectus for more information on expenses.
% Total Return
[BAR CHART APPEARS HERE]
Calendar years ended December 31
1995 1996 1997 1998
----- ---- ---- ----
16.02% 2.93% 9.72% 5.07%
The bar chart shows the performance of the fund's shares for each of the full
calendar years since its inception on June 16, 1994.
Quarterly returns:
Highest:5.75% in 2nd quarter 1995
Lowest:(2.39)% in 1st quarter 1996
Average Annual Total Returns
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Since
year inception
- -------------------------------------
<S> <C> <C>
Fund 5.07 7.35
Lehman Brothers Index 8.44 7.99*
- -------------------------------------
</TABLE>
* Index comparisons begin on June 30, 1994
Travelers Series Fund
21
<PAGE>
Fund Goals and Strategies
Putnam Diversified Income Portfolio
Investment goal
High current income consistent with preservation of capital.
Key investments
The fund invests primarily in debt securities of
U.S. and foreign governments and corporations.
Credit Quality: The fund may invest in securities
with a wide range of credit qualities depending on
the particular sector of the fixed income securi-
ties market in which the manager invests.
Duration: The Fund's duration will generally vary
from 3 to 7 years depending on market conditions
and the subadviser's 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 . Interest rate forecasts
trends
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
22
<PAGE>
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.
- --------------------------------------------------------------------------------
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 returns of
the Lehman Brothers Aggregate Bond Index and the Salomon Brothers Non-U.S.
World Government Bond Index, both of which are broad-based indices. (The Lehman
index consists of a variety of domestically issued bonds. The Salomon index
consists of foreign government bonds.) 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.
% Total Return
[BAR CHART APPEARS HERE]
Calendar years ended December 31
1995 1996 1997 1998
----- ---- ---- -----
17.49% 8.14% 7.69% 0.67%
The bar chart shows the performance of the fund's shares for each of the full
calendar years since its inception on June 16, 1994.
Quarterly returns:
Highest:4.97% in 1st quarter 1995
Lowest:(3.34)% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Since
year inception
- ---------------------------------------
<S> <C> <C>
Fund 0.67 7.65
Lehman Brothers Index 8.69 9.07*
Salomon Brothers Index 17.79 8.34*
- ---------------------------------------
</TABLE>
* Index comparisons begin on June 30, 1994
Travelers Series Fund
23
<PAGE>
Fund Goals and Strategies
Smith Barney High Income Portfolio
Investment goal
Primary: High current income Secondary: Capital appreciation
Key investments
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 in-
vestment grade securities are commonly known as
"junk bonds."
Maturity: Although the fund may invest in securi-
ties of any maturity, under current market condi-
tions, the fund intends to have an average remain-
ing 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 capitalizations 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
24
<PAGE>
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.
- --------------------------------------------------------------------------------
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 returns of
the Salomon Brothers Intermediate High Yield Index ("Salomon Index") and the
Bear Stearns High Yield Index ("Bear Stearns Index"), both of which are broad-
based indices of high yield corporate bonds. 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. These expenses will reduce performance. Please refer to the Separate
Account prospectus for more information on expenses.
% Total Return
[BAR CHART APPEARS HERE]
Calendar years ended December 31
1995 1996 1997 1998
----- ----- ----- ----
19.18% 13.13% 13.85% 0.44%
The bar chart shows the performance of the fund's shares for each of the full
calendar years since its inception on June 16, 1994.
Quarterly returns:
Highest:5.35% in 2nd quarter 1997
Lowest:(5.79)% in 3rd quarter 1998
Average Annual Total Returns
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Since
year inception
- ----------------------------------
<S> <C> <C>
Fund 0.44 9.86
Salomon Index 3.60 10.74*
Bear Stearns Index 2.08 10.85*
- ----------------------------------
</TABLE>
*Index comparisons begin on June 30, 1994
Travelers Series Fund
25
<PAGE>
Fund Goals and Strategies
Smith Barney Money Market Portfolio
Investment goal
Maximize current income consistent with
preservation of capital. The fund seeks to maintain
a stable $1 share price.
Key investments
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 se-
curities 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.
Travelers Series Fund
26
<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.
- --------------------------------------------------------------------------------
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 U.S. 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. These expenses
will reduce performance. Please refer to the Separate Account prospectus for
more information on expenses.
% Total Return
[BAR CHART APPEARS HERE]
Calendar years ended December 31
1995 1996 1997 1998
---- ---- ---- ----
5.43% 4.94% 5.09% 5.04%
The bar chart shows the performance of the Fund's shares for each of the full
calendar years since its inception on June 16, 1994.
Quarterly returns:
Highest:1.37% in 2nd quarter 1995
Lowest:1.15% in 4th quarter 1994
Average Annual Total Returns
(for the periods ended December 31, 1998)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
One Since
year inception
- -----------------------------
<S> <C> <C>
Fund 5.04 5.02
Treasury bill 5.06 5.28* *
- -----------------------------
</TABLE>
* Index comparison begins on June 30, 1994.
The fund's 7-day yield as of December 31, 1998 was 4.63%. Call toll free
1-877-795-2703
for the fund's current 7-day yield.
Travelers Series Fund
27
<PAGE>
More on the Funds' Investments
Additional investments and investment techniques
- --------------------------------------------------------------------------------
Each fund de- Smith Barney Pacific Basin Portfolio
scribes its Although the fund intends to be fully invested in equity se-
investment ob- curities, it may invest up to 20% of its assets in investment
jective and grade debt securities.
its principal
investment Smith Barney International Equity Portfolio
strategies and The fund may invest up to 20% of its assets in debt securi-
risks under ties of any credit quality or maturity of foreign corporate
"Fund Goals and governmental issuers, as well as U.S. government securi-
and Strate- ties and money market obligations of U.S. and foreign corpo-
gies." rate issuers.
This section Smith Barney Large Capitalization Growth Portfolio
provides addi- Although the fund intends to be fully invested in equity se-
tional infor- curities of growth companies, it may invest up to 35% of its
mation about total assets in money market instruments for cash management
the funds' in- purposes.
vestments and
certain port- Alliance Growth Portfolio
folio manage- Although the fund invests primarily in U.S. equity securi-
ment tech- ties, it may also invest up to 25% of its assets in high
niques the yield securities with no minimum credit quality restriction,
funds may use. and may also invest up to 15% in foreign securities.
More informa-
tion about the MFS Total Return Portfolio
funds' invest- The fund may invest without limit in ADRs and up to 20% of
ments and its total assets in foreign securities.
portfolio man-
agement tech- Travelers Managed Income Portfolio
niques, some The fund may invest up to 35% of its total assets in non-in-
of which en- vestment grade debt obligations, commonly known as "junk
tail risks, is bonds." The fund may also invest up to 35% of its total as-
included in sets in fixed-income obligations having durations longer than
the statement 10 years. The fund may also invest up to 25% of its assets in
of additional asset-backed and mortgage-backed securities, including CMOs.
information
(SAI). 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 se-
curities, options, warrants and rights. The fund may invest
up to 20% of its assets in foreign currency denominated secu-
rities and without limit in U.S. dollar denominated securi-
ties of foreign issuers.
- -------------------------------------------------------------------------------
Travelers Series Fund
28
<PAGE>
- --------------------------------------------------------------------------------
Equity Subject to its particular investment policies, each of these
investments funds may invest in all types of equity securities. Equity
Each equity securities include exchange-traded and over-the-counter (OTC)
fund, MFS To- common and preferred stocks, warrants, rights, investment
tal Return grade convertible securities, receipts and shares, trust cer-
Portfolio and tificates, limited partnership interests, shares of other in-
Smith Barney vestment companies, real estate investment trusts and equity
High Income participations.
Portfolio
- --------------------------------------------------------------------------------
Fixed income
investments Subject to its particular investment policies, each fund may
Each fixed in- invest in fixed income securities. Fixed income investments
come fund and, include bonds, notes (including structured notes), mortgage-
to a limited related securities, asset-backed securities, convertible se-
extent, each curities, Eurodollar and Yankee dollar instruments, preferred
equity fund 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.
MFS Total Each of these funds may invest in mortgage-backed and asset-
Return, backed securities. Mortgage-related securities may be issued
Travelers Managed by private companies or by agencies of the U.S. government
Income, Putnam and represent direct or indirect participations in, or are
Diversified collateralized by and payable from, mortgage loans secured by
Income and real property. Asset-backed securities represent participa-
Smith Barney tions in, or are secured by and payable from, assets such as
High Income installment sales or loan contracts, leases, credit card re-
Portfolios ceivables 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
29
<PAGE>
- --------------------------------------------------------------------------------
High yield, lower quality securities
Alliance
Growth, MFS Each of these funds may invest in fixed income securities
Total that are high yield, lower quality securities rated by a rat-
Return, ing organization below its top four long term rating catego-
Travelers ries or unrated securities determined by the manager or
Managed subadviser to be of equivalent quality. The issuers of lower
Income, Putnam quality bonds may be highly leveraged and have difficulty
Diversified servicing their debt, especially during prolonged economic
recessions or periods of rising interest rates. The prices of
Income, GT lower quality securities are volatile and may go down due to
Global market perceptions of deteriorating issuer credit-worthiness
Strategic or economic conditions. Lower quality securities may become
illiquid and hard to value in down markets.
Income and
Smith Barney
High
Income
Portfolios
only
Alliance
Growth Portfo-
lio may invest
in these secu-
rities primar-
ily for their
capital growth
potential
- --------------------------------------------------------------------------------
Foreign and Each fund may invest in foreign securities, although the for-
emerging eign investments of Smith Barney Money Market Portfolio are
market limited to U.S. dollar denominated investments issued by for-
investments eign 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 insta-
bility and the possible imposition of exchange controls or
other restrictions on investments. If a fund invests in secu-
rities 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 Emerging market investments offer the potential of signifi-
Pacific Basin, cant gains but also involve greater risks than investing in
Smith Barney more developed countries. Political or economic instability,
International lack of market liquidity and government actions such as cur-
Equity, MFS rency controls or seizure of private business or property may
Total Return, be more likely in emerging markets.
Putnam
Diversified
Income and GT
Global
Strategic
Income
Portfolios
only
Sovereign government and supranational debt
MFS Total These funds may invest in all types of fixed income securi-
Return, ties of governmental issuers in all countries, including
Travelers emerging markets. These sovereign debt securities may in-
Managed clude:
Income, Putnam
Diversified . Fixed income securities issued or guaranteed by
Income and GT governments, governmental agencies or instrumentalities and
Global political subdivisions located in emerging market
Strategic countries.
Income . Participations in loans between emerging market governments
Portfolios and financial institutions.
only . 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.
- --------------------------------------------------------------------------------
Travelers Series Fund
30
<PAGE>
- --------------------------------------------------------------------------------
. 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 Each fund may, but need not, use derivative contracts, such
and hedging as futures and options on securities, securities indices or
techniques currencies; options on these futures; forward currency con-
tracts; and interest rate or currency swaps for any of the
All funds ex- following purposes:
cept Smith
Barney Money . To hedge against the economic impact of adverse changes in
Market Portfo- the market value of its securities, due to changes in stock
lio 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 de-
liver 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 in-
terest rate exposure. Therefore, using derivatives can dis-
proportionately 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 securi-
ties. Derivatives can also make a fund less liquid and harder
to value, especially in declining markets.
- --------------------------------------------------------------------------------
Securities
lending Each fund, except Van Kampen 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 se-
cured 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 re-
ceiving additional collateral, delay in recovery of securi-
ties when the loan is called or possible loss of collateral
should the borrower fail financially.
- --------------------------------------------------------------------------------
Defensive Each fund may depart from its principal investment strategies
investing in response to adverse market, economic or political condi-
tions 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
31
<PAGE>
Management
The managers
SSBC Fund Management Inc. (SSBC), Travelers Investment Adviser Inc. (TIA) or
Travelers Asset Management International Corporation (TAMIC) is each fund's
manager. 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 and corporate customers around the
world. SSBC 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.
SSBC Fund Management Inc.
SSBC Fund Management Inc. 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. SSBC is located at 388 Greenwich Street, New York,
New York 10013. SSBC acts as investment manager to investment companies having
aggregate assets of approximately $115 billion.
SSBC 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 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>
Smith Barney Pacific
Basin Portfolio 0.90% 0.90%
Smith Barney
International Equity
Portfolio 0.90% 0.90%
Smith Barney Large Cap
Value Portfolio 0.65% 0.65%
Smith Barney Large
Capitalization Growth
Portfolio 0.00%* 0.75%
Smith Barney High Income
Portfolio 0.60% 0.60%
Smith Barney Money
Market Portfolio 0.50% 0.50%**
------------------------------------------------------------------------------
</TABLE>
* Amount paid represents less than 0.01%.
** Prior to March 11, 1998, the annual management
fee paid to SSBC was 0.60% of the average
daily net assets of the fund.
Travelers Series Fund
32
<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. TIA is located at 388 Greenwich Street, New York, New York 10013.
TIA, an affiliate of SSBC, acts as investment manager to investment companies
having aggregate assets of approximately $2.3 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% 0.80%
AIM Capital Appreciation
Portfolio 0.80% 0.80%
Van Kampen Enterprise
Portfolio 0.70% 0.70%
MFS Total Return
Portfolio 0.80% 0.80%
GT Global Strategic
Income Portfolio 0.80% 0.80%
Putnam Diversified
Income Portfolio 0.75% 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 SSBC. 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% 0.65%
------------------------------------------------------------------------------
</TABLE>
Travelers Series Fund
33
<PAGE>
The Subadvisers and Portfolio Managers
The Smith Barney funds are managed solely by SSBC. 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, SSBC; Vice
Basin Portfolio SSBC President, Salomon Smith Barney.
388 Greenwich Street
New York, New York 10013
Scott Kalb (since 1996) Investment Officer, SSBC;
SSBC Managing Director, Salomon Smith
Barney.
- --------------------------------------------------------------------------------------------------
Smith Barney James Conheady (since inception) Investment Officer, SSBC; Vice
International Equity SSBC President, Travelers Series Fund;
Portfolio 388 Greenwich Street Managing Director, Salomon Smith
New York, New York 10013 Barney.
Jeffrey Russell (since inception) Investment Officer, SSBC; Vice
SSBC President, Travelers Series Fund;
Managing Director, Salomon Smith
Barney.
- --------------------------------------------------------------------------------------------------
Smith Barney Large Cap Ellen Cardozo Sonsino (since 1998) Investment Officer, SSBC;
Value Portfolio SSBC Managing Director and Senior
388 Greenwich Street, Equity Portfolio Manager, Salomon
New York, New York 10013 Smith Barney.
- --------------------------------------------------------------------------------------------------
Smith Barney Large Alan Blake (since inception) Investment Officer, SSBC;
Capitalization Growth SSBC Managing Director, Salomon Smith
Portfolio 388 Greenwich Street Barney.
New York, New York 10013
- --------------------------------------------------------------------------------------------------
Alliance Growth Tyler Smith (since inception) Senior Vice President, Alliance
Portfolio Alliance Capital Management L.P. Capital.
1345 Avenue of the Americas
New York, New York 10105
- --------------------------------------------------------------------------------------------------
</TABLE>
Travelers Series Fund
34
<PAGE>
<TABLE>
<CAPTION>
Fund Portfolio Manager and Subadviser Business Experience
<S> <C> <C>
AIM Capital Appreciation Kenneth A. Zschappel (since inception) Vice President, A I M Capital.
Portfolio 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.
A I M Capital Management Associate 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.
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 Enterprise Jeff New (since July 1994) Senior Vice President, Van Kampen
Portfolio Van Kampen Asset Management, Inc. Asset Management; Senior Vice
One Parkview Plaza President, Van Kampen Investment
Oakbrook Terrace, IL 60181 Advisory, Inc.
- ----------------------------------------------------------------------------------------------------
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 inception) Senior Vice President, MFS.
MFS
- ----------------------------------------------------------------------------------------------------
</TABLE>
Travelers Series Fund
35
<PAGE>
<TABLE>
<CAPTION>
Fund Portfolio Manager and Subadviser Business Experience
<S> <C> <C>
GT Global Strategic Cheng-Hock Lau (since 1996) Chief Investment Officer, Fixed
Income Portfolio INVESCO (NY), Inc. Income, INVESCO since 1996.
1166 Avenue of the Americas Senior Portfolio Manager for
New York, NY 10036 Global/International Fixed
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,
INVESCO (NY), Inc. North 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.
- ----------------------------------------------------------------------------------------------------
Travelers Managed Income F. Denney Voss (since 1998) Executive Vice President, Salomon
Portfolio TAMIC Smith Barney.
One Tower Square--10PB
Hartford, Connecticut 06183-2030
- ----------------------------------------------------------------------------------------------------
Putnam Diversified Jennifer Evans Leichter (since 1998) Managing Director and Chief
Income Portfolio Putnam Investment Management, Inc. Investment Officer, Corporate
One Post Office Square Credit Group, Putnam Management.
Boston, MA 02109
- ----------------------------------------------------------------------------------------------------
Smith Barney High Income John C. Bianchi (since inception) Investment Officer, SSBC;
PortFolio MMC Managing Director, Salomon Smith
388 Greenwich Street Barney.
New York, New York 10013
- ----------------------------------------------------------------------------------------------------
</TABLE>
Travelers Series Fund
36
<PAGE>
<TABLE>
<CAPTION>
Fund Portfolio Manager and Subadviser Business Experience
<S> <C> <C>
Money Market Portfolio Martin Hanley (since inception) Investment Officer, SSBC; Vice
SSBC President, 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. Individual companies and governmental issuers that
securities held by a fund may also be adversely affected by the cost of
addressing their Year 2000 systems problems, which could be substantial. 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.
Additional information about the subadvisors
Alliance Capital Management. Alliance is a global investment adviser providing
diversified services to institutions and individuals through a broad line of
investments including approximately 249 fund portfolios. Alliance manages over
$286 billion in assets.
A I M Capital Management, Inc. AIM is a wholly owned subsidiary of A I M
Advisors, Inc., a registered investment adviser. AIM and A I M Advisors, Inc.
manage approximately $109 billion in assets.
Van Kampen Asset Management, Inc. Van Kampen is a diversified asset management
Company. Van Kampen and its affiliates manage more than $75 billion in assets.
Massachusetts Financial Services Company. MFS and its predecessor organizations
have a history of money management dating from 1924. The MFS organization
manages approximately $100 billion on behalf of 4 million investor accounts.
INVESCO (NY), Inc. INVESCO (NY) and its institutional affiliates manage
approximately $94 billion in assets.
Putnam Investment Management, Inc. Putnam has managed mutual funds since 1937.
Putnam and its affiliates manage approximately $290 billion in assets.
Travelers Series Fund
37
<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 company 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
Directors 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 reliable market prices are
not readily 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
38
<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
39
<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
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(1) 1997 1996 1995 1994(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 8.04 $ 9.75 $ 8.95 $ 10.10 $10.00
- -------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income
(loss) (3) -- (0.01) 0.08 (0.04)(4) (0.04)
- -------------------------------------------------------------------------------
Total income (loss) from
operations (1.14) (1.65) 0.83 (1.15) 0.10
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.09) (0.06) (0.03) -- --
- -------------------------------------------------------------------------------
Total distributions (0.09) (0.06) (0.03) -- --
- -------------------------------------------------------------------------------
Net asset value, end of
year $ 6.81 $ 8.04 $ 9.75 $ 8.95 $10.10
- -------------------------------------------------------------------------------
Total return (14.09)% (17.02)% 9.26% (11.39)% 1.00%(5)
- -------------------------------------------------------------------------------
Net assets, end of year
(000's) $12,728 $18,225 $16,657 $ 7,122 $4,238
- -------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses (3) 1.56% 1.38% 1.34% 1.83% 1.26%(6)
Net investment income
(loss) (0.03) (0.08) 0.47 (0.51) (0.93)(6)
- -------------------------------------------------------------------------------
Portfolio turnover rate 136% 156% 59% 28% --
- -------------------------------------------------------------------------------
(1) Per share amounts have been calculated using the average shares method.
(2) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(3) The manager waived all or part of its fees for the years ended October 31,
1996, October 31, 1995 and the period ended October 31, 1994. In addition,
the Manager reimbursed the 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:
-----------------------------------------------------------------------------
<CAPTION>
1996 1995 1994
-----------------------------------------------------------------------------
<S> <C> <C> <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%(6)
-----------------------------------------------------------------------------
</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.
(4) Includes realized gains and losses from foreign currency transactions.
(5) Not annualized.
(6) Annualized.
Travelers Series Fund
40
<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 $ 13.23 $ 12.18 $ 10.48 $ 10.55 $ 10.00
- -------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income
(loss)(2) 0.05 0.01 0.02 0.03(3) (0.03)
Net realized and
unrealized gain (loss) (0.68) 1.05 1.69 (0.10) 0.58
- -------------------------------------------------------------------------------
Total income (loss) from
operations (0.63) 1.06 1.71 (0.07) 0.55
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income -- (0.01) (0.01) -- --
- -------------------------------------------------------------------------------
Total distributions -- (0.01) (0.01) -- --
- -------------------------------------------------------------------------------
Net asset value, end of
year $ 12.60 $ 13.23 $ 12.18 $ 10.48 $ 10.55
- -------------------------------------------------------------------------------
Total return (4.76)% 8.73% 16.36% (0.66)% 5.50%(4)
- -------------------------------------------------------------------------------
Net assets, end of year
(000's) $224,207 $219,037 $143,323 $53,538 $13,811
- -------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses (2) 1.00% 1.01% 1.10% 1.44% 1.20%(5)
Net investment income
(loss) 0.37 0.09 0.23 0.25 (0.73)(5)
- -------------------------------------------------------------------------------
Portfolio turnover rate 34% 38% 41% 29% --
- -------------------------------------------------------------------------------
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) The manager waived part of its fees for the 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
41
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
Smith Barney Large Cap Value
1998(1) 1997 1996 1995 1994(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 17.90 $ 14.84 $ 12.12 $ 10.14 $10.00
- --------------------------------------------------------------------------------
Income from operations:
Net investment income (3) 0.31 0.25 0.32 0.28 0.11
Net realized and unrealized
gain 1.47 3.16 2.62 1.76 0.03
- --------------------------------------------------------------------------------
Total income from operations 1.78 3.41 2.94 2.04 0.14
- --------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.21) (0.18) (0.17) (0.06) --
Net realized gains (0.53) (0.17) (0.05) -- --
- --------------------------------------------------------------------------------
Total distributions (0.74) (0.35) (0.22) (0.06) --
- --------------------------------------------------------------------------------
Net asset value, end of year $ 18.94 $ 17.90 $ 14.84 $ 12.12 $10.14
- --------------------------------------------------------------------------------
Total return 9.65% 23.38% 24.55% 20.21% 1.40%(4)
- --------------------------------------------------------------------------------
Net assets, end of year
(000's) $423,570 $287,333 $138,712 $39,364 $6,377
- --------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses (3) 0.68% 0.69% 0.73% 0.73% 0.73%(5)
Net investment income 1.59 2.01 2.35 2.70 2.82 (5)
- --------------------------------------------------------------------------------
Portfolio turnover rate 36% 46% 32% 38% 2%
- --------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(3) The manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. In addition, the Manager
reimbursed the 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
42
<PAGE>
For a share of capital stock outstanding throughout the period ended October
31.
<TABLE>
<CAPTION>
Smith Barney Large Cap Growth
1998(1)
- -------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period $ 10.00
- -------------------------------------------------------------------
Loss from operations:
Net investment income (3) 0.01
Net realized and unrealized loss (0.11)(3)
- -------------------------------------------------------------------
Total loss from operations (0.10)
- -------------------------------------------------------------------
Less distributions from:
Net investment income --
Net realized gains --
- -------------------------------------------------------------------
Total distributions --
- -------------------------------------------------------------------
Net asset value, end of period $ 9.90
- -------------------------------------------------------------------
Total return (1.00)%(4)
- -------------------------------------------------------------------
Net assets, end of period (000's) $20,787
- -------------------------------------------------------------------
Ratios to average net assets:(5)
Expenses (2) 1.00%
Net investment income 0.52
- -------------------------------------------------------------------
Portfolio turnover rate 1%
- -------------------------------------------------------------------
</TABLE>
(1) For the period from May 1, 1998 (commencement of operations) to October 31,
1998.
(2) The manager waived part of its fees 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 $0.02 and 1.77%(5) respectively.
(3) The amount shown may not be consistent with the change in aggregate gains
and losses of portfolio securities due to the timing of sales and
redemptions of fund shares throughout the year.
(4) Not annualized.
(5) Annualized.
Travelers Series Fund
43
<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 $ 20.82 $ 16.30 $ 13.28 $ 10.65 $ 10.00
- -------------------------------------------------------------------------------
Income from operations:
Net investment income (2) 0.11 0.05 0.04 0.14 0.06
Net realized and
unrealized gain 2.69 5.11 3.39 2.61 0.59
- -------------------------------------------------------------------------------
Total income from
operations 2.80 5.16 3.43 2.75 0.65
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.04) (0.02) (0.09) (0.02) --
Net realized gains (1.44) (0.62) (0.32) (0.10) --
- -------------------------------------------------------------------------------
Total distributions (1.48) (0.64) (0.41) (0.12) --
- -------------------------------------------------------------------------------
Net asset value, end of
year $ 22.14 $ 20.82 $ 16.30 $ 13.28 $ 10.65
- -------------------------------------------------------------------------------
Total return 12.92% 32.59% 26.55% 26.18% 6.50%(3)
- -------------------------------------------------------------------------------
Net assets, end of year
(000's) $774,942 $544,526 $294,596 $111,573 $17,086
- -------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses (2) 0.82% 0.82% 0.87% 0.90% 0.88%(4)
Net investment income 0.59 0.32 0.39 1.24 1.47(4)
- -------------------------------------------------------------------------------
Portfolio turnover rate 40% 66% 88% 78% 37%
- -------------------------------------------------------------------------------
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) The manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. In addition, the Manager
reimbursed the fund for $3,500 in expenses for the period ended October 31,
1994. If such fees were not waived and expenses not reimbursed, the per
share decreases in net investment income and the ratios of expenses to
average net assets for the 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
44
<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> <C> <C>
Net asset value, beginning of
year $ 12.68 $ 10.76 $ 10.00 $10.00
- --------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (loss)
(3) (0.01) 0.02 0.02 0.02
Net realized and unrealized
gain (loss) (0.34) 1.91 0.75 (0.02)
- --------------------------------------------------------------------------------
Total income (loss) from
operations (0.35) 1.93 0.77 --
- --------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.02) (0.01) (0.01) --
- --------------------------------------------------------------------------------
Total distributions (0.02) (0.01) (0.01) --
- --------------------------------------------------------------------------------
Net asset value, end of year $ 12.31 $ 12.68 $ 10.76 $10.00
- --------------------------------------------------------------------------------
Total return (2.79)% 17.96% 7.71% 0.00%(4)
- --------------------------------------------------------------------------------
Net assets, end of year (000's) $225,862 $202,846 $112,905 $8,083
- --------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (3) 0.85% 0.85% 0.96% 1.00%(5)
Net investment income (loss) (0.06) 0.20 0.22 4.07(5)
- --------------------------------------------------------------------------------
Portfolio turnover rate 75% 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) The manager waived all of its fees with respect to the fund for 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%(5)
----------------------------------
</TABLE>
(4) Not Annualized.
(5) Annualized.
Travelers Series Fund
45
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
Van Kampen Enterprise
1998 1997 1996 1995 1994(1)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning
of year $ 19.89 $ 15.37 $ 12.89 $ 10.38 $10.00
- -------------------------------------------------------------------------------
Income from operations:
Net investment income (2) 0.06 0.06 0.05 0.03 0.03
Net realized and unrealized
gain 1.83 4.51 2.87 2.53 0.35
- -------------------------------------------------------------------------------
Total income from operations 1.89 4.57 2.92 2.56 0.38
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.05) (0.05) (0.04) (0.02) --
Net realized gains (1.17) -- (0.40) (0.03) --
- -------------------------------------------------------------------------------
Total distributions (1.22) (0.05) (0.44) (0.05) --
- -------------------------------------------------------------------------------
Net asset value, end of year $ 20.56 $ 19.89 $ 15.37 $ 12.89 $10.38
- -------------------------------------------------------------------------------
Total return 8.97% 29.81% 23.35% 24.74% 3.80%(3)
- -------------------------------------------------------------------------------
Net assets, end of year
(000's) $249,051 $196,583 $103,691 $32,447 $5,734
- -------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses (2) 0.73% 0.74% 0.83% 0.88% 0.84%(4)
Net investment income 0.35 0.41 0.53 0.65 0.79(4)
- -------------------------------------------------------------------------------
Portfolio turnover rate 68% 75% 112% 180% 55%
- -------------------------------------------------------------------------------
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) The manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. In addition, the
Manager reimbursed the 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
46
<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 $ 15.31 $ 13.13 $ 11.53 $ 9.98 $10.00
- --------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income (2) 0.32 0.38 0.33 0.45 0.13
Net realized and unrealized
gain (loss) 1.36 2.27 1.62 1.15 (0.15)
- --------------------------------------------------------------------------------
Total income (loss) from
operations 1.68 2.65 1.95 1.60 (0.02)
- --------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.28) (0.29) (0.27) (0.05) --
Net realized gains (0.48) (0.18) (0.08) -- --
- --------------------------------------------------------------------------------
Total distributions (0.76) (0.47) (0.35) (0.05) --
- --------------------------------------------------------------------------------
Net asset value, end of year $16.23 $ 15.31 $ 13.13 $ 11.53 $ 9.98
- --------------------------------------------------------------------------------
Total return 10.94% 20.64% 17.16% 16.12% (0.20)%(3)
- --------------------------------------------------------------------------------
Net assets, end of year
(000's) $462,274 $263,585 $134,529 $49,363 $8,504
- --------------------------------------------------------------------------------
Ratios to average net
assets:
Expenses (2) 0.84% 0.86% 0.91% 0.95% 0.93%(4)
Net investment income 3.32 3.54 3.82 4.40 3.51(4)
- --------------------------------------------------------------------------------
Portfolio turnover rate 118% 99% 139% 104% 18%
- --------------------------------------------------------------------------------
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) The manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. In addition, the Manager
reimbursed the 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:
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995 1994
-----------------------------------------
<S> <C> <C>
Per Share Decreases in
Net Investment Income $0.01 $0.06
-----------------------------------------
Expense Ratios Without
Fee Waivers and
Reimbursement 1.06% 2.51%(4)
-----------------------------------------
</TABLE>
(3) Not annualized.
(4) Annualized.
Travelers Series Fund
47
<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 $12.52 $ 12.45 $ 10.77 $ 9.95 $10.00
- --------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income (3) 0.84 0.75 0.74 0.64(4) 0.17
Net realized and unrealized
gain (loss) (1.09) 0.36 1.36 0.28 (0.22)
- --------------------------------------------------------------------------------
Total income (loss) from
operations (0.25) 1.11 2.10 0.92 (0.05)
- --------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.66) (0.46) (0.42) (0.10) --
Net realized gains (0.64) (0.58) -- -- --
- --------------------------------------------------------------------------------
Total distributions (1.30) (1.04) (0.42) (0.10) --
- --------------------------------------------------------------------------------
Net asset value, end of year $10.97 $ 12.52 $ 12.45 $10.77 $ 9.95
- --------------------------------------------------------------------------------
Total return (2.50)% 9.32% 20.07% 9.37% (0.50)%(5)
- --------------------------------------------------------------------------------
Net assets, end of year
(000's) $28,131 $29,232 $19,152 $8,397 $2,624
- --------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (3) 1.03% 1.07% 1.23% 1.47% 1.07%(6)
Net investment income 7.31 6.05 6.87 6.44 4.58(6)
- --------------------------------------------------------------------------------
Portfolio turnover rate 280% 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) 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> <C> <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
48
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
Travelers Managed Income
1998(1) 1997(1) 1996(1) 1995 1994(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $ 11.55 $ 11.06 $ 11.16 $ 10.04 $10.00
- --------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (3) 0.72 0.63 0.65 0.61 0.21
Net realized and unrealized gain
(loss) (0.06) 0.35 (0.14) 0.64 (0.17)
- --------------------------------------------------------------------------------
Total income (loss) from
operations (0.66) 0.98 0.51 1.25 0.04
- --------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.54) (0.49) (0.46) (0.13) --
Net realized gains (0.02) -- (0.15) -- --
- --------------------------------------------------------------------------------
Total distributions (0.56) (0.49) (0.61) (0.13) --
- --------------------------------------------------------------------------------
Net asset value, end of year $ 11.65 $ 11.55 $ 11.06 $ 11.16 $10.04
- --------------------------------------------------------------------------------
Total return 5.71% 9.19% 4.61% 12.68% 0.40%(4)
- --------------------------------------------------------------------------------
Net assets, end of year (000's) $57,556 $31,799 $23,532 $11,279 $3,840
- --------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (3) 0.84% 0.87% 0.92% 0.92% 0.87%(5)
Net investment income 6.11 6.48 6.19 6.13 5.67(5)
- --------------------------------------------------------------------------------
Portfolio turnover rate 327% 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) 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 $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
49
<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 $12.31 $ 11.99 $ 11.46 $ 10.18 $10.00
- --------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income (3) 0.57 0.67 0.78 0.79 0.23
Net realized and unrealized
gain (loss) (0.62) 0.30 0.27 0.58 (0.05)
- --------------------------------------------------------------------------------
Total income (loss) from
operations (0.05) 0.97 1.05 1.37 0.18
- --------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.42) (0.56) (0.39) (0.09) --
Net realized gains (0.14) (0.09) (0.13) -- --
- --------------------------------------------------------------------------------
Total distributions (0.56) (0.65) (0.52) (0.09) --
- --------------------------------------------------------------------------------
Net asset value, end of year $11.70 $ 12.31 $ 11.99 $ 11.46 $10.18
- --------------------------------------------------------------------------------
Total return (0.65)% 8.44% 9.43% 13.55% 1.80%(4)
- --------------------------------------------------------------------------------
Net assets, end of year
(000's) $156,895 $121,601 $81,076 $31,514 $6,763
- --------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (3) 0.87% 0.88% 0.96% 0.97% 0.98%(5)
Net investment income 7.48 6.99 7.57 7.53 6.14(5)
- --------------------------------------------------------------------------------
Portfolio turnover rate 191% 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) 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:
------------------------------------------------------------------------------
<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 1.31% 2.92%(5)
-----------------------------------------
</TABLE>
(4) Not annualized.
(5) Annualized.
Travelers Series Fund
50
<PAGE>
For a share of capital stock outstanding throughout each year ended October 31.
<TABLE>
<CAPTION>
Smith Barney High Income
1998(1) 1997 1996 1995 1994(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
year $13.25 $ 12.09 $ 11.26 $ 10.07 $10.00
- --------------------------------------------------------------------------------
Income (loss) from
operations:
Net investment income (3) 1.21 0.88 1.14 0.93 0.29
Net realized and unrealized
gain (loss) (1.58) 1.00 0.19 0.48 (0.22)
- --------------------------------------------------------------------------------
Total income (loss) from
operations (0.37) 1.88 1.33 1.41 0.07
- --------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.74) (0.66) (0.50) (0.22) --
Net realized gains (0.17) (0.06) -- -- --
- --------------------------------------------------------------------------------
Total distributions (0.91) (0.72) (0.50) (0.22) --
- --------------------------------------------------------------------------------
Net asset value, end of year $11.97 $ 13.25 $ 12.09 $ 11.26 $10.07
- --------------------------------------------------------------------------------
Total return (3.38)% 16.24% 12.17% 14.30% 0.70%(4)
- --------------------------------------------------------------------------------
Net assets, end of year
(000's) $160,259 $123,726 $65,955 $20,450 $3,395
- --------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (3) 0.67% 0.70% 0.84% 0.70% 0.69%(5)
Net investment income 9.12 9.36 9.79 9.54 7.55(5)
- --------------------------------------------------------------------------------
Portfolio turnover rate 82% 89% 104% 57% 15%
- --------------------------------------------------------------------------------
</TABLE>
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(3) The manager waived all or part of its fees for the year ended October 31,
1995 and the period ended October 31, 1994. In addition, the Manager
reimbursed the 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:
------------------------------------------------------------------------------
<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 1.07% 2.60%(5)
-----------------------------------------
</TABLE>
(4) Not annualized.
(5) Annualized.
Travelers Series Fund
51
<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 $ 1.00
- -------------------------------------------------------------------------------
Income from operations:
Net investment income (2) 0.050 0.049 0.049 0.052 0.014
- -------------------------------------------------------------------------------
Total income from operations 0.050 0.049 0.049 0.052 0.014
- -------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.050) (0.049) (0.049) (0.052) (0.014)
- -------------------------------------------------------------------------------
Total distributions (0.050) (0.049) (0.049) (0.052) (0.014)
- -------------------------------------------------------------------------------
Net asset value, end of year $1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------------
Total return 5.11% 5.05% 5.05% 5.35% 1.46%(3)
- -------------------------------------------------------------------------------
Net assets, end of year
(000's) $164,677 $111,168 $99,150 $37,487 $5,278
- -------------------------------------------------------------------------------
Ratios to average net assets:
Expenses (2) 0.64% 0.65% 0.65% 0.65% 0.66%(4)
Net investment income 4.99 4.94 4.86 5.26 3.83(4)
- -------------------------------------------------------------------------------
</TABLE>
(1) For the period from June 16, 1994 (commencement of operations) to October
31, 1994.
(2) The manager waived all or part of its fees with respect to the fund for the
years ended October 31, 1997, 1996 and 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>
<CAPTION>
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
Reimbursement 0.67% 0.74% 0.94% 2.11%(4)
-----------------------------------------------------------------------------
</TABLE>
(3) Not annualized.
(4) Annualized.
(5) Amount represents less than $0.001.
Travelers Series Fund
52
<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 the appropriate representative of a participating life
insurance company or your Financial Consultant if you do not want this policy
to apply to you.
Statement of additional information. The statement of additional (SAI)
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 1-800-842-8573
or writing to Travelers Series Fund Inc., 388 Greenwich Street, MF2, New York,
New York 10013.
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. Information about the public reference room
may be obtained by calling 1-800-SEC-0330. You may obtain copies of these
materials upon payment of a duplicating fee, by writing to the Public Reference
Section of the Commission, Washington, D.C. 20549-60019. 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 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
(Investment Company Act file no. 811-08372)
L-12410 2/99
PART B
Statement of Additional Information
February 28, 1999
STATEMENT OF ADDITIONAL INFORMATION
TRAVELERS SERIES FUND INC.
388 Greenwich Street
New York, New York 10013
1-800-842-8573
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 28, 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 principally in common stocks, with an emphasis on small and medium-
sized growth companies.
The Van Kampen 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 4
Investment Practices 14
Risk Factors 33
Investment Restrictions 41
Portfolio Turnover 54
Performance Information 54
Determination of Net Asset Value 55
Availability of the Funds 56
Redemption of Shares 56
Management 56
Other Information about the Company 61
Financial Statements 63
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; 77.
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; 62.
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.; 71.
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; 54.
*HEATH B. McLENDON, Chairman of the Board, President and Chief Executive
Officer
Managing Director of Salomon Smith Barney Inc. ("Salomon Smith Barney"),
President of SSBC Fund Management Inc. (''SSBC'') and Travelers Investment
Adviser, Inc. ("TIA"); Chairman or Co-Chairman of the Board of 59 investment
companies associated with Salomon Smith Barney; 65.
*LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Salomon Smith Barney, Senior Vice President and
Treasurer (Chief Financial Officer) of the Smith Barney Mutual Funds;
Director and Senior Vice President of SSBC and TIA; 41
*JAMES B. CONHEADY, Vice President and Investment Officer
Managing Director of Salomon Smith Barney. Formerly First Vice President of
Drexel Burnham Lambert Incorporated; 63.
*JEFFREY RUSSELL, Vice President and Investment Officer
Managing Director of Salomon Smith Barney. Formerly Vice President of Drexel
Burnham Lambert Incorporated; 41.
*JOHN C. BIANCHI, Vice President and Investment Officer
Managing Director of Salomon Smith Barney; Vice President and Investment
Officer of certain other investment companies associated with Salomon Smith
Barney; 43.
*MARTIN HANLEY, Vice President and Investment Officer
Vice President of certain other investment companies associated with Salomon
Smith Barney; 33.
*DAVID S. ISHIBASHI, Vice President and Investment Officer
Vice President of Salomon Smith Barney; formerly Head of Japanese equities
desk at SG Warburg; 43
*SCOTT KALB, Vice President and Investment Officer
Managing Director of Salomon Smith Barney. Formerly Vice President of Drexel
Burnham Lambert Incorporated; 43
*PHYLLIS M. ZAHORODNY, Vice President and Investment Officer
Managing Director of Salomon Smith Barney; Vice President and Investment
Officer of certain other investment companies associated with Salomon Smith
Barney; 41.
*IRVING DAVID, Controller
Director of Salomon Smith Barney; Controller of certain funds and various
other Smith Barney Mutual Funds; Formerly Assistant Treasurer of First
Investment Management Company; 38.
*PAUL BROOK, Controller
Director of Salomon Smith Barney; Controller of certain funds and various
other Smith Barney Mutual Funds since 1998; Prior to 1998, Managing Director
of AMT Capital Services Inc.; Prior to 1997, Partner with Ernst & Young LLP;
45
*CHRISTINA T. SYDOR, Secretary
Managing Director of Salomon Smith Barney and Secretary of Smith Barney
Mutual Funds; Secretary and General Counsel of the SSBC and TIA; 48.
___________________
* Designates "interested persons" of the Company 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 6, 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 and the total compensation
paid by the Smith Barney Mutual Funds complex for the calendar year ended
December 31, 1998. 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 Fund
Companies for
Which Director
Serves
Within Fund
Complex
Victor K. Atkins
$18,889.00
$29,500.00
2
Abraham E. Cohen
16,524.00
20,100.00
2
Robert A.
Frankel
18,989.00
72,250.00
9
Rainer Greeven
17,689.00
27,800.00
2
Susan M.
Heilbron
17,689.00
27,800.00
2
Heath B.
McLendon
0
0
59
James M. Shuart*
13,133.00
20,800.00
2
* Effective July 28, 1998, Mr. Shuart resigned from the Company's Board of
Directors.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
Each fund's investment objectives (described as "Investment Goals" in the
Prospectus) and certain investment restrictions (described under 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 or applicable law, and any such change
will first be disclosed in the then current prospectus or SAI.
Set forth below is discussion of certain nonfundamental investment policies
for each fund. Refer to the "Investment Practices" and "Risk Factors"
Sections of this SAI 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 Service Inc.
("Moody's") or BBB by Standard and Poor's Ratings Group ("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 its 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, the fund 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 Moody's 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.
Investment in non-publicly traded securities is restricted to 5% of the
fund's total assets (not including Rule 144A Securities).
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 more widely than other equity securities.
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 Enterprise Portfolio
In addition to common stocks, the fund may invest in warrants and preferred
stocks, and in the securities of 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 higher by Moody's or BBB or better by S&P or
Fitch IBCA, Inc. (formerly Fitch Investors Service, Inc.) ("Fitch")),
securities that are unrated, and securities that are rated in the lower
ratings 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
ratings categories or comparable unrated securities. See Appendix A for a
description of these ratings. Generally, most of the fund's long-term debt
investments will consist of "investment grade" securities. 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 unrated and lower-rated corporate debt
securities, commonly known as "junk bonds." The fund may also invest in
emerging market securities. The fund may also invest in emerging markets
securities.
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 investment grade (i.e.,
within the four highest categories for long-term debt) 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 lower-rated 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.
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.
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, the
subadviser 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 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.
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.
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 (i.e., rated within the four highest ratings
categories 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.
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 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.
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. 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 subadviser expects that a substantial portion of the fund's
assets will normally be invested in each of the three market sectors
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 other 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 investment grade at the time of purchase. 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. 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.
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.
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.
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.
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
lower-rated securities, and may be rated as low as C by Moody's or D by S&P,
or in non-rated income securities that the manager determines to be of
comparable quality. The 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 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.
Smith Barney Money Market Portfolio
The fund operates as a money market fund, and utilizes certain investment
policies so that, to the extent reasonably possible, its price per share will
not change from $1.00, although no assurance can be given that this goal will
be achieved on a continuous basis. For example, the fund will not purchase a
security which, after giving effect to any demand features, has 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 any limitations set
forth under "Investment Objectives and Management Policies" or under
"Investment Restrictions. See "Risk Factors" for additional information about
the risks of these investment practices.
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 "NASDAQ" 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.
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.
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.
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.
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
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.
Emerging Markets. (Smith Barney International Equity, Smith Barney Pacific
Basin, Putnam Diversified Income, GT Global Strategic Income, Smith Barney
High Income and MFS Total Return Portfolios). 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.
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. 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. 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.
Investments in Other Investment Companies providing exposure to Foreign
Markets (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.
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
Illiquid and Restricted Securities. Each fund may purchase securities that
are restricted as to resale ("restricted securities") under the Securities
Act of 1933, as amended (the "1933 Act"). Some restricted securities can be
offered and sold to "qualified institutional buyers" under Rule 144A under
the 1933 Act. The Board of Directors may determine, based upon a continuing
review of the trading markets for a specific restricted security, that such
restricted securities are liquid and therefore not subject to the fund's
restriction on illiquid investments. 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.
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.
Borrowing and Leverage (each fund). 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.
"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 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 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 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. 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 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 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 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 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 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 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 each fund's net asset value will
fluctuate, reflecting the fluctuations in the market value of its portfolio
positions (other than Smith Barney Money Market Portfolio). The following
sections describe some of the important risk factors involved in connection
with the types of investments or investment practices indicated. See
"Investment Objectives and Management Policies" and "Investment Practices"
for a description of the permissible investments and investment practices of
each fund.
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 (in general). 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 a fund that invests in
emerging markets 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.
The risks of investing in securities in emerging countries 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 the Sovereign debt of foreign countries
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 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.
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.
Ratings Categories. General. In general, the ratings of nationally recognized
statistical rating organizations ("NRSROs") represent the opinions of these
organizations 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 NRSRO might not change its rating of a particular issue to
reflect subsequent events. These ratings may be used by a fund 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. 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 capabilities of the issuer's management, and
regulatory matters.
Investment Grade Categories. In the highest four ratings categories for long-
term debt by an NRSRO are considered "investment grade." 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 to be investment grade if deemed by the manager or 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, see Appendix A.
Lower-Rated and Non-Rated Securities. The funds that may invest in debt
securities rated below investment grade 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.
Securities of Unseasoned Issuers. The issuers of these securities may lack a
significant operating history and be dependent on products or services
without an established market share.
Borrowing and Leverage. 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 or Assignments. 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, a 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.
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.
Particular Risks of 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.
Mortgage-Backed Securities. To the extent a 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
generated by 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.
INVESTMENT RESTRICTIONS
The funds have adopted the following investment restrictions and policies
that are "fundamental" and cannot be changed without the approval of a
"majority of the outstanding voting securities" of the fund affected by the
change, as defined under the 1940 Act (see "Voting"). Following the list of
each fund's fundamental investment restrictions is a list of other policies
or restrictions that are not fundamental. Investment policies and
restrictions that are not fundamental may be changed by the Company's Board
of Directors without shareholder approval. 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 the same
investment objective and restrictions as the fund.
In addition, the following nonfundamental policies have also been adopted by
Smith Barney Pacific Basin Portfolio, Smith Barney International Equity
Portfolio and Smith Barney Large Cap Value Portfolio. 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 nonfundamental policies have also been adopted by
Smith Barney Large Capitalization Growth Portfolio. 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 nonfundamental policies have also been adopted by
Alliance Growth Portfolio. 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 nonfundamental policies have also been adopted by
AIM Capital Appreciation Portfolio. 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 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 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 nonfundamental policies have also been adopted by
Van Kampen Enterprise Portfolio. 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 nonfundamental policies have also been adopted by
MFS Total Return Portfolio. 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 nonfundamental investment policies have been
adopted by the fund. 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 nonfundamental policies have also been adopted by
Travelers Managed Income Portfolio. 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 nonfundamental policy has also been adopted by the
Putnam Diversified Income Portfolio. 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 nonfundamental investment policies have been
adopted by the Smith Barney High Income Portfolio. 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 nonfundamental investment policies have been
adopted by Smith Barney Money Market Portfolio. 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
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 in
celebration of the following holidays: New Year's Day, Martin Luther King,
Jr., President's Day, 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
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
The Investment Managers.
SSBC. SSBC Fund Management Inc. 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. SSBC 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, SSBC 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, SSBC 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 SSBC 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 SSBC; there is no charge to
the Company for such services.
SSBC's name was formerly Mutual Management Corp., and also formerly Smith
Barney Mutual Funds Management, Inc.
TIA. Travelers Investment Adviser, Inc. ("TIA" or the "Manager"), an
affiliate of SSBC, 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 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 with a
different subadviser for each TIA Portfolio. Pursuant to each subadvisory
agreement, the 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 SSBC
pursuant to which SSBC 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 SSBC, 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, TIA is
responsible for the investment operations of each fund and 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
SSBC and TIA, 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.
General. Under each management agreement SSBC, TIA or TAMIC, as the case may
be, will administer the fund'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 SSBC, 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" of the Company as defined under
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.
SSBC, 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 from year to year if specifically
approved at least annually as required by the 1940 Act, except that for the
Large Cap Growth Portfolio, the fund is in an initial two-year term. 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
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 or SAI.
Each management agreement also provides that SSBC, 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 SSBC, TIA, TAMIC or the fund for any
error of judgment or mistake of law or for any loss suffered by SSBC, 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
$127,738
Smith Barney International
Equity Portfolio
887,397
1,692,179
2,099,425
Smith Barney Large Cap Value
Portfolio
564,232
1,399,650
2,461,022
Smith Barney Large
Capitalization Growth
Portfolio+
n/a
n/a
25,610
Alliance Growth Portfolio
1,624,602
3,268,019
5,537,281
AIM Capital Appreciation
Portfolio
503,898
1,294,096
1,783,860
Van Kampen Enterprise Portfolio
482,803
1,045,925
1,677,943
MFS Total Return Portfolio
744,834
1,556,167
2,992,300
GT Global Strategic Income
Portfolio++
109,949
201,225
244,014
Travelers Managed Income
Portfolio
123,774
176,499
258,425
Putnam Diversified Income
Portfolio
428,803
753,736
1,084,982
Smith Barney High Income
Portfolio
262,657
558,996
915,654
Smith Barney Money Market
Portfolio+++
425,361
650,916
622,117
* The Manager waived $30,849 in 1996 of the management fees shown.
+ The Manager waived $25,521 of the management fees shown for the period
from May 1, 1998 (commencement of
operations) to October 31, 1998.
++ 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 to the fund 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, for 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 have 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 services
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 Enterprise Portfolio is advised by Van Kampen 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 principal underwriter.
The Company's Board of Directors has determined that agency transactions in
equity securities 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 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
$862,092,628 (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 $2,302,807,589, $234,697,629 (10.19%) of which was directed
to Salomon Smith Barney and executed by unaffiliated brokers and
$2,068,109,960 (89.81%) 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
2,199,437
244,471
(11.12%)
1,954,966
(88.88%)
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 Salomon 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 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 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
The financial information contained under the following headings is hereby
incorporated by reference to the Company's 1998 Annual Reports to
Shareholders filed on December 30, 1998, accession number 91155-98-000737:
Annual Report of:
Pages(s)in:
Smith Barney Large Cap Value Portfolio
Alliance Growth Portfolio
Van Kampen Enterprise Portfolio
Schedule of Investments
12-24
Statements of Assets and Liabilities
25
Statements of Operations
26
Statements of Changes in Net Assets
27-29
Notes to Financial Statements
30-35
Financial Highlights (for a share of capital stock of each
series
outstanding through each year)
36-38
Independent Auditors' Report
39
MFS Total Return Portfolio
Travelers Managed Income Portfolio
Smith Barney Money Market Portfolio
Schedule of Investments
9-30
Statements of Assets and Liabilities
32
Statements of Operations
33
Statements of Changes in Net Assets
34-36
Notes to Financial Statements
37-43
Financial Highlights (for a share of capital stock of each
series
outstanding through each year)
44-46
Independent Auditors' Report
47
Smith Barney High Income Portfolio
Putnam Diversified Income Portfolio
Schedule of Investments
9-43
Statements of Assets and Liabilities
45
Statements of Operations
46
Statements of Changes in Net Assets
47-48
Notes to Financial Statements
49-56
Financial Highlights (for a share of capital stock of each
series
outstanding through each year)
57-58
Independent Auditors' Report
59
Smith Barney International Equity Portfolio
Smith Barney Pacific Basin Portfolio
GT Global Strategic Income Portfolio
Schedule of Investments
14-22
Statements of Assets and Liabilities
23
Statements of Operations
24
Statements of Changes in Net Assets
25-27
Notes to Financial Statements
28-36
Financial Highlights (for a share of capital stock of each
series
outstanding through each year)
37-39
Independent Auditors' Report
40
AIM Capital Appreciation Portfolio
Smith Barney Large Capitalization Growth Portfolio
Schedule of Investments
9-19
Statements of Assets and Liabilities
20
Statements of Operations
21
Statements of Changes in Net Assets
22-23
Notes to Financial Statements
24-28
Financial Highlights (for a share of capital stock of each
series
outstanding through each year)
29-30
Independent Auditors' Report
31-32
APPENDIX A
RATINGS ON DEBT OBLIGATIONS BOND (AND NOTES)
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.
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.
a.4 Amendment to Articles of Incorporation dated as of
February 17, 1999 is filed
herewith.
a.5 Amendment to Articles of Incorporation dated as of
February 24, 1999 is filed
herewith.
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 SSBC Fund Management Inc., formerly Mutual
Management Corp. ("MMC") is incorporated by reference
to Exhibit 5(a) to Pre-Effective Amendment No. 1 on
June 10, 1994 and Post-Effective Amendment No. 1
filed December 29, 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 and Post-Effective
Amendment No. 1 filed December 29, 1994. Form of
Transfer and Assumption of Management Agreement from
MMC to Travelers Investment Adviser, Inc. ("TIA") is
filed herewith as Exhibit d.21.
d.3 Management Agreement between Registrant on behalf of
the Van Kampen Enterprise Portfolio and MMC is
incorporated by reference to Exhibit 5(c) to Pre-
Effective Amendment No. 1 on June 10, 1994 and Post-
Effective Amendment No. 1 filed December 29, 1994.
Form of Transfer and Assumption of Management
Agreement from MMC to Travelers Investment Adviser,
Inc. ("TIA") is filed herewith as Exhibit d.21.
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 and
Post-Effective Amendment No. 1 filed on December 29,
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. 1 on June 10, 1994 and Post-
Effective Amendment No. 1 filed on December 29, 1994.
d.6 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 and Post-
Effective Amendment No. 1 filed December 29, 1994.
Form of Transfer and Assumption of Management
Agreement from MMC to Travelers Investment Adviser,
Inc. ("TIA") is filed herewith as Exhibit d.21.
d.7 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 and Post-
Effective Amendment No. 1 filed December 29, 1994.
Form of Transfer and Assumption of Management
Agreement from MMC to Travelers Investment Adviser,
Inc. ("TIA") is filed herewith as Exhibit d.21.
d.8 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 and Post-
Effective Amendment No. 1 filed December 29, 1994.
d.9 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 and Post-
Effective Amendment No. 1 filed December 29, 1994.
Form of Transfer and Assumption of Management
Agreement from MMC to Travelers Investment Adviser,
Inc. ("TIA") is filed herewith as Exhibit d.21.
d.10 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 and Post-
Effective Amendment No. 1 filed December 29, 1994.
d.11 Subadvisory Agreement for Alliance Growth Portfolio
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 and
Post-Effective Amendment No. 1 filed December 29,
1994. Form of Agreement replacing MMC with TIA as
the adviser under the Subadvisory Agreement is filed
herewith as Exhibit d.22.
d.12 Subadvisory Agreement for Van Kampen Enterprise
Portfolio among Registrant, MMC and Van Kampen Asset
Management, Inc. is incorporated by reference to
Exhibit 5(m) to Pre-Effective Amendment No. 1 on June
10, 1994 and Post-Effective Amendment No. 1 filed
December 29, 1994. Form of Agreement replacing MMC
with TIA as the adviser under the Subadvisory
Agreement is filed herewith as Exhibit d.22.
d.13 Subadvisory Agreement for Putnam Diversified Income
Portfolio 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 and Post-Effective Amendment No. 1 filed
December 29, 1994. Form of Agreement replacing MMC
with TIA as the adviser under the Subadvisory
Agreement is filed herewith as Exhibit d.22.
d.14 Subadvisory Agreement for GT Global Strategic Income
Portfolio among Registrant, MMC and Invesco (NY),
formerly, G.T. Capital Management, Inc., is
incorporated by reference to Exhibit 5(p) to Pre-
Effective Amendment No. 1 on June 10, 1994 and Post-
Effective Amendment No. 1 filed December 29, 1994.
Form of Agreement replacing MMC with TIA as the
adviser under the Subadvisory Agreement is filed
herewith as Exhibit d.22.
d.15 Subadvisory Agreement for MFS Total Return Portfolio
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 and Post-Effective Amendment No. 1 filed
December 29, 1994. Form of Agreement replacing MMC
with TIA as the adviser under the Subadvisory
Agreement is filed herewith as Exhibit d.22.
d.16 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 and
Post-Effective Amendment No. 1 filed December 29,
1994.
d.17 Management Agreement between Registrant, on behalf of
AIM Capital Appreciation Portfolio and MMC is
incorporated by reference to Post-Effective Amendment
No. 4 filed on February 28, 1996. Form of Transfer
and Assumption of Management Agreement from MMC to
TIA is filed herewith as Exhibit d.21.
d.18 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. Form of Agreement replacing MMC with TIA as
the adviser under the Subadvisory Agreement is filed
herewith as Exhibit d.22.
d.19 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.20 Form of Management Agreement between Registrant on
behalf of Travelers Managed Income Portfolio and
Travelers Asset Management International Corporation
is incorporated by reference to Exhibit d.22 to Post-
Effective Amendment No. 10 filed on December 23,
1998.
d.21 Form of Transfer and Assumption of Management
Agreement between MMC and TIA (filed herewith).
d.22 Form of Agreement replacing MMC with TIA as adviser
under Subadvisory Agreement (filed herewith).
e.1 Distribution Agreement between Registrant and CFBDS,
Inc. is incorporated by reference to Exhibit m.1 to
Post-Effective Amendment No. 10 filed on December 23,
1998.
e.2 Form of Selected Dealer Agreement between Registrant
and CFBDS, Inc. (filed herewith).
f. Not applicable.
g.1 Custodian Agreement between Registrant and PNC Bank,
National Association is incorporated by reference to
Exhibit 8 to Post-Effective Amendment No. 1 filed on
December 29, 1994.
g.2 Global Custody Agreement between Barclays Bank PLC
and PNC Bank is incorporated by reference to Exhibit
8 to Post-Effective Amendment No. 1 filed on December
29, 1994.
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 is incorporated by reference to
Exhibit 8(d) to Post-Effective Amendment No. 7 filed
on February 25, 1997.
h.1 Transfer Agency Agreement between Registrant and
First Data Investor Services Group, Inc. is
incorporated by reference to Exhibit 9 (b) to Post-
Effective Amendment No. 7 filed on February 25, 1997.
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 is filed herewith.
k. Not applicable.
l. Subscription Agreement between Registrant and The
Travelers, Inc. is incorporated by reference to
Exhibit 8 to Post-Effective Amendment No. 1 filed on
December 29, 1994.
m not applicable
n. Financial Data Schedule is filed herewith.
o. not applicable
_________________________
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 SSBC Fund
Management Inc. (formerly known as Mutual Management Corp.)
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 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 G.T. 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
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., ("CFBDS") the Registrant's Distributor, is
also the distributor for the following Smith Barney funds:
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 Funds Inc., Smith Barney Investment
Trust, 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., and various series of unit
investment trusts.
CFBDS also serves as the distributor for the following funds: The
Travelers Fund UL for Variable Annuities, The Travelers Fund VA
for Variable Annuities, The Travelers Fund BD for Variable
Annuities, The Travelers Fund BD II for Variable Annuities, The
Travelers Fund BD III for Variable Annuities, The Travelers Fund
BD IV for Variable Annuities, The Travelers Fund ABD for Variable
Annuities, The Travelers Fund ABD II for Variable Annuities, The
Travelers Separate Account PF for Variable Annuities, The
Travelers Separate Account PF II for Variable Annuities, The
Travelers Separate Account QP for Variable Annuities, The
Travelers Separate Account TM for Variable Annuities, The
Travelers Separate Account TM II for Variable Annuities, The
Travelers Separate Account Five for Variable Annuities, The
Travelers Separate Account Six for Variable Annuities, The
Travelers Separate Account Seven for Variable Annuities, The
Travelers Separate Account Eight for Variable Annuities, The
Travelers Fund UL for Variable Annuities, The Travelers Fund UL
II for Variable Annuities, The Travelers Variable Life Insurance
Separate Account One, The Travelers Variable Life Insurance
Separate Account Two, The Travelers Variable Life Insurance
Separate Account Three, The Travelers Variable Life Insurance
Separate Account Four, The Travelers Separate Account MGA, The
Travelers Separate Account MGA II, The Travelers Growth and
Income Stock Account for Variable Annuities, The Travelers
Quality Bond Account for Variable Annuities, The Travelers Money
Market Account for Variable Annuities, The Travelers Timed Growth
and Income Stock Account for Variable Annuities, The Travelers
Timed Short-Term Bond Account for Variable Annuities, The
Travelers Timed Aggressive Stock Account for Variable Annuities,
The Travelers Timed Bond Account for Variable Annuities.
In addition, CFBDS, the Registrant's Distributor, is also the
distributor for CitiFunds Multi-State Tax Free Trust, CitiFunds
Premium Trust, CitiFunds Institutional Trust, CitiFunds Tax Free
Reserves, CitiFunds Trust I, CitiFunds Trust II, CitiFunds Trust
III, CitiFunds International Trust, CitiFunds Fixed Income Trust,
CitiSelect VIP Folio 200, CitiSelect VIP Folio 300, CitiSelect
VIP Folio 400, CitiSelect VIP Folio 500, CitiFunds Small Cap
Growth VIP Portfolio. CFBDS is also the placement agent for
Large Cap Value Portfolio, Small Cap Value Portfolio,
International Portfolio, Foreign Bond Portfolio, Intermediate
Income Portfolio, Short-Term Portfolio, Growth & Income
Portfolio, U.S. Fixed Income Portfolio, Large Cap Growth
Portfolio, Small Cap Growth Portfolio, International Equity
Portfolio, Balanced Portfolio, Government Income Portfolio, Tax
Free Reserves Portfolio, Cash Reserves Portfolio and U.S.
Treasury Reserves Portfolio.
In addition, CFBDS 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.
In addition, CFBDS is also the distributor for the Centurion
Funds, Inc.
(b) The information required by this Item 27 with respect to
each director and officer of CFBDS is incorporated by reference
to Schedule A of Form BD filed by CFBDS pursuant to the
Securities and Exchange Act of 1934 (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, the Registrant, Travelers
Series Fund, Inc., has duly caused this Post-Effective Amendment
to its Registration Statement to be signed on its behalf by the
undersigned or, 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 26th of February, 1999.
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
February 26, 1999
/s/ Abraham E. Cohen
Director
February 26, 1999
(Abraham E. Cohen)
/s/ Victor K. Atkins*
Director
February 26, 1999
(Victor K. Atkins)
/s/ Robert A. Frankel*
Director
February 26, 1999
(Robert A. Frankel)
/s/ Rainer Greeven*
Director
February 26, 1999
(Rainer Greeven)
/s/ Susan M. Heilbron*
Director
February 26, 1999
(Susan M. Heilbron)
/s/Lewis E. Daidone
Treasurer
February 26, 1999
(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 February 26, 1999
Lewis E. Daidone
EXHIBIT INDEX
a.4 Amendment to Articles of Incorporation
a.5 Amendment to Articles of Incorporation
d.21 Form of Transfer and Assumption of Management Agreement
d.22 Form of Agreement replacing MMC with TIA as adviser under
Subadvisory Agreement
e.2 Form of Selected Dealer Agreement
j. Auditors' Consent
n. Financial Data Schedules
TRAVELERS SERIES FUND INC.
ARTICLES OF AMENDMENT
CHANGING NAME OF SERIES
PURSUANT TO MGCL SECTION 2-605
Travelers Series Fund Inc., a Maryland corporation, having its
principal office in Baltimore City, Maryland (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended to provide as
follows:
The name of the "TBC Managed Income Portfolio" series of capital stock
of the Corporation is hereby changed to the "Travelers Managed Income
Portfolio" series of capital stock of the Corporation.
SECOND: The amendment does not change the outstanding authorized
capital stock of the Corporation or the aggregate par value thereof.
THIRD: The foregoing amendment to the Charter of the Corporation has
been approved by a majority of the Corporation's Board of Directors and is
limited to changes expressly permitted by Section 2-605 of the Maryland
General Corporation Law.
FOURTH: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.
IN WITNESS WHEREOF, the Corporation has caused these presents to be
signed in its name and on its behalf by its President and witnessed by its
Assistant Secretary on this 24th day of February, 1999.
ATTEST: TRAVELERS SERIES FUND INC.
____________________________________
__________________________________
____
Name: Gordon E. Swartz Name: Heath B. McLendon
Title: Assistant Secretary Title: President
THE UNDERSIGNED, the President of Travelers Series Fund Inc. who
executed on behalf of the Corporation the foregoing Articles of Amendment of
which this certificate is made a part, hereby acknowledges in the name and
on behalf of the Corporation the foregoing Articles of Amendment to be the
corporate act of the Corporation and hereby certifies to the best of his
knowledge, information and belief the matters and facts set forth therein
with respect to the authorization and approval thereof are true in all
material respects under the penalties of perjury.
_______________________________
Name: Heath B. McLendon
Title: President
U:\legal\funds\$sts\orgdocs\ArticleAmend2
TRAVELERS SERIES FUND INC.
ARTICLES OF AMENDMENT
CHANGING NAME OF SERIES
PURSUANT TO MGCL SECTION 2-605
Travelers Series Fund Inc., a Maryland corporation, having its
principal office in Baltimore City, Maryland (hereinafter called the
"Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended to provide
as follows:
The name of the "Van Kampen American Capital Enterprise Portfolio"
series of capital stock of the Corporation is hereby changed to the "Van
Kampen Enterprise Portfolio" series of capital stock of the Corporation.
SECOND: The amendment does not change the outstanding authorized
capital stock of the Corporation or the aggregate par value thereof.
THIRD: The foregoing amendment to the Charter of the Corporation has
been approved by the Corporation's Board of Directors and is limited to
changes expressly permitted by Section 2-605 of the Maryland General
Corporation Law.
FOURTH: The Corporation is registered as an open-end investment
company under the Investment Company Act of 1940.
FIFTH: The amendment to the Charter of the Corporation effected
hereby shall become effective at 9:00 a.m. on February 26, 1999.
IN WITNESS WHEREOF, the Corporation has caused these presents to be
signed in its name and on its behalf by its President and witnessed by its
Secretary on this 17th day of February, 1999.
ATTEST: TRAVELERS SERIES FUND INC.
____________________________________
________________________________
______
Name: Christina T. Sydor Name: Heath B. McLendon
Title: Secretary Title: President
THE UNDERSIGNED, the President of Travelers Series Fund Inc. who
executed on behalf of the Corporation the foregoing Articles of Amendment
of which this certificate is made a part, hereby acknowledges in the name
and on behalf of the Corporation the foregoing Articles of Amendment to be
the corporate act of the Corporation and hereby certifies to the best of
his knowledge, information and belief the matters and facts set forth
therein with respect to the authorization and approval thereof are true in
all material respects under the penalties of perjury.
_______________________________
Name: Heath B. McLendon
Title: President
U:\legal\funds\$sts\orgdocs\ArticleAmend
FORM OF
TRANSFER AND ASSUMPTION OF
SUBADVISORY AGREEMENT
for
TRAVELERS SERIES FUND INC. ON BEHALF OF
THE GT GLOBAL STRATEGIC INCOME PORTFOLIO
TRANSFER AND ASSUMPTION OF SUBADVISORY AGREEMENT, made as of
the 3rd day of September, 1996, by and among Travelers Series
Fund Inc. (the "Company"), a corporation organized under the laws
of the State of Maryland, on behalf of the GT Global Strategic
Income Portfolio (the "Portfolio"), Smith Barney Mutual Funds
Management Inc.. ("SBMFM"), a Delaware corporation, LGT Asset
Management, Inc. (formerly known as G.T. Capital Management, Inc.),
a California corporation (the "Sub-Adviser") and Travelers
Investment Adviser, Inc. ("TIA"), a Delaware corporation.
WHEREAS, the Company is registered with the Securities and
Exchange Commission as an open-end management investment company
under the Investment Company Act of 1940, as amended (the "Act");
and
WHEREAS, the Company consists of several distinct investment
portfolios or series; and
WHEREAS, the Company, Mutual Management Corp. ("MMC") and the
Sub-Adviser entered into a Subadvisory Agreement on June 2, 1994,
("Subadvisory Agreement") under which MMC served as the investment
manager and the Sub-Adviser served as the sub-investment adviser
for the Portfolio; and
WHEREAS, the Sub-Adviser consented to the assignment of MMC's
interest, rights, responsibilities and obligations in and under the
Subadvisory Agreement to SBMFM pursuant to a Transfer and
Assumption of Subadvisory Agreement dated as of December 31, 1994,
and SBMFM currently serves as the investment manager (the
"Investment Manager") for the Portfolio; and
WHEREAS, SBMFM desires that its interest, rights,
responsibilities and obligations in and under the Subadvisory
Agreement be transferred to TIA and TIA desires to assume SBMFM's
interest, rights, responsibilities and obligations in and under the
Subadvisory Agreement; and
WHEREAS, this Agreement does not result in a change of actual
control or management of the Investment Manager to the Company and,
therefore, is not an "assignment" as defined in Section 2(a)(4) of
the Act nor an "assignment" for the purposes of Section 15(a)(4) of
the Act.
NOW, THEREFORE, in consideration of the mutual covenants set
forth in this Agreement and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the
parties hereby agree as follows:
1. Assignment. Effective as of September 3, 1996 (the
"Effective Date"), SBMFM hereby transfers to TIA all of SBMFM's
interest, rights, responsibilities and obligations in and under the
Subadvisory Agreement dated June 2, 1994, to which SBMFM is a
party with the Sub-Adviser and the Company.
2. Assumption and Performance of Duties. As of the
Effective Date, TIA hereby accepts all of SBMFM's interest and
rights, and assumes and agrees to perform all of SBMFM's
responsibilities and obligations in and under the Subadvisory
Agreement; TIA agrees to be subject to all of the terms and
conditions of said Agreement; and TIA shall indemnify and hold
harmless SBMFM from any claim or demand made thereunder arising or
incurred after the Effective Date.
3. Representation of TIA. TIA represents and warrants
that : (1) it is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended; and (2) is an indirect
wholly owned subsidiary of the Travelers Insurance Company.
4. Consent. The Company and the Sub-Adviser hereby
consent to this transfer by SBMFM to TIA of SBMFM's interest,
rights, responsibilities and obligations in and under the
Subadvisory Agreement and to the acceptance and assumption by TIA
of the same. The Company and the Sub-Adviser each agrees, subject
to the terms and conditions of said Agreement, to look solely to
TIA for the performance of the Investment Manager's
responsibilities and obligations under said Agreement from and
after the Effective Date, and to recognize as inuring solely to TIA
the interest and rights heretofore held by SBMFM thereunder.
5. Counterparts. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers hereunto
duly attested.
Attest:
By:
Travelers Series Fund Inc.
on behalf of the GT Global Strategic
Income Portfolio
Attest:
By:
Travelers Investment Adviser, Inc.
Attest:
____________________ By:
Smith Barney Mutual Funds Management
Inc.
Attest:
By:
LGT Asset Management, Inc.
g:\funds\$sts\agreemts\gtglobal.trn
FORM OF
TRANSFER AND ASSUMPTION OF
INVESTMENT MANAGEMENT AGREEMENT
for
TRAVELERS SERIES FUND INC.
ON BEHALF OF THE GT GLOBAL STRATEGIC INCOME PORTFOLIO
TRANSFER AND ASSUMPTION OF MANAGEMENT AGREEMENT, made as of
the 3rd day of September, 1996, by and among Travelers Series Fund
Inc. (the "Company"), a corporation organized under the laws of the
State of Maryland, on behalf of the GT Global Strategic Income
Portfolio (the "Portfolio"), Smith Barney Mutual Funds Management
Inc., a Delaware corporation ("SBMFM") and Travelers Investment
Adviser, Inc. ("TIA"), a Delaware corporation.
WHEREAS, the Company is registered with the Securities and
Exchange Commission as an open-end management investment company
under the Investment Company Act of 1940, as amended (the "Act");
and
WHEREAS, the Company consists of several distinct investment
portfolios or series; and
WHEREAS, the Company and Mutual Management Corp. ("MMC")
entered into an Investment Management Agreement on June 2, 1994,
("Management Agreement") under which MMC served as the investment
manager for the Portfolio; and
WHEREAS, the Company consented to the assignment of MMC's
interest, rights, responsibilities and obligations in and under the
Management Agreement to SBMFM pursuant to a Transfer and Assumption
of Investment Management Agreement dated as of December 31, 1994,
and SBMFM currently serves as the investment manager (the
"Investment Manager") for the Portfolio; and
WHEREAS, SBMFM desires that its interest, rights,
responsibilities and obligations in and under the Management
Agreement be transferred to TIA and TIA desires to assume SBMFM's
interest, rights, responsibilities and obligations in and under the
Management Agreement; and
WHEREAS, this Agreement does not result in a change of actual
control or management of the Investment Manager to the Company and,
therefore, is not an "assignment" as defined in Section 2(a)(4) of
the Act nor an "assignment" for the purposes of Section 15(a)(4) of
the Act.
NOW, THEREFORE, in consideration of the mutual covenants set
forth in this Agreement and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the
parties hereby agree as follows:
1. Assignment. Effective as of September 3, 1996 (the
"Effective Date"), SBMFM hereby transfers to TIA all of SBMFM's
interest, rights, responsibilities and obligations in and under the
Management Agreement dated June 2, 1994, to which SBMFM is a party
with the Company.
2. Assumption and Performance of Duties. As of the
Effective Date, TIA hereby accepts all of SBMFM's interest and
rights, and assumes and agrees to perform all of SBMFM's
responsibilities and obligations in and under the Management
Agreement; TIA agrees to be subject to all of the terms and
conditions of said Agreement; and TIA shall indemnify and hold
harmless SBMFM from any claim or demand made thereunder arising or
incurred after the Effective Date.
3. Representation of TIA. TIA represents and warrants
that : (1) it is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended; and (2) is a indirect
wholly owned subsidiary of the Travelers Insurance Company.
4. Consent. The Company hereby consents to this transfer
by SBMFM to TIA of SBMFM's interest, rights, responsibilities and
obligations in and under the Management Agreement and to the
acceptance and assumption by TIA of the same. The Company agrees,
subject to the terms and conditions of said Agreement, to look
solely to TIA for the performance of the Investment Manager's
responsibilities and obligations under said Agreement from and
after the Effective Date, and to recognize as inuring solely to TIA
the interest and rights heretofore held by SBMFM thereunder.
5. Counterparts. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with
the same effect as if the signatures thereto and hereto were upon
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized officers hereunto
duly attested.
Attest:
By:
Secretary Travelers Series Fund,
Inc.
on behalf of the GT
Global Strategic Income
Portfolio
Date: September 3, 1996
Attest:
By:
Secretary Travelers Investment Adviser, Inc.
Date: September 3, 1996
Attest:
Secretary By:
Smith Barney Mutual Funds
Management Inc.
Date: September 3, 1996
u:\legal\funds\$sts\agreemts\invman.gtg
SMITH BARNEY MUTUAL FUNDS
BROKER DEALER CONTRACT
CFBDS, Inc.
21 Milk Street
Boston, Massachusetts 02109
Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
We, CFBDS, Inc. ("CFBDS"), have agreements
with certain investment companies for which Mutual
Management Corp. serves as investment adviser and/or
administrator (each a "Fund") pursuant to which we act
as nonexclusive principal underwriter and distributor
for the sale of shares of capital stock ("shares") of
the various series of such Funds, and as such have the
right to distribute shares for resale. Each Fund is
an open-end investment company registered under the
Investment Company Act of 1940, as amended (the "1940
Act") and the shares being offered to the public are
registered under the Securities Act of 1933, as
amended (the "1933 Act"). Each series of each Fund
covered by a Distribution Agreement from time to time
is referred to in this agreement as a "Series" and
collectively as the "Series." The term "Prospectus",
as used herein, refers to the prospectus and related
statement of additional information (the "Statement of
Additional Information") incorporated therein by
reference (as amended or supplemented) on file with
the Securities and Exchange Commission at the time in
question. As a broker in the capacity of principal
underwriter and distributor for the Trust, we offer to
sell to you, as a broker or dealer, shares of each
Fund upon the following terms and conditions:
1. In all sales to the public
you shall act as broker for your customers or as
dealer for your own account, and in no transaction
shall you have any authority to act as agent for the
Trust, for us or for any other dealer. tc " In all
sales to the public you shall act as dealer for your
own account, and in no transaction shall you have any
authority to act as agent for the Fund, for us or for
any other dealer."
2. Orders received from you
will be accepted through us only at the public
offering price per share (i.e. the net asset value per
share plus the applicable front-end sales charge, if
any) applicable to each order, and all orders for
redemption of any shares shall be executed at the net
asset value per share less any contingent deferred
sales charge, if any, in each case as set forth in the
Prospectus. You will be entitled to receive and
retain any contingent deferred sales charge amounts in
partial consideration of your payment to financial
consultants of commission amounts at the time of sale
and we will obligate any other brokers with whom we
enter into similar agreements to pay such amounts
directly to you. The procedure relating to the
handling of orders shall be subject to paragraph 4
hereof and instructions which we or the Fund shall
forward from time to time to you. All orders are
subject to acceptance or rejection by the applicable
Fund or us in the sole discretion of either. The
minimum initial purchase and the minimum subsequent
purchase of any shares shall be as set forth in the
Prospectus pertaining to the relevant Series. tc "
Orders received from you will be accepted through us
only at the public offering price per share (i.e. the
net asset value per share plus the applicable sales
charge, if any) applicable to each order, and all
orders for redemption of any Fund shares shall be
executed at the net asset value per share less any
contingent deferred sales charge, if any, in each case
as set forth in the Prospectus. The procedure
relating to the handling of orders shall be subject to
paragraph 4 hereof and instructions which we or the
Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by
Salomon or the Fund in the sole discretion of either.
The minimum initial purchase and the minimum
subsequent purchase shall be as set forth in the
Prospectus of the Fund."
3. You shall not place orders
for any shares unless you have already received
purchase orders for those shares at the applicable
public offering price and subject to the terms hereof.
You agree that you will not offer or sell any shares
except under circumstances that will result in
compliance with the applicable Federal and state
securities laws, the applicable rules and regulations
thereunder and the rules and regulations of applicable
regulatory agencies or authorities and that in
connection with sales and offers to sell shares you
will furnish to each person to whom any such sale or
offer is made, a copy of the Prospectus and, upon
request, the Statement of Additional Information, and
will not furnish to any person any information
relating to shares which is inconsistent in any
respect with the information contained in the
Prospectus or Statement of Additional Information (as
then amended or supplemented). You shall not furnish
or cause to be furnished to any person or display or
publish any information or materials relating to the
shares (including, without limitation, promotional
materials and sales literature, advertisements, press
releases, announcements, statements, posters, signs or
other similar material), except such information and
materials as may be furnished to you by or on behalf
of us or the Funds, and such other information and
materials as may be approved in writing by or on
behalf of us or the Funds. tc " You shall not place
orders for any shares unless you have already received
purchase orders for those shares at the applicable
public offering price and subject to the terms hereof
and of the Distribution Contract. You agree that you
will not"
4. As a broker dealer, you are
hereby authorized (i) to place orders directly with
the applicable Fund or Series for shares subject to
the applicable terms and conditions governing the
placement of orders by us set forth in the Prospectus
and (ii) to tender shares directly to each Fund or its
agent for redemption subject to the applicable terms
and conditions governing the redemption of shares
applicable to us set forth in the Prospectus. tc " As
a dealer, you are hereby authorized (i) to place
orders directly with the Fund for shares to be resold
by us to you subject to the applicable terms and
conditions governing the placement of orders by us set
forth in the Prospectus and the Distribution Contract
and (ii) to tender shares directly to the Fund or its
agent for redemption subject to the applicable terms
and conditions governing the redemption of shares
applicable to us set forth in the Prospectus and the
Distribution Agreement."
5. You shall not withhold
placing orders received from your customers so as to
profit yourself as a result of such withholding, e.g.,
by a change in the "net asset value" from that used in
determining the offering price to your customers. tc "
You shall not withhold placing orders received from
your customers so as to profit yourself as a result of
such withholding, e.g., by a change in the \"net asset
value\" from that used in determining the offering
price to your customers."
6. In determining the amount
of any sales concession payable to you hereunder, we
reserve the right to exclude any sales which we
reasonably determine are not made in accordance with
the terms of the Prospectus and the provisions of this
Agreement. Unless at the time of transmitting an
order we advise you or the transfer agent to the
contrary, the shares ordered will be deemed to be the
total holdings of the specified investor. tc " In
determining the amount of any sales concession payable
to you hereunder, we reserve the right to exclude any
sales which we reasonably determine are not made in
accordance with the terms of the Prospectus and the
provisions of this Agreement. Unless at the time of
transmitting an order we advise you or the transfer
agent to the contrary, the shares ordered will be
deemed to be the total holdings of the specified
investor."
7. (a) You agree that payment
for orders from you for the purchase of shares will be
made in accordance with the terms of the Prospectus.
On or before the business day following the settlement
date of each purchase order for shares, you shall
transfer same day funds to an account designated by us
with the transfer agent in an amount equal to the
public offering price on the date of purchase of the
shares being purchased less your sales concession, if
any, with respect to such purchase order determined in
accordance with the Prospectus. If payment for any
purchase order is not received in accordance with the
terms of the Prospectus, we reserve the right, without
notice, to cancel the sale and to hold you responsible
for any loss sustained as a result thereof. tc " (a)
You agree that payment for orders from you for the
purchase of shares will be made in accordance with the
terms of the Prospectus. On or before the business
day following the settlement date of each purchase
order for shares, you shall transfer same day funds to
an account designated by us with the transfer agent an
amount equal to the public offering price on the date
of purchase of the shares being purchased less your
sales concession, if any, with respect to such
purchase order determined in accordance with the
Prospectus. If payment for any purchase order is not
received in accordance with the terms of the
Prospectus, we reserve the right, without notice, to
cancel the sale and to hold you responsible for any
loss sustained as a result thereof."
(b) If any shares sold under the
terms of this Agreement are sold with a sales charge
and are redeemed or are tendered for redemption within
seven (7) business days after confirmation of your
purchase order for such shares: (i) you shall
forthwith refund to us the full sales concession
received by you on the sale; and (ii) we shall
forthwith pay to the applicable Series our portion of
the sales charge on the sale which has been retained
by us, if any, and shall also pay to the applicable
Series the amount refunded by you. tc " If any shares
sold under the terms of this Agreement are sold with a
sales charge and are redeemed or are tendered for
redemption within seven (7) business days after
confirmation of your purchase order for such shares\:
(i) you shall forthwith refund to us the full sales
concession received by you on the sale; and (ii) we
shall forthwith pay to the applicable Series our
portion of the sales charge on the sale which has been
retained by us, if any, and shall also pay to the
Series the amount refunded by you."
(c) We will not be obligated to
pay or cause to be paid to you any ongoing trail
commission or shareholder service fees with respect to
shares of the Series purchased through you and held by
or for your customers, which you shall collect
directly from the Funds. tc " We will pay you an
ongoing trail commission with respect to holdings by
you of shares of the Funds at such rates and in such
manner as may be described in the Prospectus."
(d) Certificates evidencing
shares shall be available only upon request. Upon
payment for shares in accordance with paragraph 7(a)
above, the transfer agent will issue and transmit to
you or your customer a confirmation statement
evidencing the purchase of such shares. Any
transaction in uncertificated shares, including
purchases, transfers, redemptions and repurchases,
shall be effected and evidenced by book-entry on the
records of the transfer agent. tc " Certificates
evidencing shares shall be available only upon
request. Upon payment for shares in accordance with
paragraph 7(a) above, the transfer agent will issue
and transmit to you a confirmation statement
evidencing the purchase of such shares. Any
transaction in uncertificated shares, including
purchases, transfers, redemptions and repurchases,
shall be effected and evidenced by book-entry on the
records of the transfer agent."
8. No person is authorized to
make any representations concerning shares except
those contained in the current Prospectus and
Statement of Additional Information and in printed
information subsequently issued by us or the Funds as
information supplemental to the Prospectus and the
Statement of Additional Information. In purchasing or
offering shares pursuant to this Agreement you shall
rely solely on the representations contained in the
Prospectus, the Statement of Additional Information
and the supplemental information above mentioned. tc "
No person is authorized to make any representations
concerning shares except those contained in the
current Prospectus and Statement of Additional
Information and in printed information subsequently
issued by us or the Fund as information supplemental
to the Prospectus and the Statement of Additional
Information. In purchasing sor offering shares
pursuant to this Agreement you shall rely solely on
the representations contained in the Prospectus, the
Statement of Additional Information and the
supplemental information above mentioned."
9. PRIVATE You agree to deliver to
each purchaser making a purchase of shares from or
through you a copy of the Prospectus at or prior to
the time of offering or sale, and, upon request, the
Statement of Additional Information. You may instruct
the transfer agent to register shares purchased in
your name and account as nominee for your customers.
You agree thereafter to deliver to any purchaser whose
shares you or your nominee are holding as record
holder copies of the annual and interim reports and
proxy solicitation materials and any other information
and materials relating to the Trust and prepared by or
on behalf of us, the Funds or the investment adviser,
custodian, transfer agent or dividend disbursing agent
for distribution to beneficial holders of shares. The
Funds shall be responsible for the costs associated
with forwarding such reports, materials and other
information and shall reimburse you in full for such
costs. You further agree to make reasonable efforts
to endeavor to obtain proxies from such purchasers
whose shares you or your nominee are holding as record
holder. You further agree to obtain from each
customer to whom you sell shares any taxpayer
identification number certification required under
Section 3406 of the Internal Revenue Code of 1986, as
amended (the "Code"), and the regulations promulgated
thereunder, and to provide us or our designee with
timely written notice of any failure to obtain such
taxpayer identification number certification in order
to enable the implementation of any required backup
withholding in accordance with Section 3406 of the
Code and the regulations thereunder. Additional
copies of the Prospectus, Statement of Additional
Information, annual or interim reports, proxy
solicitation materials and any such other information
and materials relating to the Trust will be supplied
to you in reasonable quantities upon request. tc "
You agree to deliver to each purchaser making a
purchase of shares from you a copy of the Prospectus
at or prior to the time of offering or sale, and, upon
request, the Statement of Additional Information. You
may instruct the transfer agent to register shares
purchased in your name and account as nominee for your
customers. You agree thereafter to deliver to any
purchaser whose shares you are holding as record
holder copies of the annual and interim reports and
proxy solicitation materials and any other information
and materials relating to the Fund and prepared by or
on behalf of us, the Fund or its investment adviser,
custodian, transfer agent or dividend disbursing agent
for distribution to such customer. The Fund shall be
responsible for the costs associated with forwarding
such reports, materials and other information and
shall reimburse you in full for such costs. You
further agree to make reasonable efforts to endeavor
to obtain proxies from such purchasers whose shares
you are holding as record holder. You further agree
to obtain from each customer to whom you sell shares
any taxpayer identification number certification
required under Section 3406 of the Internal Revenue
Code of 1986, as amended (the \"Code\"), and the
regulations promulgated thereunder, and to provide us
or our designee with timely written notice of any
failure to obtain such taxpayer identification number
certification in order to enable the implementation of
any required backup withholding in accordance with
Section 3406 of the Code and the regulations
thereunder. Additional copies of the Prospectus,
Statement of Additional Information, annual or interim
reports, proxy solicitation materials and any such
other information and materials relating to the Fund
will be supplied to you in reasonable quantities upon
request."
10. PRIVATE (a) In accordance with the
terms of the Prospectus, a reduced sales charge may be
available to customers, depending on the amount of the
investment or proposed investment. In each case where
a reduced sales charge is applicable, you agree to
furnish to the transfer agent sufficient information
to permit confirmation of qualification for a reduced
sales charge, and acceptance of the purchase order is
subject to such confirmation. Reduced sales charges
may be modified or terminated at any time in the sole
discretion of each Fund. tc " (a) In accordance
with the terms of the Prospectus, a reduced sales
charge may be available to customers, depending on the
amount of the investment. In each case where a
reduced sales charge is applicable, you agree to
furnish to the transfer agent sufficient information
to permit confirmation of qualification for a reduced
sales charge, and acceptance of the purchase order is
subject to such confirmation. Reduced sales charges
may be modified or terminated at any time in the sole
discretion of the Fund."
(b) You acknowledge that
certain classes of investors may be entitled to
purchase shares at net asset value without a sales
charge as provided in the Prospectus and Statement of
Additional Information. tc " You acknowledge that
certain classes of investors may be entitled to
purchase shares at net asset value without a sales
charge as provided in the Prospectus and Statement of
Additional Information."
(c) You agree to advise us
promptly as to the amount of any and all sales by you
qualifying for a reduced sales charge or no sales
charge. tc " You agree to advise us promptly as to
the amount of any and all sales by you qualifying for
a reduced sales charge or no sales charge."
(d) Exchanges (i.e., the
investment of the proceeds from the liquidation of
shares of one Series in the shares of another Series,
each of which is managed by the same or an affiliated
investment adviser) shall, where available, be made in
accordance with the terms of each Prospectus. tc "
Exchanges (i.e., the investment of the proceeds from
the liquidation of shares of one fund in the shares of
another fund, each of which is managed by the Fund's
investment adviser) shall, where available, be made in
accordance with the terms of each Prospectus."
11. We and each Fund reserve
the right in our discretion, without notice, to
suspend sales or withdraw the offering of any shares
entirely. Each party hereto has the right to cancel
the portions of this Agreement to which it is party
upon notice to the other parties; provided, however,
that no cancellation shall affect any party's
obligations hereunder with respect to any transactions
or activities occurring prior to the effective time of
cancellation. We reserve the right to amend this
Agreement in any respect effective on notice to
you. tc " We reserve the right in our discretion,
without notice, to suspend sales or withdraw the
offering of shares entirely. Each party hereto has
the right to cancel this agreement upon notice to the
other part parties; provided; however, that no
cancellation shall affect any party's obligations
hereunder with respect to any transactions or
activities occurring prior to the effective time of
cancellation. We reserve the right to amend this
Agreement in any respect effective on notice to you."
12. We shall have full authority
to take such action as we may deem advisable in respect
of all matters pertaining to the continuous offering of
shares. We shall be under no liability to you except for
lack of good faith and for obligations expressly assumed
by us herein. Nothing contained in this paragraph 12 is
intended to operate as, and the provisions of this
paragraph 12 shall not in any way whatsoever constitute a
waiver by you of compliance with, any provisions of the
1933 Act or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.
tc " We shall have full authority to take such action
as we may deem advisable in respect of all matters
pertaining to the continuous offering of shares. We
shall be under no liability to you except for lack of
good faith and for obligations expressly assumed by us
herein. Nothing contained in this paragraph 12 is
intended to operate as, and the provisions of this
paragraph 12 shall not in any way whatsoever constitute a
waiver by you of compliance with, any provisions of the
1933 Act or of the rules and regulations of the
Securities and Exchange Commission issued thereunder."
13. You agree that: (a) you
shall not effect any transactions (including, without
limitation, any purchases and tc " You agree that\:
(a) you shall not effect any transactions (including,
without limitation, any purchases and" redemptions)
in any shares registered in the name of, or
beneficially owned by, any customer unless such
customer has granted you full right, power and
authority to effect such transactions on his behalf,
(b) we shall have full authority to act upon your
express instructions to sell, repurchase or exchange
shares through us on behalf of your customers under
the terms and conditions provided in the Prospectus
and (c) we, the Funds, the investment adviser, the
administrator, the transfer agent and our and their
respective officers, directors or trustees, agents,
employees and affiliates shall not be liable for, and
shall be fully indemnified and held harmless by you
from and against, any and all claims, demands,
liabilities and expenses (including, without
limitation, reasonable attorneys' fees) which may be
incurred by us or any of the foregoing persons
entitled to indemnification from you hereunder arising
out of or in connection with (i) the execution of any
transactions in shares registered in the name of, or
beneficially owned by, any customer in reliance upon
any oral or written instructions believed to be
genuine and to have been given by or on behalf of you,
(ii) any statements or representations that you or
your employees or representatives make concerning the
Funds that are inconsistent with the applicable Fund's
Prospectus, (iii) any written materials used by you or
your employees or representatives in connection with
making offers or sales of shares that were not
furnished by us, the Funds or the investment adviser
or an affiliate thereof and (iv) any sale of shares of
a Fund where the Fund or its shares were not properly
registered or qualified for sale in any state, any
U.S. territory or the District of Columbia, when we
have indicated to you that the Fund or its shares were
not properly registered or qualified. The
indemnification agreement contained in this Paragraph
13 shall survive the termination of this Agreement.
14. You represent that: (a) you
are a member in good standing of the National
Association of Securities Dealers, Inc. (the "NASD"),
or, if a foreign dealer who is not eligible for
membership in the NASD, that (i) you will not make any
sales of shares in, or to nationals of, the United
States of America, its territories or its possessions,
and (ii) in making any sales of shares you will comply
with the NASD's Conduct Rules and (b) you are a member
in good standing of the Securities Investor Protection
Corporation ("SIPC"). You agree that you will provide
us with timely written notice of any change in your
NASD or SIPC status. tc " You represent that you are
a member in good standing of the National Association
of Securities Dealers, Inc. (the \"NASD\"), or, if a
foreign dealer who is not eligible for membership in
the NASD, that (a) you will not make any sales of
shares in, or to nationals of, the United States of
America, its territories or its possessions, and (b)
in making any sales of shares you will comply with the
NASD's Rules of Fair Practice."
15. We shall inform you as to
the states or other jurisdictions in which the Fund has
advised us that shares have been qualified for sale
under, or are exempt from the requirements of, the
respective securities laws of such states, but we
assume no responsibility or obligation as to your
qualification to sell shares in any jurisdiction.
16. 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.
17. All communications to us
should be sent, postage prepaid, to 21 Milk Street,
Boston, Massachusetts 02109 Attention: Philip
Coolidge. Any notice to you shall be duly given if
mailed, telegraphed or telecopied to you at the
address specified by you below. Communications
regarding placement of orders for shares should be
sent, postage prepaid, to First Data Investor Services
Group, Inc., P.O. Box 5128, Westborough, Massachusetts
01581-5128. tc " All communications to us should be
sent, postage prepaid, to 7 World Trade Center, New
York, New York 10048. Attention\: Robert J. Leonard.
Any notice to you shall be duly given if mailed,
telegraphed or telecopied to you at the address
specified by you below. Communications regarding
placement of orders for shares should be sent, postage
prepaid, to The Shareholder Services Group, Inc., P.O.
Box 9109, Boston, Massachusetts 02205-9109."
18. This Agreement shall be
binding upon both parties hereto when signed by us and
accepted by you in the space provided below tc " This
Agreement shall be binding upon both parties hereto
when signed by us and accepted by you in the space
provided below until July 14, 1995 or such earlier
date upon negotiation of section 3 and 12 of this
agreement. " .
19. 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. tc " 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."
CFBDS, INC.
By:/s/
(Authorized
Signature)
Accepted:
Firm Name:
Address:
Accepted By (signature):
Name (print):
Title: Date:
u:\legal\general\forms\agreemts\dist12b-1\dealerag1.doc
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Travelers Series Fund Inc.:
We consent to the use of our reports dated December 18, 1998,
with respect to the Portfolios listed below of Travelers Series
Fund Inc., incorporated herein by reference and to the
references to our Firm under the headings "Financial Highlights"
in the Prospectus and "Independent Auditors" in the Statement of
Additional Information.
Portfolios
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 Enterprise Portfolio
GT Global Strategic Income Portfolio
Travelers Managed Income Portfolio
Putnam Diversified Income Portfolio
Smith Barney High Income Portfolio
MFS Total Return Portfolio
Smith Barney Money Market Portfolio
KPMG LLP
New York, New York
February 23, 1999
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<TABLE> <S> <C>
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<NAME> PUTNAM DIVERSIFIED INCOME PORTFOLIO
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