February 28, 1999
As Amended July 27, 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 32
Investment Restrictions 39
Portfolio Turnover 52
Performance Information 52
Determination of Net Asset Value 53
Availability of the Funds 53
Redemption of Shares 54
Management 54
Other Information about the Company 58
Financial Statements 60
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.
Director of two investment companies associated with Salomon Smith
Barney; 62.
ROBERT A. FRANKEL, Director
Managing Partner of Robert A. Frankel Managing Consultants, 102
Grand Street, Croton-on-Hudson, NY. Director of nine 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) are deemed to be "fundamental," and
therefore may be changed only by the "vote of a majority of the
outstanding voting securities" as defined under the 1940 Act.
However, each fund's investment policies are nonfundamental, and
thus may be changed without shareholder approval 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.
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" fund 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.
The Portfolio may invest up to 20% of its assets in the securities
of foreign issuers that are denominated in currencies other than the
U.S. dollar and may invest without limitation in securities of
foreign issuers that are denominated in U.S. dollars.
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 fund 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 Company'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.
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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.
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.
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 PRACTICES
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. Fixed Income securities rated 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 (e.g. 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 investment grade 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 investment grade 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.
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
"Other Information about the Company-Voting Rights"). Following the
list of each fund's fundamental investment restrictions which is set
forth below 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 an investment by the fund, a later
increase or decrease in percentage resulting solely from a change in
values of portfolio securities or amount of total or net assets will
not be considered a violation of such percentage restriction.
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. ("VKAM"). VKAM is located at One Parkview Plaza,
Oakbrook Terrace, IL 60181 and is an indirect wholly owned
subsidiary of Morgan Stanley Dean Witter & Co. For the services
provided by VKAM, the Manager pays to VKAM 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 Dean Witter & Co. ("Morgan
Stanley") (an affiliate of VKAM) 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.
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