UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-8372
Legg Mason Partners Variable Portfolios III, Inc.
(Exact name of registrant as specified in charter)
| 125 Broad Street, New York, NY | 10004 | |
| (Address of principal executive offices) | (Zip code) | |
Robert I. Frenkel, Esq.
Legg Mason & Co., LLC
300 First Stamford Place, 4th Fl.
Stamford, CT 06902
(Name and address of agent for service)
Registrant’s telephone number, including area code: (800) 451-2010
Date of fiscal year end: October 31
Date of reporting period: October 31, 2006
ITEM 1. REPORT TO STOCKHOLDERS.
The Annual Report to Stockholders is filed herewith.
ANNUAL REPORT
OCTOBER 31, 2006
Legg Mason Partners Variable Money Market Portfolio
INVESTMENT PRODUCTS: NOT FDIC INSURED Ÿ NO BANK GUARANTEE Ÿ MAY LOSE VALUE
Variable Money Market Portfolio
Annual Report • October 31, 2006
What’s
Inside
Fund Objective
Maximize current income consistent with preservation of capital. The Fund seeks to maintain a stable $1 share price.
An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the Fund.
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Board Approval of Management and Subadvisory Agreements | 22 | |
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R. JAY GERKEN, CFA
Chairman, President and Chief Executive Officer
Dear Shareholder,
While the U.S. economy continued to expand, it weakened considerably as the reporting period progressed. After expanding 4.1% in the third quarter of 2005, gross domestic product (“GDP”)i increased a modest 1.7% in the last three months of the year. The economy then rebounded sharply in the first quarter of 2006. During this period, GDP rose 5.6%, its highest reading since the third quarter of 2003. The economy then took a step backwards in the second quarter of 2006, as GDP growth was 2.6%, according to the U.S. Commerce Department. The preliminary estimate for third quarter GDP growth was 2.2%.
After increasing the federal funds rateii to 5.25% in June—its 17th consecutive rate hike—the Federal Reserve Board (“Fed”)iii paused from raising rates at its next four meetings. In its statement accompanying the December meeting, the Fed stated, “Economic growth has slowed over the course of the year, partly reflecting a substantial cooling of the housing market. Although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.” The Fed’s next meeting is at the end of January, and we believe any further rate movements will likely be data dependent.
Both short- and long-term yields rose over the reporting period. However, after peaking in late June—with two-year and 10-year Treasuries hitting 5.29% and 5.25%, respectively—rates fell sharply as the Fed paused from its tightening cycle. In addition, inflationary pressures eased as oil prices, which rose to a record $78 a barrel in mid-July, fell 15% in the latter part of the third quarter.iv Overall, during the 12 months ended October 31, 2006, two-year Treasury yields increased from 4.40% to 4.71%. Over the same period, 10-year Treasury yields moved from 4.57% to 4.61%.
Legg Mason Partners Variable Money Market Portfolio I
The yields available from money market instruments fluctuated given the changes in short-term interest rates over the 12-month reporting period. Overall, during this period there remained solid demand for shorter dated money market securities.
Within this environment, the Portfolio performed as follows:
| Performance Snapshot as of October 31, 2006 (unaudited) | ||||
| 6 months | 12 months | |||
Variable Money Market Portfolio1 | 2.39% | 4.41% | ||
90-Day U.S. Treasury Bill Index | 2.43% | 4.50% | ||
Lipper Variable Money Market Funds Category Average | 2.37% | 4.33% | ||
| The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown above. Principal value and investment returns will fluctuate and investors’ shares, when redeemed, may be worth more or less than their original cost. | ||||
| Performance figures reflect reimbursements and/or fee waivers, without which the performance would have been lower. | ||||
| Portfolio returns assume the reinvestment of all distributions including returns of capital, if any, at net asset value and the deduction of all Portfolio expenses. | ||||
| Lipper, Inc. is a major independent mutual-fund tracking organization. Returns are based on the period ended October 31, 2006 and include the reinvestment of distributions, including returns of capital, if any, calculated among the 108 funds for the six-month period and among the 107 funds for the 12-month period in the Portfolio’s Lipper category. | ||||
Please read on for a more detailed look at prevailing economic and market conditions during the Portfolio’s fiscal year and to learn how those conditions have affected Portfolio performance.
Special Shareholder Notices
As part of the continuing effort to integrate investment products managed by the advisers acquired with Citigroup Inc.’s asset management business, Legg Mason, Inc. (“Legg
| 1 | The Portfolio is an underlying investment option of various variable annuity and variable life insurance products. The Portfolio’s performance returns do not reflect the deduction of initial sales charges and expenses imposed in connection with investing in variable annuity or variable life insurance contracts, such as administrative fees, account charges, and surrender charges, which, if reflected, would reduce the performance of the Portfolio. Past performance is no guarantee of future results. |
II Legg Mason Partners Variable Money Market Portfolio
Mason”) has recommended various Portfolio actions in order to streamline product offerings, eliminate redundancies and improve efficiencies within the organization. At Board meetings held during June and July 2006, the Portfolio’s Board reviewed and approved these recommendations, and provided authorization to move ahead with proxy solicitations for those matters needing shareholder approval.
Effective August 1, 2006, Legg Mason Partners Fund Advisor, LLC (“LMPFA”) became the Portfolio’s investment manager and Western Asset Management Company (“Western Asset”) became the Portfolio’s subadviser. The portfolio managers who are responsible for the day-to-day management of the Portfolio remain the same immediately prior to and immediately after the date of these changes. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason.
The Portfolio was formerly known as Travelers Series Fund Inc.—Smith Barney Money Market Portfolio.
Information About Your Portfolio
As you may be aware, several issues in the mutual fund industry have come under the scrutiny of federal and state regulators. Affiliates of the Portfolio’s manager have, in recent years, received requests for information from various government regulators regarding market timing, late trading, fees, and other mutual fund issues in connection with various investigations. The regulators appear to be examining, among other things, the Portfolio’s response to market timing and shareholder exchange activity, including compliance with prospectus disclosure related to these subjects. The Portfolio is not in a position to predict the outcome of these requests and investigations.
Important information with regard to recent regulatory developments that may affect the Portfolio is contained in the Notes to Financial Statements included in this report.
Legg Mason Partners Variable Money Market Portfolio III
As always, thank you for your confidence in our stewardship of your assets. We look forward to helping you continue to meet your financial goals.
Sincerely,
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
December 13, 2006
All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
| i | Gross domestic product is a market value of goods and services produced by labor and property in a given country. |
| ii | The federal funds rate is the interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. |
| iii | The Federal Reserve Board is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. |
| iv | Source: The Wall Street Journal, 9/29/06. |
IV Legg Mason Partners Variable Money Market Portfolio
Q. What were the overall market conditions during the Portfolio’s reporting period?
A. The economy grew at a slightly below-average pace over the 12-month reporting period. Economic growth downshifted in the latter half of the period due to emerging weakness in the housing sector and declining worker productivity. Inflation was somewhat elevated, with core consumer inflation accelerating from 2.1% to 2.9%, but headline inflation fell from 4.7% to 2.1%, thanks to a sharp decline in energy prices late in the period. With economic growth and inflation exceeding expectations for most of the period, interest rates rose across the yield curvei as the Federal Reserve Board (“Fed”)ii boosted its target federal funds rateiii from 3.5% to 5.25%. Longer-term yields rose less than short-term rates. This occurred as the Fed decided to hold rates steady near the end of the period and the market began to anticipate an easing of rates and moderating inflation in the first half of 2007. Corporate profits reached record levels and tax receipts at the state and federal level continued to register very strong growth. Default rates remained low and credit spreads were generally tighter across the board.
Performance Update1
For the 12 months ended October 31, 2006, Legg Mason Partners Variable Money Market Portfolio, returned 4.41%. These shares outperformed the Lipper Variable Money Market Funds Category Average,2 which increased 4.33%. The Portfolio’s unmanaged benchmark, the 90-Day U.S. Treasury Bill Index,iv returned 4.50% for the same period.
Q. What were the most significant factors affecting Portfolio performance?
What were the leading contributors to performance?
A. For most of the reporting period, we maintained a more neutral maturity stance in the Portfolio, investing primarily in high quality commercial paper and bank obligations.
What were the leading detractors from performance?
A. Throughout the reporting period, we maintained a diversified portfolio supported by thorough credit analysis. We did not invest in any securities that we believed would be detrimental to the performance of the Portfolio.
Q. Were there any significant changes to the Portfolio during the reporting period?
A. There were no significant changes to the Portfolio during the reporting period.
| 1 | The Portfolio is an underlying investment option of various variable annuity and variable life insurance products. The Portfolio’s performance returns do not reflect the deduction of initial sales charges and expenses imposed in connection with investing in variable annuity or variable life insurance contracts, such as administrative fees, account charges, and surrender charges, which, if reflected, would reduce the performance of the Portfolio. Past performance is no guarantee of future results. |
| 2 | Lipper, Inc. is a major independent mutual-fund tracking organization. Returns are based on the 12-month period ended October 31, 2006, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 107 funds in the Portfolio’s Lipper category. |
Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report 1
Thank you for your investment in the Legg Mason Partners Variable Money Market Portfolio. As ever, we appreciate that you have chosen us to manage your assets and we remain focused on seeking to achieve the Fund’s investment goals.
Sincerely,
Western Asset Management Company
November 29, 2006
The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.
RISKS: An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the Portfolio seeks to preserve the value of your investment at one dollar per share, it is possible to lose money by investing in the Portfolio. Please see the Portfolio’s prospectus for more information on these and other risks.
All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
| i | The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities. |
| ii | The Federal Reserve Board is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. |
| iii | The federal funds rate is the interest rate that banks with excess reserves at a Federal Reserve district bank charge other banks that need overnight loans. |
| iv | The 90-day U.S. Treasury Bill Index is an unmanaged indes that consists of one 90-day United States Treasury Bill whose return is tracked until its maturity. |
2 Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report
Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report 3
Example
As a shareholder of the Fund, you may incur two types of costs: (1) transaction costs and (2) ongoing costs, including management fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
This example is based on an investment of $1,000 invested on May 1, 2006 and held for the six months ended October 31, 2006.
Actual Expenses
The table below titled “Based on Actual Total Return” provides information about actual account values and actual expenses. You may use the information provided in this table, together with the amount you invested, to estimate the expenses that you paid over the period. To estimate the expenses you paid on your account, divide your ending account value by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled “Expenses Paid During the Period”.
| Based on Actual Total Return(1) | |||||||||||||||
| Actual Total Return(2) | Beginning Account Value | Ending Account Value | Annualized Expense Ratio | Expenses Paid During the Period(3) | |||||||||||
Legg Mason Partners Variable Money Market Portfolio | 2.39 | % | $ | 1,000.00 | $ | 1,023.90 | 0.51 | % | $ | 2.60 | |||||
| (1) | For the six months ended October 31, 2006. |
| (2) | Assumes reinvestment of all distributions, including returns of capital, if any, at net asset value. Total return is not annualized, as it may not be representative of the total return for the year. Total returns do not reflect expenses associated with the separate account such as administrative fees, account charges and surrender charges, which, if reflected, would reduce the total returns. Performance figures may reflect fee waivers and/or expense reimbursements. Past performance is no guarantee of future results. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. |
| (3) | Expenses (net of fee waivers and/or expense reimbursements) are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 365. |
4 Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report
Fund Expenses (unaudited) (continued)
Hypothetical Example for Comparison Purposes
The table below titled “Based on Hypothetical Total Return” provides information about hypothetical account values and hypothetical expenses based on the actual expense ratio and an assumed rate of return of 5.00% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use the information provided in this table to compare the ongoing costs of investing in the Fund and other funds. To do so, compare the 5.00% hypothetical example relating to the Fund with the 5.00% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table below are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transaction costs were included, your costs would have been higher.
| Based on Hypothetical Total Return(1) | |||||||||||||||
| Hypothetical Annualized Total Return | Beginning Account Value | Ending Account Value | Annualized Expense Ratio | Expenses Paid During the Period(2) | |||||||||||
Legg Mason Partners Variable Money Market Portfolio | 5.00 | % | $ | 1,000.00 | $ | 1,022.63 | 0.51 | % | $ | 2.60 | |||||
| (1) | For the six months ended October 31, 2006. |
| (2) | Expenses (net of fee waivers and/or expense reimbursements) are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 365. |
Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report 5
Schedule of Investments (October 31, 2006)
LEGG MASON PARTNERS VARIABLE MONEY MARKET PORTFOLIO
Face Amount | Security | Value | |||||
| SHORT-TERM INVESTMENTS — 101.3% | |||||||
| Commercial Paper — 51.8% | |||||||
| $ | 3,000,000 | Anglesea Funding, 5.375% due 3/12/07 (a) | $ | 2,942,578 | |||
| 5,000,000 | Atlantis One Funding Corp., 5.377% due 3/12/07 (a) | 4,904,843 | |||||
| 5,000,000 | Atomium Funding Corp., 5.458% due 11/1/06 (a) | 5,000,000 | |||||
Bank of America Corp.: | |||||||
| 7,000,000 | 5.296% due 11/6/06 (a) | 6,994,896 | |||||
| 5,000,000 | 5.346% due 11/27/06 (a) | 4,980,951 | |||||
| 10,000,000 | Bavaria TRR Corp., 5.321% due 11/14/06 (a) | 9,980,861 | |||||
| 3,823,000 | Beethoven Funding Corp., 5.373% due 11/13/06 (a) | 3,816,195 | |||||
| 10,000,000 | Belmont Funding LLC, 5.299% due 11/20/06 (a) | 9,972,160 | |||||
| 10,000,000 | Clipper Receivables Co., LLC, 5.292% due 11/28/06 (a) | 9,960,475 | |||||
Danske Corp.: | |||||||
| 3,041,000 | 5.293% due 12/27/06 (a) | 3,016,212 | |||||
| 3,000,000 | 5.300% due 1/30/07 (a) | 2,960,775 | |||||
Dexia Delaware LLC: | |||||||
| 2,900,000 | 5.271% due 11/21/06 (a) | 2,891,542 | |||||
| 10,000,000 | 5.286% due 12/19/06 (a) | 9,930,133 | |||||
| 10,000,000 | East-Fleet Finance LLC, 5.313% due 11/2/06 (a) | 9,998,531 | |||||
Ebury Finance Ltd.: | |||||||
| 1,390,000 | 5.336% due 11/3/06 (a) | 1,389,591 | |||||
| 5,000,000 | 5.337% due 3/19/07 (a) | 4,900,333 | |||||
| 15,000,000 | Galleon Capital Corp., 5.297% due 11/15/06 (a) | 14,969,200 | |||||
General Electric Capital Corp.: | |||||||
| 5,000,000 | 5.212% due 11/1/06 (a) | 5,000,000 | |||||
| 5,000,000 | 5.402% due 2/5/07 (a) | 4,929,867 | |||||
| 5,000,000 | 5.335% due 6/19/07 (a) | 4,836,125 | |||||
ING U.S. Funding LLC: | |||||||
| 4,000,000 | 5.266% due 11/20/06 (a) | 3,988,917 | |||||
| 8,825,000 | 5.266% due 11/30/06 (a) | 8,787,749 | |||||
| 10,000,000 | Kaiserplatz Delaware, 5.340% due 4/4/07 (a) | 9,777,556 | |||||
| 5,000,000 | Market Street Funding Corp., 5.322% due 11/14/06 (a) | 4,990,431 | |||||
| 10,000,000 | Mica Funding LLC, 5.321% due 11/13/06 (a) | 9,982,333 | |||||
| 5,000,000 | Nestle Capital Corp., 5.304% due 11/29/06 (a) | 4,979,894 | |||||
| 7,000,000 | Ormond Quay Funding LLC, 5.316% due 11/29/06 (a) | 6,971,199 | |||||
| 5,000,000 | Perry Global Funding LLC, 5.292% due 11/10/06 (a) | 4,993,537 | |||||
| 13,000,000 | Sanpaolo IMI U.S. Financial Co. 5.461 - 5.543% due 12/29/06 (a) | 12,887,867 | |||||
| 10,000,000 | Santander Centro Hispano LLC, 5.403% due 2/14/07 (a) | 9,846,583 | |||||
Societe Generale North America: | |||||||
| 5,000,000 | 5.227% due 11/13/06 (a) | 4,991,517 | |||||
| 5,000,000 | 5.229% due 11/13/06 (a) | 4,991,508 | |||||
| 5,000,000 | 5.360% due 2/20/07 (a) | 4,919,217 | |||||
| 5,000,000 | Solitaire Funding LLC, 5.368% due 3/2/07 (a) | 4,912,107 | |||||
| 5,000,000 | Svenska Handelsbanken Inc., 5.499% due 2/2/07 (a) | 4,930,896 | |||||
See Notes to Financial Statements.
6 Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report
Schedule of Investments (October 31, 2006) (continued)
Face Amount | Security | Value | |||||
| Commercial Paper — 51.8% (continued) | |||||||
| $ | 5,000,000 | Tasman Funding Inc., 5.302% due 11/7/06 (a) | $ | 4,995,600 | |||
| 5,000,000 | UBS Finance Delaware LLC, 5.430% due 2/5/07 (a) | 4,929,533 | |||||
Westpac Banking Corp.: | |||||||
| 5,000,000 | 5.429% due 1/25/07 (a) | 4,937,549 | |||||
| 10,000,000 | 5.230% due 12/12/06 | 9,940,094 | |||||
Total Commercial Paper | 250,129,355 | ||||||
| Certificates of Deposit — 2.3% | |||||||
| 5,000,000 | Bank of America NA, 5.310% due 1/24/07 | 5,000,000 | |||||
Wells Fargo Bank NA: | |||||||
| 3,000,000 | 4.800% due 1/29/07 | 2,999,717 | |||||
| 3,000,000 | 4.865% due 1/31/07 | 2,999,964 | |||||
Total Certificates of Deposit | 10,999,681 | ||||||
| Certificates of Deposit (Yankee) — 45.3% | |||||||
| 6,290,000 | Abbey National Treasury Services PLC, 5.280% due 1/4/07 | 6,290,055 | |||||
| 5,000,000 | Bank Montreal Chicago, IL Branch, 5.480% due 12/21/06 | 5,000,427 | |||||
| 3,000,000 | Bank of Nova Scotia NY, 4.860% due 1/30/07 | 2,999,852 | |||||
Barclays Bank PLC NY: | |||||||
| 10,000,000 | 5.310% due 11/20/06 | 10,000,000 | |||||
| 5,000,000 | 5.310% due 1/30/07 | 5,000,000 | |||||
BNP Paribas NY Branch: | |||||||
| 5,000,000 | 5.455% due 1/31/07 | 5,000,000 | |||||
| 5,000,000 | 5.345% due 3/20/07 | 5,000,000 | |||||
Calyon NY: | |||||||
| 10,000,000 | 5.280% due 12/1/06 | 10,000,000 | |||||
| 3,000,000 | 5.095% due 3/6/07 | 2,995,972 | |||||
| 15,000,000 | Credit Suisse New York, 5.300% due 11/8/06 | 15,000,000 | |||||
| 10,000,000 | Depfa Bank PLC, 5.440% due 11/3/06 | 10,000,020 | |||||
| 5,000,000 | Deutsche Bank NY, 5.280% due 11/27/06 | 5,000,000 | |||||
Dresdner Bank NY: | |||||||
| 10,000,000 | 5.275% due 11/10/06 | 10,000,000 | |||||
| 7,000,000 | 5.295% due 12/27/06 | 7,000,000 | |||||
Fortis Bank NY: | |||||||
| 10,000,000 | 5.300% due 11/6/06 | 10,000,000 | |||||
| 2,000,000 | 5.225% due 4/4/07 | 2,000,000 | |||||
HBOS Treasury Services NY: | |||||||
| 5,000,000 | 5.335% due 12/11/06 | 5,000,023 | |||||
| 5,000,000 | 5.340% due 12/18/06 | 5,000,054 | |||||
| 5,000,000 | 4.770% due 1/3/07 | 4,993,275 | |||||
| 2,000,000 | 5.255% due 4/5/07 | 2,000,041 | |||||
| 10,000,000 | Lloyds TSB Bank PLC NY, 5.300% due 1/19/07 | 10,000,000 | |||||
| 16,700,000 | Natexis Banque Populair NY, 4.710% due 11/6/06 | 16,698,115 | |||||
| 5,000,000 | Rabobank Nederland NV NY, 5.265% due 11/30/06 | 4,999,270 | |||||
Royal Bank of Scotland NY: | |||||||
| 3,000,000 | 4.640% due 11/1/06 | 3,000,000 | |||||
| 12,000,000 | 4.750% due 12/4/06 | 11,991,547 | |||||
See Notes to Financial Statements.
Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report 7
Schedule of Investments (October 31, 2006) (continued)
Face Amount | Security | Value | |||||
| Certificates of Deposit (Yankee) — 45.3% (continued) | |||||||
Svenska Handelsbanken NY: | |||||||
| $ | 5,000,000 | 5.330% due 12/15/06 | $ | 4,999,986 | |||
| 8,000,000 | 5.330% due 12/22/06 | 8,000,000 | |||||
Toronto Dominion Bank NY: | |||||||
| 5,000,000 | 5.300% due 12/14/06 | 5,000,000 | |||||
| 3,000,000 | 5.230% due 3/30/07 | 3,000,000 | |||||
UBS AG Stamford CT: | |||||||
| 5,000,000 | 5.305% due 11/8/06 | 5,000,005 | |||||
| 8,000,000 | 5.300% due 11/20/06 | 8,000,000 | |||||
Unicredito Italiano NY: | |||||||
| 5,000,000 | 5.420% due 2/20/07 | 5,000,380 | |||||
| 5,000,000 | 5.390% due 3/1/07 | 5,000,389 | |||||
Total Certificates of Deposit (Yankee) | 218,969,411 | ||||||
| Time Deposit — 1.1% | |||||||
| 5,151,000 | State Street Cayman Islands, 5.310% due 11/1/06 | 5,151,000 | |||||
| U.S. Government Agencies (a) — 0.8% | |||||||
Federal National Mortgage Association (FNMA), Discount Notes: | |||||||
| 2,000,000 | 5.111% due 3/6/07 | 1,966,111 | |||||
| 2,000,000 | 5.123% due 3/30/07 | 1,959,646 | |||||
Total U.S. Government Agencies | 3,925,757 | ||||||
| TOTAL INVESTMENTS — 101.3% (Cost — $489,175,204#) | 489,175,204 | ||||||
Liabilities in Excess of Other Assets — (1.3)% | (6,299,120 | ) | |||||
| TOTAL NET ASSETS — 100.0% | $ | 482,876,084 | |||||
| (a) | Rate shown represents yield to maturity. |
| # | Aggregate cost for federal income tax purposes is substantially the same. |
See Notes to Financial Statements.
8 Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report
Statement of Assets and Liabilities (October 31, 2006)
| ASSETS: | ||||
Investments, at amortized cost | $ | 489,175,204 | ||
Cash | 425 | |||
Interest receivable | 3,474,529 | |||
Receivable for Fund shares sold | 1,733,711 | |||
Prepaid expenses | 7,742 | |||
Total Assets | 494,391,611 | |||
| LIABILITIES: | ||||
Payable for securities purchased | 9,940,094 | |||
Payable for Fund shares repurchased | 1,326,060 | |||
Investment management fee payable | 184,078 | |||
Directors’ fees payable | 1,970 | |||
Distributions payable | 140 | |||
Accrued expenses | 63,185 | |||
Total Liabilities | 11,515,527 | |||
Total Net Assets | $ | 482,876,084 | ||
| NET ASSETS: | ||||
Par value (Note 3) | $ | 4,829 | ||
Paid-in capital in excess of par value | 482,872,689 | |||
Overdistributed net investment income | (902 | ) | ||
Accumulated net realized loss on investments | (532 | ) | ||
Total Net Assets | $ | 482,876,084 | ||
Shares Outstanding | 482,870,567 | |||
Net Asset Value | $1.00 | |||
See Notes to Financial Statements.
Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report 9
Statement of Operations (For the year ended October 31, 2006)
| INVESTMENT INCOME: | ||||
Interest | $ | 22,857,512 | ||
| EXPENSES: | ||||
Investment management fee (Note 2) | 2,132,892 | |||
Shareholder reports | 41,997 | |||
Directors’ fees | 39,764 | |||
Directors’ retirement expense | 30,583 | |||
Audit and tax | 28,154 | |||
Legal fees | 26,110 | |||
Proxy fees | 16,900 | |||
Custody fees | 15,557 | |||
Insurance | 12,113 | |||
Transfer agent fees (Note 2) | 1,424 | |||
Miscellaneous expenses | 5,308 | |||
Total Expenses | 2,350,802 | |||
Less: Fee waivers and/or expense reimbursements (Notes 2 and 6) | (11,983 | ) | ||
Net Expenses | 2,338,819 | |||
Net Investment Income | 20,518,693 | |||
Net Realized Loss From Investment Transactions | (7 | ) | ||
Increase in Net Assets From Operations | $ | 20,518,686 | ||
See Notes to Financial Statements.
10 Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report
Statements of Changes in Net Assets (For the years ended October 31,)
| 2006 | 2005 | |||||||
| OPERATIONS: | ||||||||
Net investment income | $ | 20,518,693 | $ | 11,832,187 | ||||
Net realized loss | (7 | ) | (525 | ) | ||||
Increase in Net Assets From Operations | 20,518,686 | 11,831,662 | ||||||
| DISTRIBUTIONS TO SHAREHOLDERS FROM (NOTES 1 AND 5): | ||||||||
Net investment income | (20,518,693 | ) | (11,832,187 | ) | ||||
Decrease in Net Assets From Distributions to Shareholders | (20,518,693 | ) | (11,832,187 | ) | ||||
| FUND SHARE TRANSACTIONS (NOTE 3): | ||||||||
Net proceeds from sale of shares | 123,680,099 | 130,216,637 | ||||||
Reinvestment of distributions | 21,003,182 | 11,533,870 | ||||||
Cost of shares repurchased | (142,478,810 | ) | (172,163,455 | ) | ||||
Net assets of shares issued in connection with merger (Note 4) | — | 545,829 | ||||||
Increase (Decrease) in Net Assets From Fund Share Transactions | 2,204,471 | (29,867,119 | ) | |||||
Increase (Decrease) in Net Assets | 2,204,464 | (29,867,644 | ) | |||||
| NET ASSETS: | ||||||||
Beginning of year | 480,671,620 | 510,539,264 | ||||||
End of year* | $ | 482,876,084 | $ | 480,671,620 | ||||
* Includes overdistributed net investment income of: | $(902) | $(902) | ||||||
See Notes to Financial Statements.
Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report 11
For a share of capital stock outstanding throughout each year ended October 31:
| 2006 | 2005 | 2004(1) | 2003(1) | 2002 | ||||||||||||||||
Net Asset Value, Beginning of Year | $ | 1.000 | $ | 1.000 | $ | 1.000 | $ | 1.000 | $ | 1.000 | ||||||||||
Income From Operations: | ||||||||||||||||||||
Net investment income | 0.043 | 0.024 | 0.007 | 0.007 | 0.014 | |||||||||||||||
Net realized gain (loss)(2) | (0.000 | ) | (0.000 | ) | 0.000 | 0.000 | 0.000 | |||||||||||||
Total Income From Operations | 0.043 | 0.024 | 0.007 | 0.007 | 0.014 | |||||||||||||||
Less Distributions From: | ||||||||||||||||||||
Net investment income | (0.043 | ) | (0.024 | ) | (0.007 | ) | (0.007 | ) | (0.014 | ) | ||||||||||
Net realized gain | — | — | — | — | — | |||||||||||||||
Total Distributions | (0.043 | ) | (0.024 | ) | (0.007 | ) | (0.007 | ) | (0.014 | ) | ||||||||||
Net Asset Value, End of Year | $ | 1.000 | $ | 1.000 | $ | 1.000 | $ | 1.000 | $ | 1.000 | ||||||||||
Total Return(3) | 4.41 | % | 2.44 | % | 0.71 | % | 0.74 | % | 1.40 | % | ||||||||||
Net Assets, End of Year (millions) | $483 | $481 | $511 | $599 | $733 | |||||||||||||||
Ratios to Average Net Assets: | ||||||||||||||||||||
Gross expenses | 0.50 | % | 0.52 | % | 0.53 | % | 0.53 | % | 0.53 | % | ||||||||||
Net expenses(4) | 0.49 | (5) | 0.52 | (5) | 0.53 | (5) | 0.53 | 0.53 | ||||||||||||
Net investment income | 4.33 | 2.41 | 0.71 | 0.75 | 1.38 | |||||||||||||||
| (1) | Per share amounts have been calculated using the average shares method. |
| (2) | Amount represents less than $0.001 per share. |
| (3) | Performance figures may reflect fee waivers and/or expense reimbursements. Past performance is no guarantee of future results. In the absence of fee waivers and/or expense reimbursements, the total return would have been lower. |
| (4) | As a result of a voluntary expense limitation, the ratio of expenses to average net assets, other than interest, brokerage, taxes and extraordinary expenses, of the Fund will not exceed 1.25%. |
| (5) | Reflects fee waivers and/or expense reimbursements. |
See Notes to Financial Statements.
12 Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report
| 1. | Organization and Significant Accounting Policies |
Legg Mason Partners Variable Money Market Portfolio (formerly known as Smith Barney Money Market Portfolio) (the “Fund”), is a separate diversified investment fund of Legg Mason Partners Variable Portfolios III, Inc. (formerly known as Travelers Series Fund Inc.) (the “Company”). The Company, a Maryland corporation, is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. Shares of the Fund may only be purchased or redeemed through variable annuity contracts and variable life insurance policies offered by the separate accounts of participating life insurance companies or through eligible pension or other qualified plans.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ.
(a) Investment Valuation. Money market instruments are valued at amortized cost, in accordance with Rule 2a-7 under the 1940 Act, which approximates market value. This method involves valuing portfolio securities at its cost and thereafter assuming a constant amortization to maturity of any discount or premium. The Fund’s use of amortized cost is subject to their compliance with certain conditions as specified under Rule 2a-7 of the 1940 Act.
(b) Security Transactions and Investment Income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. The cost of investments sold is determined by use of the specific identification method.
(c) Distributions to Shareholders. Distributions from net investment income on the shares of the Fund are declared each business day to shareholders of record, and are paid monthly. Distributions of net realized gains, if any, are declared at least annually. Distributions are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(d) Federal and Other Taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute substantially all of its income and net realized gains on investments, if any, to shareholders each year. Therefore, no federal income tax provision is required in the Fund’s financial statements.
(e) Reclassification. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. During the current year, the Fund had no reclassifications.
Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report 13
Notes to Financial Statements (continued)
| 2. | Investment Management Agreement and Other Transactions with Affiliates |
On December 1, 2005, Citigroup Inc. (“Citigroup”) completed the sale of substantially all of its asset management business to Legg Mason, Inc. (“Legg Mason”). As a result, the Fund’s then investment manager, Smith Barney Fund Management LLC (“SBFM”), previously an indirect wholly-owned subsidiary of Citigroup, became a wholly-owned subsidiary of Legg Mason. Completion of the sale caused the Fund’s then existing investment management contract to terminate. The Fund’s shareholders approved a new investment management contract between the Fund and SBFM, which became effective on December 1, 2005.
Prior to the Legg Mason transaction and continuing under a new investment management agreement, effective December 1, 2005, the Fund paid SBFM an investment management fee calculated daily and paid monthly in accordance with the following breakpoint schedule:
| Average Daily Net Assets | Annual Rate | ||
First $1 Billion | 0.450 | % | |
Next $1 Billion | 0.425 | ||
Next $3 Billion | 0.400 | ||
Next $5 Billion | 0.375 | ||
Over $10 Billion | 0.350 | ||
Effective August 1, 2006, Legg Mason Partners Fund Advisor, LLC (“LMPFA”) became the Fund’s investment manager and Western Asset Management Company (“Western Asset”), became the Fund’s subadviser. The portfolio managers who are responsible for the day-to-day management of the Fund remain the same immediately prior to and immediately after the date of these changes. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason.
LMPFA provides administrative and certain oversight services to the Fund. LMPFA has delegated to the subadviser the day-to-day portfolio management of the Fund. The Fund’s investment management fee remains unchanged. For its services, LMPFA pays Western Asset 70% of the net management fee that it receives from the Fund.
During the year ended October 31, 2006, the Fund had a voluntary expense limitation in place of 1.25%.
During the year ended October 31, 2006, SBFM and LMPFA waived a portion of their investment management fee in the amount of $10,446. In addition, during the year ended October 31, 2006, the Fund was reimbursed for expenses amounting to $1,537.
The Fund’s Board has approved PFPC Inc. (“PFPC”) to serve as transfer agent for the Fund, effective January 1, 2006. The principal business office of PFPC is located at 4400 Computer Drive, Westborough, MA 01581. Prior to January 1, 2006, Citicorp Trust Bank, fsb. (“CTB”), a subsidiary of Citigroup, acted as the Fund’s transfer agent. Also, prior to January 1, 2006, PFPC acted as the Fund’s sub-transfer agent. CTB received account fees and asset-based fees that varied according to the size and type of account. PFPC was responsible for shareholder recordkeeping and financial processing for all share - -
14 Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report
Notes to Financial Statements (continued)
holder accounts and was paid by CTB. For the period ended October 31, 2006, the Fund paid transfer agent fees of $2,085 to CTB.
The Fund’s Board has appointed the Fund’s current distributor, Citigroup Global Markets Inc. (“CGM”), a subsidiary of Citigroup, and Legg Mason Investor Services, LLC (“LMIS”), a wholly-owned broker-dealer subsidiary of Legg Mason, as co-distributors of the Fund. CGM and other broker-dealers, financial intermediaries and financial institutions (each called a “Service Agent”) that currently offer Fund shares will continue to make the Fund’s shares available to their clients. Additional Service Agents may offer Fund shares in the future.
Certain officers and one Director of the Company are employees of Legg Mason or its affiliates and do not receive compensation from the Company.
| 3. | Capital Shares |
At October 31, 2006, the Company had six billion shares of capital stock authorized with a par value of $0.00001 per share. Each share of a Fund represents an equal proportionate interest in that Fund with each other share of the same Fund and has an equal entitlement to any dividends and distributions made by the Fund.
Capital stock transactions were as follows:
| Year Ended October 31, 2006 | Year Ended October 31, 2005 | |||||
Shares sold | 123,680,099 | 130,209,587 | ||||
Shares issued on reinvestment | 21,003,182 | 11,533,870 | ||||
Shares repurchased | (142,478,810 | ) | (172,163,455 | ) | ||
Shares issued in connection with merger (Note 4) | — | 547,329 | ||||
Net Increase (Decrease) | 2,204,471 | (29,872,669 | ) | |||
Because the Fund has maintained a $1.00 net asset value per share from inception, the number of shares sold, shares issued in reinvestment of dividends declared, and shares repurchased, is equal to the dollar amount shown in the Statements of Changes in Net Assets for the corresponding capital share transactions.
| 4. | Transfer of Net Assets |
On July 8, 2005, the Fund acquired the assets and certain liabilities of the GSS Salomon Brothers Variable Money Market Fund pursuant to a plan of reorganization approved by GSS Salomon Brothers Variable Money Market Fund shareholders on July 1, 2005. Total shares issued by the Fund, the total net assets of the GSS Salomon Brothers Variable Money Market Fund and the total net assets of the Fund on the date of the transfer were as follows:
| Acquired Fund | Shares Issued by the Fund | Total Net Assets of the GSS Salomon Brothers Variable Money Market Fund | Total Net Assets of the Fund | |||||
GSS Salomon Brothers Variable Money Market Fund | 547,329 | $ | 545,829 | $ | 490,581,343 | |||
Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report 15
Notes to Financial Statements (continued)
Total net assets of the Fund immediately after the transfer were $491,127,172. The transaction was structured to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended.
| 5. | Income Tax Information and Distributions to Shareholders |
Subsequent to the fiscal year end, October 31, 2006, the Fund has made the following distributions:
Record Date Payable Date | |||
Daily 11/30/2006 | $ | 0.003965 | |
As of October 31, 2006, there were no significant differences between the book and tax components of net assets.
As of October 31, 2006, the Fund had the following net capital loss carryforward remaining:
| Year of Expiration | Amount | |||
10/31/2013 | $ | (525 | ) | |
10/31/2014 | (7 | ) | ||
| $ | (532 | ) | ||
These amounts will be available to offset any future taxable capital gains.
| 6. | Regulatory Matters |
On May 31, 2005, the U.S. Securities and Exchange Commission (“SEC”) issued an order in connection with the settlement of an administrative proceeding against SBFM, the Fund’s prior investment manager, and CGM relating to the appointment of an affiliated transfer agent for the Smith Barney family of mutual funds (the “Funds”).
The SEC order finds that SBFM and CGM willfully violated Section 206(1) of the Investment Advisers Act of 1940 (“Advisers Act”). Specifically, the order finds that SBFM and CGM knowingly or recklessly failed to disclose to the boards of the Funds in 1999 when proposing a new transfer agent arrangement with an affiliated transfer agent that: First Data Investors Services Group (“First Data”), the Funds’ then-existing transfer agent, had offered to continue as transfer agent and do the same work for substantially less money than before; and that Citigroup Asset Management (“CAM”), the Citigroup business unit that, at the time, included the Fund’s investment manager and other investment advisory companies, had entered into a side letter with First Data under which CAM agreed to recommend the appointment of First Data as sub-transfer agent to the affiliated transfer agent in exchange for, among other things, a guarantee by First Data of specified amounts of asset management and investment banking fees to CAM and CGM. The order also
16 Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report
Notes to Financial Statements (continued)
finds that SBFM and CGM willfully violated Section 206(2) of the Advisers Act by virtue of the omissions discussed above and other misrepresentations and omissions in the materials provided to the Funds’ boards, including the failure to make clear that the affiliated transfer agent would earn a high profit for performing limited functions while First Data continued to perform almost all of the transfer agent functions, and the suggestion that the proposed arrangement was in the Funds’ best interests and that no viable alternatives existed. SBFM and CGM do not admit or deny any wrongdoing or liability. The settlement does not establish wrongdoing or liability for purposes of any other proceeding.
The SEC censured SBFM and CGM and ordered them to cease and desist from violations of Sections 206(1) and 206(2) of the Advisers Act. The order requires Citigroup to pay $208.1 million, including $109 million in disgorgement of profits, $19.1 million in interest, and a civil money penalty of $80 million. Approximately $24.4 million has already been paid to the Funds, primarily through fee waivers. The remaining $183.7 million, including the penalty, has been paid to the U.S. Treasury and will be distributed pursuant to a plan submitted for the approval of the SEC. At this time, there is no certainty as to how the above-described proceeds of the settlement will be distributed, to whom such distributions will be made, the methodology by which such distributions will be allocated, and when such distributions will be made. The order also required that transfer agency fees received from the Funds since December 1, 2004, less certain expenses, be placed in escrow and provided that a portion of such fees might be subsequently distributed in accordance with the terms of the order. On April 3, 2006, an aggregate amount of approximately $9 million was distributed to the affected Funds.
The order required SBFM to recommend a new transfer agent contract to the Funds’ boards within 180 days of the entry of the order; if a Citigroup affiliate submitted a proposal to serve as transfer agent or sub-transfer agent, SBFM and CGM would have been required, at their expense, to engage an independent monitor to oversee a competitive bidding process. On November 21, 2005, and within the specified timeframe, the Fund’s Board selected a new transfer agent for the Fund. No Citigroup affiliate submitted a proposal to serve as transfer agent. Under the order, SBFM also must comply with an amended version of a vendor policy that Citigroup instituted in August 2004.
Although there can be no assurance, the Fund’s manager does not believe that this matter will have a material adverse effect on the Funds.
On December 1, 2005, Citigroup completed the sale of substantially all of its global asset management business, including SBFM, to Legg Mason.
| 7. | Legal Matters |
Beginning in August 2005, five class action lawsuits alleging violations of federal securities laws and state law were filed against CGM and SBFM, (collectively, the “Defendants”) based on the May 31, 2005 settlement order issued against the Defendants by the SEC as described in Note 6. The complaints seek injunctive relief and compensatory and punitive damages, removal of SBFM as the investment manager for the Smith Barney family of funds, rescission of the Funds’ management and other contracts with SBFM, recovery of all fees paid to SBFM pursuant to such contracts, and an award of attorneys’ fees and litigation expenses.
Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report 17
Notes to Financial Statements (continued)
On October 5, 2005, a motion to consolidate the five actions and any subsequently-filed, related action was filed. That motion contemplates that a consolidated amended complaint alleging substantially similar causes of action will be filed in the future.
As of the date of this report, the Fund’s manager believes that resolution of the pending lawsuit will not have a material effect on the financial position or results of operations of the Fund or the ability of the Fund’s manager and its affiliates to continue to render services to the Funds under their respective contracts.
* * *
Beginning in June 2004, class action lawsuits alleging violations of the federal securities laws were filed against CGM and a number of its then affiliates, including SBFM and Salomon Brothers Asset Management Inc. (“SBAM”), which were then investment adviser or manager to certain of the Funds (the “Managers”), substantially all of the mutual funds then managed by the Managers (the “Defendant Funds”), and Board Members of the Defendant Funds (collectively, the “Defendants”). The complaints alleged, among other things, that CGM created various undisclosed incentives for its brokers to sell Smith Barney and Salomon Brothers funds. In addition, according to the complaints, the Managers caused the Defendant Funds to pay excessive brokerage commissions to CGM for steering clients towards proprietary funds. The complaints also alleged that the defendants breached their fiduciary duty to the Defendant Funds by improperly charging Rule 12b-1 fees and by drawing on fund assets to make undisclosed payments of soft dollars and excessive brokerage commissions. The complaints also alleged that the Defendant Funds failed to adequately disclose certain of the allegedly wrongful conduct. The complaints sought injunctive relief and compensatory and punitive damages, rescission of the Defendant Funds’ contracts with the Managers, recovery of all fees paid to the Managers pursuant to such contracts and an award of attorneys’ fees and litigation expenses.
On December 15, 2004, a consolidated amended complaint (the “Complaint”) was filed alleging substantially similar causes of action. On May 27, 2005, all of the Defendants filed motions to dismiss the Complaint. On July 26, 2006, the court issued a decision and order (1) finding that plaintiffs lacked standing to sue on behalf of the shareholders of the Defendant Funds in which none of the plaintiffs had invested (including the Fund) and dismissing those Defendant Funds from the case (although stating that they could be brought back into the case if standing as to them could be established), and (2) other than one stayed claim, dismissing all of the causes of action against the remaining Defendants, with prejudice, except for the cause of action under Section 36(b) of the 1940 Act, which the court granted plaintiffs leave to replead as a derivative claim.
On October 16, 2006, plaintiffs filed their Second Consolidated Amended Complaint (“Second Amended Complaint”) which alleges derivative claims on behalf of nine funds identified in the Second Amended Complaint, Section 36(b) of the 1940 Act, against CAM, SBAM, SBFM and CGM as investment advisers to the identified funds, as well as CGM as a distributor for the identified funds (collectively, the “Second Amended Complaint Defendants”). The Fund was not identified in the Second Amended Complaint.
18 Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report
Notes to Financial Statements (continued)
The Second Amended Complaint alleges no claims against any of the Funds or any of their Board Members. Under Section 36(b), the Second Amended Complaint alleges similar facts and seeks similar relief against the Second Amended Complaint Defendants as the Complaint.
Additional lawsuits arising out of these circumstances and presenting similar allegations and requests for relief may be filed in the future.
| 8. | Other Matters |
On September 16, 2005, the staff of the SEC informed SBFM and SBAM that the staff is considering recommending that the SEC institute administrative proceedings against SBFM and SBAM for alleged violations of Section 19(a) and 34(b) of the 1940 Act (and related Rule 19a-1). The notification is a result of an industry wide inspection by the SEC and is based upon alleged deficiencies in disclosures regarding dividends and distributions paid to shareholders of certain funds. Section 19(a) and related Rule 19a-1 of the 1940 Act generally require funds that are making dividend and distribution payments to provide shareholders with a written statement disclosing the source of the dividends and distributions, and, in particular, the portion of the payments made from each of net investment income, undistributed net profits and/or paid-in capital. In connection with the contemplated proceedings, the staff may seek a cease and desist order and/or monetary damages from SBFM or SBAM.
Although there can be no assurance, the Fund’s manager believes that this matter is not likely to have a material adverse effect on the Fund.
| 9. | Additional Shareholder Information |
The Fund’s Board approved a number of initiatives designed to streamline and restructure the fund complex, and authorized seeking shareholder approval for those initiatives where shareholder approval is required. As a result, Fund shareholders have been asked to elect a new Board, approve matters that will result in the Fund being grouped for organizational and governance purposes with other funds in the fund complex, and domicile the Fund as a Maryland business trust, with all funds operating under uniform charter documents. Fund shareholders also have been asked to approve investment matters, including standardized fundamental investment policies. Shareholder approval was obtained on December 11, 2006. These matters generally are expected to be implemented during the first half of 2007.
| 10. | Recent Accounting Pronouncements |
During June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48” or the “Interpretation”), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109. FIN 48 supplements FASB Statement 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the financial statements. FIN 48 prescribes a comprehensive model for how a fund should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the fund has taken or expects to take on a tax return. FIN 48 requires that the tax effects of a position be recognized only if it is “more
Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report 19
Notes to Financial Statements (continued)
likely than not” to be sustained based solely on its technical merits. Management must be able to conclude that the tax law, regulations, case law, and other objective information regarding the technical merits sufficiently support the position’s sustainability with a likelihood of more than 50 percent. FIN 48 is effective for fiscal periods beginning after December 15, 2006, which for this Fund will be November 1, 2007. At adoption, the financial statements must be adjusted to reflect only those tax positions that are more likely than not to be sustained as of the adoption date. Management of the Fund has determined that adopting FIN 48 will not have a material impact on the Fund’s financial statements.
* * *
On September 20, 2006, FASB released Statement of Financial Accounting Standards No. 157 “Fair Value Measurements” (“FAS 157”). FAS 157 establishes an authoritative definition of fair value, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. The application of FAS 157 is required for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. At this time, management is evaluating the implications of FAS 157 and its impact on the financial statements has not yet been determined.
20 Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Legg Mason Partners Variable Portfolios III, Inc.:
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of Legg Mason Partners Variable Money Market Portfolio (formerly Smith Barney Money Market Portfolio), a series of Legg Mason Partners Variable Portfolios III, Inc. (formerly Travelers Series Fund Inc.), as of October 31, 2006, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2006, by correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Legg Mason Partners Variable Money Market Portfolio as of October 31, 2006, and the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.
New York, New York
December 27, 2006
Legg Mason Partners Variable Money Market Portfolio 2006 Annual Report 21
Board Approval of Management and Subadvisory Agreements (unaudited)
At a meeting held in person on June 23, 2006, the Fund’s Board, including a majority of the Board Members who are not “interested persons” of the Fund or Legg Mason Partners Fund Advisor, LLC (the “Manager”) or proposed sub-investment adviser as defined in the Investment Company Act of 1940, as amended (the “1940 Act”) (the “Independent Board Members”), approved a new management agreement (the “New Management Agreement”) between the Fund and the Manager. The Fund’s Board, including a majority of the Independent Board Members, also approved a new subadvisory agreement between the Manager and Western Asset Management Company (the “Subadviser”) (the “New Subadvisory Agreement”). The New Management Agreement and the New Subadvisory Agreement replaced the Fund’s prior management agreement with Smith Barney Fund Management, LLC and were entered into in connection with an internal reorganization of the Manager’s, and the prior manager’s and the Subadviser parent organization, Legg Mason. In approving the New Management Agreement and New Subadvisory Agreement, the Board, including the Independent Board Members, considered the factors discussed below, among other things.
The Board noted that the Manager will provide administrative and certain oversight services to the Fund, and that the Manager will delegate to the Subadviser the day-to-day portfolio management of the Fund. The Board Members reviewed the qualifications, backgrounds and responsibilities of the senior personnel that will provide oversight and general management services and the portfolio management team that would be primarily responsible for the day-to-day management of the Fund. The Board Members noted that the portfolio management team was expected to be the same as then managing the Fund.
The Board Members received and considered information regarding the nature, extent and quality of services expected to be provided to the Fund by the Manager under the New Management Agreement and by the Subadviser under the New Subadvisory Agreement. The Board Members’ evaluation of the services expected to be provided by the Manager and the Subadviser took into account the Board Members’ knowledge and familiarity gained as Fund Board Members, including as to the scope and quality of Legg Mason’s investment management and other capabilities and the quality of its administrative and other services. The Board Members considered, among other things, information and assurances provided by Legg Mason as to the operations, facilities and organization of the Manager and the Subadviser and the qualifications, backgrounds and responsibilities of their senior personnel. The Board Members further considered the financial resources available to the Manager, the Subadviser and Legg Mason. The Board Members concluded that, overall, the nature, extent and quality of services expected to be provided under the New Management Agreement and the New Subadvisory Agreement were acceptable.
The Board Members also received and considered performance information for the Fund as well as comparative information with respect to a peer group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board Members were provided with a description of the methodology Lipper used to determine the similarity of the Fund to the funds included in
22 Legg Mason Partners Variable Money Market Portfolio
Board Approval of Management and Subadvisory Agreements (unaudited) (continued)
the Performance Universe. The Board Members noted that they had received and dis
cussed with management, at periodic intervals, information comparing the Fund’s performance against, among other things, its benchmark. Based on the Board Members’ review, which included careful consideration of the factors noted above, the Board Members concluded that the performance of the Fund, under the circumstances, supported approval of the New Management Agreement and New Subadvisory Agreement.
The Board Members reviewed and considered the management fee that would be payable by the Fund to the Manager in light of the nature, extent and quality of the management services expected to be provided by the Manager, including the fee waiver and/or expense reimbursement arrangements currently in place. Additionally, the Board Members received and considered information comparing the Fund’s management fee and overall expenses with those of comparable funds in both the relevant expense group and a broader group of funds, each selected and provided by Lipper. The Board Members also reviewed and considered the subadvisory fee that would be payable by the Manager to the Subadviser in light of the nature, extent and quality of the management services expected to be provided by the Subadviser. The Board Members noted that the Manager, and not the Fund, will pay the subadvisory fee to the Subadviser. The Board Members determined that the Fund’s management fee and the Fund’s subadvisory fee were reasonable in light of the nature, extent and quality of the services expected to be provided to the Fund under the New Management Agreement and the New Subadvisory Agreement.
The Board Members received and considered a pro-forma profitability analysis of Legg Mason and its affiliates in providing services to the Fund, including information with respect to the allocation methodologies used in preparing the profitability data. The Board Members recognized that Legg Mason may realize economies of scale based on its internal reorganization and synergies of operations. The Board Members noted that it was not possible to predict with a high degree of confidence how Legg Mason’s and its affiliates’ profitability would be affected by its internal reorganization and by other factors including potential economies of scale, but that based on their review of the pro forma profitability analysis, their most recent prior review of the profitability of the predecessor manager and its affiliates from their relationship with the Fund and other factors considered, they determined that the management fee was reasonable. The Board Members noted that they expect to receive profitability information on an annual basis.
In their deliberations, the Board Members also considered, and placed significant importance on, information that had been received and conclusions that had been reached by the Board in connection with the Board’s most recent approval of the Fund’s prior management agreement, in addition to information provided in connection with the Board’s evaluation of the terms and conditions of the New Management Agreement and the New Subadvisory Agreement.
The Board Members considered Legg Mason’s advice and the advice of its counsel that the New Management Agreement and the New Subadvisory Agreement were being entered into in connection with an internal reorganization within Legg Mason, that did not involve an actual change of control or management. The Board Members further
Legg Mason Partners Variable Money Market Portfolio 23
Board Approval of Management and Subadvisory Agreements (unaudited) (continued)
noted that the terms and conditions of the New Management Agreement are substantially identical to those of the Fund’s previous management agreement except for the identity of the Manager, and that the initial term of the New Management Agreement (after which it will continue in effect only if such continuance is specifically approved at least annually by the Board, including a majority of the Independent Board Members) was the same as that under the prior management agreement.
In light of all of the foregoing, the Board, including the Independent Board Members, approved the New Management Agreement and the New Subadvisory Agreement. No single factor reviewed by the Board Members was identified as the principal factor in determining whether to approve the New Management Agreement and the New Subadvisory Agreement. The Independent Board Members were advised by separate independent legal counsel throughout the process. The Independent Board Members also discussed the proposed approval of the New Management Agreement and the New Subadvisory Agreement in private sessions with their independent legal counsel at which no representatives of the Manager or Subadviser were present.
24 Legg Mason Partners Variable Money Market Portfolio
Additional Information (unaudited)
Information about Directors and Officers
The business and affairs of the Legg Mason Partners Variable Portfolios III, Inc. (formerly known as Travelers Series Fund Inc.) (the “Company”) are managed under the direction of the Board of Directors. Information pertaining to the Directors and Officers of the Company is set forth below. The statement of Additional Information includes additional information about the Company’s Directors and is available, without charge, by calling Legg Mason Partners Shareholder Services at 1-800-451-2010.
| Name, Address, and Birth Year | Position(s) Held with Fund | Term of Office* and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Director | Other Board Memberships Held by Director | |||||
| Non-Interested Directors: | ||||||||||
| Robert A. Frankel 1961 Deergrass Way Carlsbad, CA 92009 Birth Year: 1927 | Director | Since 1999 | Managing Partner of Robert A. Frankel Managing Consultants; Formerly, Vice President of The Readers Digest Association, Inc. | 18 | None | |||||
Michael E. Gellert 47th Floor | Director | Since 1999 | General Partner of Windcrest Partners, a venture capital firm | 11 | Director of Dalet S.A., (media management operations), SEACOR Holdings, Inc. (offshore marine services provider) and Six Flags, Inc. | |||||
| Rainer Greeven 630 5th Avenue Suite 1960 New York, NY 10111 Birth Year: 1936 | Director | Since 1994 | Attorney, Rainer Greeven PC (since 1998); President and Director, 175 E. 62nd St. Corp (real estate) (since 2002) | 11 | None | |||||
Susan M. Heilbron Chilmark, MA 02535 Birth Year: 1945 | Director | Since 1994 | Independent consultant (since 2001); Formerly, owner of Lacey & Heilbran (communications consulting) (from 1993 to 2001) | 11 | None | |||||
Legg Mason Partners Variable Money Market Portfolio 25
Additional Information (unaudited) (continued)
| Name, Address, and Birth Year | Position(s) Held with Fund | Term of Office* and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Director | Other Board Memberships Held by Director | |||||
| Interested Director: | ||||||||||
R. Jay Gerken, CFA** Legg Mason & Co., LLC 4th Floor | Chairman, President and Chief Executive Officer | Since 2002 | Managing Director of Legg Mason; President and Chief Executive Officer of Legg Mason Partners Fund Advisors, LLC (‘‘LMPFA’’) (Since 2006); President and Chief Executive Officer of Smith Barney Fund Management LLC (‘‘SBFM’’) and Citi Fund Management Inc, (‘‘CFM’’); President and Chief Executive Officer of certain mutual funds associated with Legg Mason; Formerly, Chairman of SBFM and CFM (from 2002 to 2006); Formerly, Chairman, President and Chief Executive Officer of Travelers Investment Advisers, Inc. (from 2002 to 2005) | 162 | Trustee, Consulting Group Capital Markets Fund | |||||
| Officers: | ||||||||||
Frances M. Guggino Legg Mason 125 Broad Street, 10th Floor New York, NY 10004 Birth Year: 1957 | Chief Financial Officer and Treasurer | Since 2006 | Director of Legg Mason; Chief Financial Officer and Treasurer of certain mutual funds associated with Legg Mason; Formerly, Controller of certain mutual funds associated with Legg Mason (from 1999 to 2004) | N/A | N/A | |||||
26 Legg Mason Partners Variable Money Market Portfolio
Additional Information (unaudited) (continued)
| Name, Address, and Birth Year | Position(s) Held with Fund | Term of Office* and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Fund Complex Overseen by Director | Other Board Memberships Held by Director | |||||
Ted P. Becker Legg Mason 399 Park Avenue, New York, NY 10022 Birth Year: 1951 | Chief Compliance Officer | Since 2006 | Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance at Legg Mason (since 2005); Chief Compliance Officer with certain mutual funds associated with Legg Mason (since 2006); Managing Director of Compliance at Legg Mason or its predecessor (from 2002 to 2005); Prior to 2002, Managing Director— Internal Audit & Risk Review at Citigroup, Inc. | N/A | N/A | |||||
John Chiota Legg Mason 100 First Stamford Place, Stamford, CT 06902 Birth Year: 1968 | Chief Anti- Money Laundering Compliance Officer | Since 2006 | Vice President of Legg Mason or its predecessor (since 2004); Chief Anti- Money Laundering Compliance Officer with certain mutual funds associated with Legg Mason (since 2006); Prior to August 2004, Chief AML Compliance Officer with TD Waterhouse | N/A | N/A | |||||
Robert I. Frenkel 300 First Stamford Place 4th Floor Stamford, CT 06902 Birth Year: 1954 | Secretary and Chief Legal Officer | Since 2003 | Managing Director and General Counsel of Global Mutual Funds for Legg Mason and its predecessors (since 1994); Secretary and Chief Legal Officer of mutual funds associated with Legg Mason (since 2003); Formerly, Secretary of CFM (from 2001 to 2004) | N/A | N/A | |||||
| * | Each Director and Officer serves until his or her successor has been duly elected and qualified. |
| ** | Mr. Gerken is an “interested person” of the Company as defined in the Investment Company Act of 1940, as amended, because Mr. Gerken is an officer of LMPFA and certain of its affiliates. |
Legg Mason Partners Variable Money Market Portfolio 27
Additional Shareholder Information (unaudited)
Results of a Special Meeting of Shareholders
On December 11, 2006, a Special Meeting of Shareholders was held to vote on various proposals recently approved by the Fund’s Board Members. The following tables provide the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to the following proposals: (1) Elect Board Members, (2) Regroup and Reorganize Fund, and (3) Revise Fundamental Investment Policies.
Proposal 1: Elect Board Members†.
| Item Voted On | Votes For | Votes Against | Abstentions | Broker Non-Votes | ||||
Nominees: | ||||||||
Paul R. Ades | 627,038,784.337 | 28,077,775.512 | 0.000 | 0.000 | ||||
Andrew L. Breech | 627,196,957.837 | 27,919,602.012 | 0.000 | 0.000 | ||||
Dwight B. Crane | 626,833,724.086 | 28,282,835.763 | 0.000 | 0.000 | ||||
Robert M. Frayn, Jr. | 626,781,438.698 | 28,335,121.151 | 0.000 | 0.000 | ||||
Frank G. Hubbard | 626,978,109.222 | 28,138,450.627 | 0.000 | 0.000 | ||||
Howard J. Johnson | 626,924,564.456 | 28,191,995.393 | 0.000 | 0.000 | ||||
David E. Maryatt | 626,906,972.055 | 28,209,587.794 | 0.000 | 0.000 | ||||
Jerome H. Miller | 627,150,693.392 | 27,965,866.457 | 0.000 | 0.000 | ||||
Ken Miller | 627,176,821.935 | 27,939,737.914 | 0.000 | 0.000 | ||||
John J. Murphy | 626,472,532.788 | 28,644,027.061 | 0.000 | 0.000 | ||||
Thomas F. Schlafly | 627,140,091.304 | 27,976,468.545 | 0.000 | 0.000 | ||||
Jerry A. Viscione | 626,511,106.887 | 28,605,452.962 | 0.000 | 0.000 | ||||
R. Jay Gerken, CFA | 626,765,585.797 | 28,350,974.052 | 0.000 | 0.000 | ||||
| † | Board Members are elected by the shareholders of all of the series of the Company of which the Fund is a series. |
Proposal 2: Regroup and Reorganize Fund.
| Item Voted On | Votes For | Votes Against | Abstentions | Broker Non-Votes | ||||
Regroup and Reorganize | 451,415,482.693 | 17,916,975.531 | 14,674,624.176 | 0.000 | ||||
Proposal 3: Revise Fundamental Investment Policies.
| Items Voted On | Votes For | Votes Against | Abstentions | Broker Non-Votes | ||||
Borrowing Money | 442,324,676.302 | 18,792,718.047 | 22,889,688.051 | 0.000 | ||||
Underwriting | 444,672,086.278 | 17,729,060.625 | 21,605,935.497 | 0.000 | ||||
Lending | 442,565,341.201 | 19,047,677.269 | 22,394,063.930 | 0.000 | ||||
Issuing Senior Securities | 443,571,868.371 | 15,304,422.961 | 25,130,791.068 | 0.000 | ||||
Real Estate | 444,261,354.660 | 16,093,804.882 | 23,651,922.858 | 0.000 | ||||
Commodities | 441,710,738.582 | 16,428,789.446 | 25,867,554.372 | 0.000 | ||||
Concentration | 441,517,365.797 | 17,426,275.881 | 25,063,440.722 | 0.000 | ||||
Diversification | 443,108,491.017 | 15,576,286.486 | 25,322,304.897 | 0.000 | ||||
Non-Fundamental | 435,909,811.898 | 26,062,548.842 | 22,034,721.660 | 0.000 | ||||
Remove policy relating to borrowing money | 437,024,972.857 | 24,881,795.998 | 22,100,313.545 | 0.000 | ||||
28 Legg Mason Partners Variable Money Market Portfolio
Legg Mason Partners Variable
Money Market Portfolio
DIRECTORS Robert A. Frankel Michael E. Gellert R. Jay Gerken, CFA Rainer Greeven Susan M. Heilbron
INVESTMENT MANAGER Legg Mason Partners Fund Advisor, LLC | SUBADVISER Western Asset Management Company
DISTRIBUTORS Citigroup Global Markets Inc. Legg Mason Investor Services, LLC
CUSTODIAN State Street Bank and Trust Company
ANNUITY ADMINISTRATION Travelers Annuity One Cityplace Hartford, Connecticut 06103-3415
TRANSFER AGENT PFPC Inc. 4400 Computer Drive Westborough,
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 345 Park Avenue New York, New York 10154 |
This report is submitted for the general information of the shareholders of Legg Mason Partners Variable Money Market Portfolio.
This report must be preceded or accompanied by a free prospectus. Investors should consider the Fund’s investment objectives, risks, charges and expenses before investing. The prospectus contains this and other important information about the Fund. Please read the prospectus carefully before investing.
www.leggmason.com/InvestorServices
©2006 Legg Mason Investor Services, LLC
Member NASD, SIPC
| IN0253 12/06 | SR06-209 |
Legg Mason Partners Variable Money Market Portfolio
The Fund is a separate investment fund of the Legg Mason Partners Variable Portfolios III, Inc., a Maryland corporation.
LEGG MASON PARTNERS VARIABLE PORTFOLIOS III, INC.
Legg Mason Partners Funds
125 Broad Street
10th Floor, MF-2
New York, New York 10004
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the Commission’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call Legg Mason Partners Shareholder Services at 1-800-451-2010.
Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio transactions is available (1) without charge, upon request, by calling 1-800-451-2010, (2) on the Fund’s website at www.leggmason.com/InvestorsServices and (3) on the SEC’s website at www.sec.gov.
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors of the registrant has determined that Robert A. Frankel, the Chairman of the Board’s Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated Mr. Frankel as the Audit Committee’s financial expert. Mr. Frankel is an “independent” Director pursuant to paragraph (a)(2) of Item 3 to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
a) Audit Fees. The aggregate fees billed in the last two fiscal years ending October 31, 2005 and October 31, 2006 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $177,500 in 2005 and $207,000 in 2006.
b) Audit-Related Fees. There were no fees billed in the Reporting Periods for assurance and related services by the Auditor that are reasonably related to the performance of the audit of the Registrant’s financial statements and are not reported under paragraph (a) of this Item 4.
In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Legg Mason Partners Variable Portfolio III (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Periods (prior to May 6, 2003 services provided by the Auditor were not required to be pre-approved).
(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $37,500 in 2005 and $4,400 in 2006. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.
There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.
d) All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item for the Legg Mason Partners Variable Portfolio III
All Other Fees. There were no other non-audit services rendered by the Auditor to Smith Barney Fund Management LLC (“SBFM”), and any entity controlling, controlled by or under common control with SBFM that provided ongoing services to Legg Mason Partners Variable Portfolio III requiring pre-approval by the Audit Committee in the Reporting Period.
(e) Audit Committee’s pre–approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by Smith Barney Fund Management LLC or Salomon Brothers Asset Management Inc. or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.
The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.
Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.
(2) For the Legg Mason Partners Variable Portfolio III, the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 0% for 2005 and 2006; Tax Fees were 100% and 0% for 2005 and 2006; and Other Fees were 100% and 0% for 2005 and 2006.
(f) N/A
(g) Non-audit fees billed by the Auditor for services rendered to Legg Mason Partners Variable Portfolio III and CAM and any entity controlling, controlled by, or under common control with CAM that provides ongoing services to Legg Mason Partners Variable Portfolio III during the reporting period were $0 in 2006 for fees related to the transfer agent matter as fully described in the notes the financial statements titled “additional information” and $75,000 for 2005.
(h) Yes. Legg Mason Partners Variable Portfolio III’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates which were not pre-approved (not requiring pre-approval) is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the Legg Mason Partners Variable Portfolio III or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Included herein under Item 1.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 11. CONTROLS AND PROCEDURES.
| (a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. |
| (b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal half-year (the registrant’s second fiscal half-year in the case of an annual report) that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. |
ITEM 12. EXHIBITS.
| (a)(1) | Code of Ethics attached hereto. | |
| Exhibit 99.CODE ETH | ||
| (a)(2) | Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto. | |
| Exhibit 99.CERT | ||
| (b) | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto. | |
| Exhibit 99.906CERT | ||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.
Legg Mason Partners Variable Portfolios III, Inc.
| By: | /s/ R. Jay Gerken | |
| R. Jay Gerken | ||
| Chief Executive Officer of | ||
| Legg Mason Partners Variable Portfolios III, Inc. | ||
| Date: | January 8, 2007 | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ R. Jay Gerken | |
| R. Jay Gerken | ||
| Chief Executive Officer of | ||
| Legg Mason Partners Variable Portfolios III, Inc. | ||
| Date: | January 8, 2007 | |
| By: | /s/ Frances M. Guggino | |
| Frances M. Guggino | ||
| Chief Financial Officer of | ||
| Legg Mason Partners Variable Portfolios III, Inc. | ||
| Date: | January 8, 2007 | |